2014 (11) TMI 694 - HC - Income Tax

Deemed dividend u/s 2(22)(e) Applicability of circular No.495 dated 22.9.1987 Assessee not the shareholder - Held that - CIT(A) rightly noted that the assessee company itself is not a shareholder in the company Front Line Printers - Accordingly, no dividend, normal or deemed, could have been received by the assessee company from Front Line Printers as long as the assessee company was not a shareholder in that concern - The assessment of deemed dividend in the hands of the assessee company was not correct - Tribunal rightly recorded that in order to satisfy the requirement of Section 2(22)(e) of the Income Tax Act, the assessee should be the beneficial owner of the shares besides being a registered shareholder - Only if these two ingredients are satisfied, the question of assessment to tax as deemed dividend would arise- in ACIT V. Bhoumik Colour (P) Ltd. 2008 (11) TMI 273 - ITAT BOMBAY-E it has been held that the assessee not being a registered or beneficial owner of the shareholdings, is not liable to be taxed and hence the Tribunal placing reliance on the Explanatory Notes to Finance Act stating that it cannot override the provisions of the Act Tribunal rightly recorded that the assessee, not being a registered or beneficial shareholder, is not liable to pay tax, are correct Decided against revenue.

Summary

Issues:
1. Whether the sum paid by the assessee company is assessable under Section 2(22)(e) of the Income Tax Act, 1961?
2. Whether Circular No.495 dated 22.9.1987 issued by CBDT is applicable in the case?

Analysis:
1. The case involves an appeal by the Revenue against the Income Tax Appellate Tribunal's order regarding the assessability of a sum of Rs. 40 lakhs paid by the assessee company, Printwave Services P. Ltd., to a director in both the assessee company and its sister concern, Front Line Printers P. Ltd. The Assessing Officer treated this payment as a loan attracting Section 2(22)(e) of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) allowed the appeal, stating that as the assessee was not a shareholder in Front Line Printers, the deemed dividend could only be assessable in the hands of the substantial shareholder, T.R. Jawahar, and not the assessee company.

2. The Income Tax Appellate Tribunal, relying on a previous decision, emphasized that for Section 2(22)(e) to apply, the assessee must be the beneficial owner of the shares. As the assessee was neither the registered nor beneficial owner of the shareholdings in Front Line Printers, the Tribunal rejected the appeal filed by the Revenue. The Tribunal highlighted that the Explanatory Notes to the Finance Act cannot override the Act's provisions.

3. The High Court, after considering the arguments presented by the Revenue's counsel, Mr. T.R. Senthilkumar, reiterated the definition of dividend under Section 2(22)(e) of the Income Tax Act. It clarified that for a payment to be considered a dividend, the recipient must be a beneficial owner of shares. Since the assessee was not the beneficial owner of the shares in Front Line Printers, the court upheld the Tribunal's decision, dismissing the appeal filed by the Revenue.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing that the assessee, not being a registered or beneficial shareholder, was not liable to be taxed under Section 2(22)(e) of the Income Tax Act. The appeal by the Revenue was dismissed, and no costs were awarded.