2011 (7) TMI 288 - HC - Income Tax

Deemed dividend - Partnership firm - purchase of shares in the name of partners - It was argued that only that beneficial owner whose name is entered as beneficial owner in the records of the depository, would be deemed to be a member of the concerned company - Held that - since the partnership firm is the beneficial owner and it has to per force purchase the shares in the name of the partners, it is very easy for a person like him to ensure that only the names of partners in whose name shares are purchased is entered in the records of the company and the names of all the partners are not recorded so that provisions of Section 187C of the Companies Act are not fulfilled - for the purpose of Section 2(22)(e) of the Act, partnership firm is to be treated as the shareholder and it is not necessary that is has to be registered shareholder . - Decided against the assessee

Issues Involved:
1. Interpretation of Section 2(22)(e) of the Income-Tax Act.
2. Whether a partnership firm can be considered a "shareholder" for the purposes of Section 2(22)(e).
3. The requirement of being both a registered and beneficial shareholder under Section 2(22)(e).

Issue-wise Detailed Analysis:

1. Interpretation of Section 2(22)(e) of the Income-Tax Act:
Section 2(22)(e) of the Income-Tax Act creates a fiction that certain payments made by a company to specified persons are deemed as dividend income. The provision applies under the following conditions:
- The payer company must be a closely held company.
- The payment must be by way of loan or advance to:
a. A shareholder holding at least 10% of the voting power in the payer company.
b. A company in which such a shareholder has at least 20% of the voting power.
c. A concern (other than a company) in which such a shareholder has at least 20% interest.
- The payer company must have accumulated profits on the date of any such payment.
- The payment of loan or advance must not be in the course of ordinary business activities.

2. Whether a Partnership Firm can be Considered a "Shareholder":
The court addressed whether a partnership firm, which had purchased shares in the name of its partners, could be treated as a shareholder for the purposes of Section 2(22)(e). The court noted that the partnership firm is the beneficial owner of the shares, even though the shares were purchased in the names of the partners due to legal compulsion. The court stated that the partnership firm should be treated as the shareholder for the purposes of Section 2(22)(e), even if it is not a registered shareholder. This interpretation is necessary to prevent the circumvention of the provision's purpose, which is to tax loans or advances given to shareholders as deemed dividends.

3. Requirement of Being Both a Registered and Beneficial Shareholder:
The court examined whether Section 2(22)(e) requires the person receiving the loan or advance to be both a registered shareholder and a beneficial owner. The court referred to the Supreme Court's decision in Rameshwarlal Sanwarmal v. CIT, which held that both conditions must be satisfied. The court concluded that the expression "being a person who is a beneficial owner of shares" qualifies the word 'shareholder,' meaning that the person must be both a registered shareholder and a beneficial owner to attract the provisions of Section 2(22)(e).

Conclusion:
The court concluded that for the purposes of Section 2(22)(e) of the Income-Tax Act, a partnership firm should be treated as a shareholder, even if it is not a registered shareholder. The court emphasized that this interpretation is necessary to fulfill the provision's purpose and prevent the avoidance of tax on deemed dividends. The court allowed the appeal, setting aside the order of the Tribunal and restoring the order of the Assessing Officer.

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