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2019 (8) TMI 1211 - HC - Income TaxDeemed dividend u/s 2(22)(e) - Whether Assessee should be held to be a beneficial shareholder which can compel Verizon Singapore to vote in a particular way? - HELD THAT - In the present case the Assessee is only a borrower from VCIPL of a sum of ₹ 16.73 crores (which the AO has restricted to ₹ 6.40 crores to the extent of available accumulated profits). ITAT further held that merely because Verizon Singapore holds more than 10% of the voting power in both VCIPL as well as the Assessee will not permit the Revenue to tax the aforementioned loan as a deemed dividend in the hands of the Assessee which is only the borrower. A proper reading of Section 2(22)(e) can only lead to one conclusion, which is also what the ITAT concluded, viz., that the said amount which is borrowed by the Assessee from VCIPL, in which Verizon Singapore holds more than 10% of voting power can if it all, be taxed only as deemed dividend in the hands of Verizon Singapore and not the Assessee. No substantial question of law arises
Issues:
- Appeal against ITAT order on taxability of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. - Interpretation of the term 'shareholder' in light of the decision in Ankitech Pvt. Ltd. case and subsequent doubts raised by the Supreme Court in National Travel Services case. Analysis: 1. The appeal was filed by the Revenue challenging the ITAT's decision regarding the taxability of a sum as 'deemed dividend' under Section 2(22)(e) of the Income Tax Act, 1961 for the Assessment Year 2008-09. The ITAT held that the amount in question should be taxable in the hands of M/s. Verizon Asia Pacific Holdings Pvt. Ltd., Singapore, and not in the hands of the Assessee. This decision was based on the interpretation of the term 'shareholder' as discussed in previous judgments. 2. The Division Bench of the High Court had earlier ruled in Commissioner of Income Tax v. Ankitech Pvt. Ltd. that the lender holding shares of the borrower should be liable to pay tax on 'deemed dividend' and not the borrower itself. This decision was upheld by the Supreme Court in CIT v. Madhur Housing and Developing Company. However, doubts were raised by the Supreme Court in National Travel Services case regarding whether the term 'shareholder' should include a beneficial owner of shares. 3. The Supreme Court in National Travel Services case expressed concerns about the interpretation of the term 'shareholder' and the necessity of being a registered shareholder or a beneficial owner. The Court emphasized that the amended provision aimed to include beneficial owners holding not less than 10% of voting power. This led to a reevaluation of the Ankitech Pvt. Ltd. judgment and the need for a broader interpretation of the term 'shareholder.' 4. The High Court, in the present case, found that the ITAT's decision was in line with the legal principles established in Ankitech Pvt. Ltd. and Madhur Housing cases. The Assessee, being a borrower from VCIPL, could not be held liable for tax on the deemed dividend borrowed from Verizon Singapore, which held more than 10% of voting power in both VCIPL and the Assessee. The Court reiterated that the tax liability, if any, should fall on Verizon Singapore as the beneficial shareholder. 5. The Revenue argued that the Assessee should be considered a 'beneficial shareholder' due to the shareholding pattern with Verizon Singapore. However, a thorough analysis of Section 2(22)(e) of the Act led the Court to conclude that the borrowed amount could only be taxed as deemed dividend in the hands of Verizon Singapore and not the Assessee. Consequently, the appeal was dismissed as no substantial question of law arose in this matter.
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