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2018 (1) TMI 1159 - SC - Income TaxDeemed dividend u/s 2(22)(e) - whether Section 2(22)(e) gets attracted inasmuch as a loan has been made to a shareholder, who after the amendment, is a person who is the beneficial owner of shares holding not less than 10% of the voting power in the Company - whether the loan is made to any concern in which such shareholder is a partner and in which he has a substantial interest, which is defined as being an interest of 20% or more of the share of the profits of the firm? - Held that - The whole object of the amended provision would be stultified if the Division Bench judgment were to be followed. Ankitech s case 2011 (5) TMI 325 - DELHI HIGH COURT , in stating that no change was made by introducing the deeming fiction insofar as the expression shareholder is concerned is, according to us, wrongly decided. The whole object of the provision is clear from the Explanatory memorandum and the literal language of the newly inserted definition clause. This is why shareholder now, post amendment, has only to be a person who is the beneficial owner of shares. One cannot be a registered owner and beneficial owner in the sense of a beneficiary of a trust or otherwise at the same time. It is clear therefore that the moment there is a shareholder, who need not necessarily be a member of the Company on its register, who is the beneficial owner of shares, the Section gets attracted without more. To state, therefore, that two conditions have to be satisfied, namely, that the shareholder must first be a registered shareholder and thereafter, also be a beneficial owner is not only mutually contradictory but is plainly incorrect. Also, what is important is the addition, by way of amendment, of such beneficial owner holding not less than 10% of voting power. This is another indicator that the amendment speaks only of a beneficial shareholder who can compel the registered owner to vote in a particular way, as has been held in a catena of decisions starting from Mathalone vs. Bombay Life Assurance Co. Ltd., 1953 (5) TMI 25 - SUPREME COURT OF INDIA . This being the case, we are prima facie of the view that the Ankitech judgment (2011 (5) TMI 325 - DELHI HIGH COURT ) itself requires to be reconsidered, and this being so, without going into other questions that may arise, including whether the facts of the present case would fit the second limb of the amended definition clause, we place these appeals before the Hon ble Chief Justice of India in order to constitute an appropriate Bench of three learned Judges in order to have a relook at the entire question.
Issues Involved:
1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961, as amended in 1988. 2. Whether a partnership firm can be considered a shareholder under Section 2(22)(e). 3. The applicability of the term "beneficial owner" in the context of deemed dividends. Detailed Analysis: Interpretation of Section 2(22)(e) of the Income Tax Act, 1961: The primary issue in the appeals was the interpretation of Section 2(22)(e) of the Income Tax Act, 1961, specifically post the 1988 amendment. The section pertains to the treatment of certain payments by companies as deemed dividends. The court examined the historical context and amendments to the provision to understand its current application. The original definition under the Income Tax Act, 1922, and its judicial interpretation in cases like C.I.T., Andhra Pradesh vs. C.P. Sarathy Mudaliar (1972) and M/s Rameshwari Lal Sanwarmal vs. Commissioner of Income Tax, Assam (1980) were discussed. The court noted that the term "shareholder" traditionally referred to a registered shareholder in the company's books. Whether a Partnership Firm Can Be Considered a Shareholder: The court addressed whether a partnership firm, which had taken a loan from a company, could be considered a shareholder under the amended Section 2(22)(e). The Assessee firm had taken a loan from M/s Jetair Private Limited, and the shares were held by two partners on behalf of the firm. The court examined whether the firm could be treated as a shareholder, given that the shares were registered in the names of the individual partners. The court concluded that a partnership firm could not be considered a registered shareholder, aligning with the precedent that only individuals registered in the company's books could be shareholders. Applicability of the Term "Beneficial Owner": The court scrutinized the term "beneficial owner" introduced in the 1988 amendment. The amendment aimed to prevent closely held companies from avoiding tax by distributing profits as loans or advances instead of dividends. The court analyzed the legislative intent and the explanatory memorandum accompanying the amendment, which clarified that the provision targets loans or advances to shareholders holding not less than 10% of the voting power or to concerns where such shareholders have substantial interest. The court concluded that the term "shareholder" in both limbs of the amended definition refers to the beneficial owner of shares, not necessarily a registered shareholder. This interpretation aligned with the legislative intent to tax deemed dividends effectively. Judicial Precedents and Conflicting Judgments: The court noted conflicting judgments, particularly the Division Bench judgment in C.I.T. vs. Ankitech Private Limited, which held that the term "shareholder" continued to mean a registered shareholder even after the amendment. The court found this interpretation inconsistent with the legislative intent and the literal language of the amended provision. The court emphasized that the beneficial owner, holding not less than 10% of the voting power, should be considered for the application of Section 2(22)(e). Conclusion and Referral to Larger Bench: Given the conflicting interpretations and the significant implications of the amended provision, the court decided that the matter required reconsideration by a larger bench. The court referred the appeals to the Chief Justice of India to constitute a bench of three judges to re-examine the entire question, including the applicability of the term "beneficial owner" and whether the facts of the present case fit the second limb of the amended definition clause. Ordered Accordingly: The appeals were placed before the Chief Justice of India for the constitution of an appropriate bench to re-evaluate the issues comprehensively.
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