2014 (9) TMI 88 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - Assessee company was not a shareholder in the lending company Held that - The legislature has incorporated and inserted the definition of the term dividend - It is made inclusive of distribution of profits, any distribution to the shareholders by a company of debentures, debenturestock, or deposit certificate in any form, or distribution made to the shareholders upon liquidation of a company - Equally, amount distributed on reduction of capital is termed as dividend - What is also then included is a payment made by a company to its shareholder - That is by way of advance or loan to him - This is included so as to visit the shareholder with a liability to pay tax - It is eventually, the shareholder who will pay tax on the same - The shareholder cannot escape that liability merely because the loan or advance has been made over to any concern in which such shareholder is a member or a partner and in which he has substantial interest - legislature noted that the shareholder would receive the sum from a company and which is not strictly falling within the concept of dividend . Any reference to Explanation 3 and particularly the definition of term concern will not advance or carry the Revenue's case any further - it is the shareholder who is registered as such who is entitled to receive the dividend - Merely because the payment is made to him by way of advance or loan was not termed as such earlier that the legislature has inserted such a payment in the definition of the term dividend and made the definition wide and broad so also inclusive - The view taken in the present case that the recipient/assessee was not a shareholder, thus is in consonance with the legal position. Relying upon Commissioner of Income Tax v/s C. P. Sarathy 1971 (10) TMI 8 - SUPREME Court - the beneficial owner of shares whose name does not appear in the register of the shareholders of the company cannot be said to be a shareholder though he may be beneficially entitled to the shares but he is not a shareholder - by the deeming provision, such payment by the company is treated as dividend - The purpose is to tax dividend in the hands of the shareholder - so long as the Tribunal in the matters and the Appeals which are brought on hold that the assessee company before it was not a shareholder in any of the entities which have advanced and lent sums, then, the addition is required to be deleted following the decision in Commissioner of Income-tax Versus Universal Medicare Private Limited 2010 (3) TMI 323 - BOMBAY HIGH COURT - if the payment cannot be termed as loan or advance to the shareholder, then, even such a view cannot be termed in the given facts and circumstances and without anything more as perverse or vitiated by error of law apparent on the face of the record Decided against revenue.

Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961.
2. Interpretation of the term "shareholder" under Section 2(22)(e).
3. Relevance of the judgment in the case of Universal Medicare Pvt Ltd.
4. Validity of the Income Tax Appellate Tribunal's reliance on the Special Bench decision in Bhaumik Colour Pvt Ltd.
5. Consideration of amendments to Section 2(22)(e) and their impact on the interpretation of the term "dividend".

Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961
The primary issue in these appeals is whether Section 2(22)(e) of the Income Tax Act, 1961, can be invoked when the assessee company is not a shareholder in the lending company. The Revenue argued that the Tribunal's interpretation of Section 2(22)(e) is incorrect and that the provision applies even if the assessee is not a shareholder but has a controlling stake in the lending company. The Tribunal, however, found that Section 2(22)(e) is not attracted in such cases, raising a substantial question of law.

2. Interpretation of the term "shareholder" under Section 2(22)(e)
The Tribunal's decision was based on the interpretation that the term "shareholder" in Section 2(22)(e) refers to a registered shareholder. The Tribunal applied the ratio of its Special Bench decision in the case of Assistant Commissioner of Income Tax v/s Bhaumik Colour Pvt Ltd, which was approved by the Bombay High Court in Commissioner of Income Tax v/s Universal Medicare Pvt Ltd. The Tribunal held that the recipient of the amount must be a registered shareholder of the lending company for Section 2(22)(e) to apply.

3. Relevance of the judgment in the case of Universal Medicare Pvt Ltd
The Revenue requested that the appeals not be disposed of by applying the ratio of the Universal Medicare Pvt Ltd judgment, arguing that it requires reconsideration. However, the Court found that if the judgment in Universal Medicare does not require reconsideration, the individual appeals must be decided against the Revenue by upholding the Tribunal's view. The Court ultimately upheld the Universal Medicare judgment, finding that it correctly interpreted Section 2(22)(e) and that the dividend must be taxed in the hands of the shareholder, not the recipient company.

4. Validity of the Income Tax Appellate Tribunal's reliance on the Special Bench decision in Bhaumik Colour Pvt Ltd
The Tribunal's reliance on the Bhaumik Colour Pvt Ltd decision was upheld. The Tribunal had found that the assessee company was not a shareholder in any of the lending companies, and therefore, the addition under Section 2(22)(e) was not justified. The Court confirmed that the Tribunal's interpretation and reliance on the Special Bench decision were correct and consistent with the legal provisions.

5. Consideration of amendments to Section 2(22)(e) and their impact on the interpretation of the term "dividend"
The Revenue argued that amendments to Section 2(22)(e) should change the interpretation of the term "dividend," particularly the inclusion of beneficial ownership of shares. However, the Court found that the amendments did not alter the fundamental requirement that the recipient must be a registered shareholder. The Court noted that the legislative intent was to prevent the circumvention of tax liabilities by distributing profits as loans or advances, but this did not change the requirement that the dividend must be taxed in the hands of the shareholder.

Conclusion:
The Court dismissed the Revenue's appeals, holding that the Tribunal's interpretation of Section 2(22)(e) was correct and consistent with the legal provisions. The judgment in Universal Medicare Pvt Ltd was upheld, confirming that the term "shareholder" refers to a registered shareholder and that the dividend must be taxed in the hands of the shareholder, not the recipient company. The Tribunal's reliance on the Bhaumik Colour Pvt Ltd decision was validated, and the amendments to Section 2(22)(e) did not change the fundamental interpretation of the term "dividend." All appeals raising similar questions were disposed of accordingly.

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