the ground that N was a trust holding
the shares in the name of the Trustees for the benefit
of the beneficiaries. Aggrieved by the order of the CIT(A) the Income Tax
Authorities (the Revenue) preferred an appeal to the
ITAT. The assessee & the Revenue relied on two
directly conflicting decisions of the ITAT, Mumbai viz.,
Seamist Properties (P) Ltd. v/s ITO [95 TTJ 201(Mum)]
relied on by the assessee; and DCIT v/s Nikko
Technologies (I) Pvt Ltd. [ITA No.4707/Mum/2002]
relied on by the Revenue.
M/s Weaveland, Panipat, Haryana were granted
permission to appear as intervener before the Special
Bench. M/s Weaveland, a partnership firm had various
transactions of receipts and payments of money with
M/s Paliwal Industries Pvt Ltd (PIPL). The partners of
M/s Weaveland were the shareholders of PIPL. The AO
taxed the net outstanding by Weaveland to PIPL in the
hands of Weaveland as deemed dividend u/s 2(22)(e).
The CIT(A) reversed the order of the AO and the
revenue was in appeal against it.
Issues before the ITAT:
The following questions of law were raised before the
Special Bench :
Whether deemed dividend under section 2(22)(e) can
be assessed in the hands of a person other than a
shareholder of the lender company?
Whether the expression “such shareholder” occurring
in section 2(22)(e) refers to a shareholder who is both a
registered shareholder as well as a beneficial
shareholder or only to a registered shareholder?
Observations of the Special Bench:
The Special Bench observed that as per section 2(6A)
(e) of the Income Tax Act, 1922 (provision
corresponding to section 2(22)(e) of the Income Tax
Act, 1961), two categories of payments were
considered as dividend viz;
- Any payment by way of advance or loan to a
shareholder
- Any payment by such company on behalf or for the
individual benefit of a shareholder was considered
as dividend.
These were taxable as deemed dividend even as per
the Income‐tax Act of 1961. However in the 1961 Act,
there is an additional condition that payment should
be to a shareholder who is a beneficial owner of shares
and also who has a substantial interest in the company
(i.e.; his shareholding in the company is not less than
20% of the total voting power of the company).
Subsequently an amendment has been made in 1987
w.e.f. 1st April, 1988 whereby a new category of
payment was considered as deemed dividend. It is
payment to any concern in which such shareholder is a
member or a partner and in which it has substantial
interest.
The Special Bench relied on the Supreme Court
judgement in the case of CIT v/s C.P. Sarathy Mudaliar
[83 ITR 170(SC)] wherein the Company advanced loans
to an HUF who was the beneficial owner of shares in
that company but the shares were registered in the
name of the Karta who held shares for and on behalf of
the HUF. It was held that since the HUF was only a
beneficial owner of the shares & not the registered
shareholder of the company (as recognized by
Company Law), no addition in the hands of the HUF
could be made in respect of deemed dividend.
Conditions laid down by
the Special Bench to be
fulfilled in determining the
applicability of Section 2(22)(e):
The Special Bench has laid down the following
conditions to be fulfilled in determining whether a
particular advance can be considered as deemed
dividend u/s 2(22)(e):
- There must be a payment to a person by a
company
- That person must be a registered shareholder of
the payee company and also a beneficial owner of
shares holding more than 10% of the voting power
in the company; or
- The payment must be made to a concern in which
the person referred to in (ii) above is a member or a
partner and he holds a substantial interest in the
concern. Substantial interest means holding more
than 20% of the total voting power of such concern
in case of a company or he must be entitled to 20%
of total income of such concern.
In the case of the assessee, the payment was made to a
concern referred above but the registered shareholder
(the trustees of N) and the beneficial owner of the
shares (the beneficiaries of N) were different persons &
hence the loan was not taxed as deemed dividend in the
hands of B.
Conclusion:
Deemed dividend can be taxed only in the hands of a
person who is a registered shareholder of the lending
company and no other person. Thus, even if the trustees
and the beneficiaries of the Trust were one and the
same person(s), yet the loan given to the other company
would not be taxed as deemed dividend income in the
hands of the said company.
The expression ‘such shareholder’ referred to in section
2(22)(e) refers to both a registered shareholder as well
as a beneficial shareholder. If the person to whom loan
is given is a registered shareholder but not the beneficial
shareholder, then the provisions of section 2(22)(e) will
not apply. Similarly, if a person is a beneficial
shareholder but not the registered shareholder, then
too, the provisions of Section 2(22)(e) will not apply. In
short the shareholder mentioned in this sub‐section
must possess both the qualifications of being a
registered as well as a beneficial shareholder.
Thus, going forward, in the event that a closely held
company inadvertently gives a loan/advance to a group
concern in which the immediate shareholder of the
lending company holds a substantial interest not directly
but indirectly, the Special Bench decision may come in
handy as a defense. However, we do not recommend
this as a planning device. It may only be used as a
mechanism to defend. |