2014 (4) TMI 788 - HC - Income Tax

Deemed dividend u/s 2(22)(e) of the Act Advance/loan paid - Held that - The assessee is not a shareholder of M/s. Ittina - the definition of dividend has been enlarged, and that loan or advances given under the conditions specified under this provision would also be treated as dividend - The fiction is not to be extended for enlarging the concept of shareholders - Dividend is to be given by any company, to its shareholders - in the second category u/s 2(22)(e) of the Act, loan or advances given to a concern which is not a shareholder of the payee company could be treated as shareholder receiving dividend Relying upon Commissioner of Income-tax Versus MCC Marketing (P.) Ltd. 2011 (11) TMI 232 - DELHI HIGH COURT - if the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of deeming shareholder, then the legislature would have inserted deeming provision in respect of shareholder as well. The legislature has not done so - It is only the person whose name is entered in the Register of the shareholders of the Company as the holder of the shares who can be said to be a shareholder qua Company and not the person beneficially entitled to the shares - it is only where a loan is advanced by the Company to the registered shareholder and the other conditions set out in Section 2(22)(e) of the Act are satisfied, that amount of loan would be liable to be regarded as deemed dividend thus, there was no reason to interfere in the decision of the Tribunal Decided against Revenue.

Summary

Issues Involved:
1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961.
2. Taxation of deemed dividend in the hands of the shareholder versus the concern.
3. Applicability of Circular No.495 dated 22.09.1987.

Detailed Analysis:

1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961:
The primary issue revolves around whether the amount advanced by M/s. Ittina Properties Private Limited (Ittina) to the respondent-assessee can be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Tribunal and the first Appellate Authority concluded that since the respondent-assessee was not a shareholder of Ittina, the amount could not be treated as deemed dividend. The High Court upheld this interpretation, emphasizing that the term "dividend" under Section 2(22)(e) is intended to apply to shareholders, not to non-shareholder concerns. The Court referenced judgments from the Bombay High Court (Universal Medicare (P.) Ltd.) and the Delhi High Court (MCC Marketing (P.) Ltd. and Ankitech (P.) Ltd.), which supported the view that deemed dividend should be taxed in the hands of the shareholder, not the concern.

2. Taxation of deemed dividend in the hands of the shareholder versus the concern:
The High Court examined whether the amounts advanced by Ittina to the respondent-assessee could be taxed as deemed dividend in the hands of the concern. The Court noted that the respondent-assessee was not a shareholder of Ittina, and thus, the amounts could not be treated as deemed dividend under Section 2(22)(e). The Court highlighted that the intention behind Section 2(22)(e) is to tax dividends in the hands of shareholders, and legal fiction should not extend to treating non-shareholders as shareholders for the purpose of taxation. The Court reiterated that dividend can only be distributed to shareholders, and any attempt to tax non-shareholders under this provision would be contrary to the legislative intent.

3. Applicability of Circular No.495 dated 22.09.1987:
The revenue argued that the respondent-assessee should be considered a shareholder under the second limb of Section 2(22)(e) based on Circular No.495. However, the Court, referencing the Delhi High Court's decision in Ankitech (P.) Ltd., held that circulars issued by the Central Board of Direct Taxes (CBDT) are not binding on courts and tribunals. The Court emphasized that the legal provision relates to "dividend" and should be interpreted strictly. The Court concluded that the circular could not override the clear statutory language and the judicial interpretation that deemed dividend should be taxed in the hands of the shareholder, not the concern.

Conclusion:
The High Court upheld the decisions of the Tribunal and the first Appellate Authority, confirming that the amounts advanced by Ittina to the respondent-assessee could not be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961, since the respondent-assessee was not a shareholder of Ittina. The Court emphasized the legislative intent to tax dividends in the hands of shareholders and rejected the revenue's reliance on Circular No.495. The appeals were disposed of in favor of the respondent-assessee, with the Court noting that the revenue could take corrective measures to tax the deemed income in the hands of the shareholders if necessary.