2021 (1) TMI 460 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - shares held in the name of minor children - whether the minor legally cannot enter into contract with the companies for purchase of shares and hence shares held by minor, who is not having voting rights cannot be treated as beneficial owner of shares? - Commissioner (Appeals) deleted the additions by holding that the shareholding of assessee, as father and his minor cannot be added for the purpose of section 2(22(e) read with section 2(32) - HELD THAT - As none of the shareholders was holding more than 10% of voting power in Vapi Care Pharma and had more than 20% shares in Varieties Pharma and /or in Veritas Biovention - source of shareholding of Master Yes Shah is independent and he is entitled to the benefit of ownership. Assessee does not have any beneficial interest in the Shares held by Minor son Master Yes Shah. Commissioner (Appeals) also held that the issue for consideration was whether the share held on behalf of Minor child, who could not exercise voting power, should be excluded from the total share holding for ascertaining whether assessee is a substantial shareholder. If shares were excluded from the total shares issued by the company, the assessee s interest would exceed 20%, but if such shares are included, his interest would fall below 20%. In CIT Vs C.P. Sarathy Mudaliar 1971 (10) TMI 8 - SUPREME COURT while considering the (corresponding section 2(6A)(e) of Indian Income tax Act 1922) held that the section speaks of shareholder , it refers to the registered shareholder and not to the beneficial owner. Also in Minnie Cama Vs ITO 1984 (11) TMI 77 - ITAT AHMEDABAD held that it is well settled that a deeming provision like section 2(22)(e) must be strictly construed. For determination of question as to whether the assessee had substantial interest in company, shares held by trust in which assessee was trustee, or held in joint names or held in name of minor children of the assessee could not be considered as shares held by the assessee. If so considered, it could be seen from the list of shareholders, that the assessee was not holding shares carrying not less than twenty per cent of the voting power and, therefore, she could not be treated to be a person who has substantial interest in the company within the meaning of the provisions of section 2(22). Hon ble Bombay High Court in ITO Vs S.S. Barodawala 1983 (1) TMI 110 - ITAT BOMBAY-B held that when a father as a guardian may manage the affairs with regard to the shares standing in the name of his minor sons, but this will not make him the beneficial owner of the shares. To make him a beneficial owner the benefit or advantage arising out of the shares must accrue to him. In the present case, no such benefit accrued, and hence the assessee could not be said to be the beneficial owner of the shares standing in the name of his minor sons. Commissioner (Appeals) was, thus, right in holding that the amounts withdrawn from the company could not be deemed to be dividend under section 2(22)(e). Thus in view of the above said factual and legal discussion, we affirm the order of learned Commissioner (Appeals). - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made under Section 2(22)(e) of the Income Tax Act.
2. Consideration of minor's shareholding for determining substantial interest.
3. Validity of additions not based on incriminating material found during the search.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made Under Section 2(22)(e):

The Revenue contested the deletion of ?13,97,50,223/- added under Section 2(22)(e) of the Income Tax Act by the Assessing Officer (AO). The AO argued that the minor could not legally enter into contracts for purchasing shares, and thus, the shares held by the minor should be considered as beneficially owned by the father. The AO included the minor's shareholding with the assessee's to conclude that the assessee held more than 10% in Vapi Care Pharma Ltd. and more than 20% in Veritas Biovention Pvt. Ltd., thereby attracting the provisions of Section 2(22)(e). The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the additions, holding that the shares held by the minor independently sourced and the father did not have beneficial ownership. The Tribunal upheld the CIT(A)'s decision, noting that the deeming provisions of Section 2(22)(e) must be strictly construed and that the assessee did not meet the criteria for deemed dividend under Section 2(22)(e).

2. Consideration of Minor's Shareholding for Determining Substantial Interest:

The AO included the minor's shareholding in the assessee's total shareholding to determine substantial interest, arguing that the minor's income is assessed in the hands of the guardian father. The CIT(A) and the Tribunal disagreed, stating that the shares held by the minor should not be included in the assessee's shareholding for the purposes of Section 2(22)(e). The Tribunal referenced multiple case laws, including CIT Vs C.P. Sarathy Mudaliar and ITO Vs S.S. Barodawala, to support the position that shares held by a minor should not be considered as beneficially owned by the guardian for the purposes of determining substantial interest.

3. Validity of Additions Not Based on Incriminating Material Found During the Search:

The assessee argued that the additions were not based on any incriminating material found during the search proceedings. The Tribunal did not delve deeply into this issue, as it had already affirmed the CIT(A)'s decision on the primary ground that the provisions of Section 2(22)(e) were not applicable.

Conclusion:

The Tribunal dismissed the Revenue's appeals for both AY 2012-13 and AY 2013-14, affirming the CIT(A)'s order that the shareholding of the minor should not be included in the assessee's shareholding for the purposes of Section 2(22)(e). The Tribunal emphasized that the deeming provisions must be strictly construed and that the assessee did not meet the criteria for deemed dividend under the said section. The Tribunal also noted that the shares held by the minor were independently sourced and not beneficially owned by the assessee. The appeals were dismissed as the primary contention was resolved in favor of the assessee, making other arguments academic.