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TMI Blog2009 (3) TMI 633X X X X Extracts X X X X X X X X Extracts X X X X ..... he company M/s. Jetair Pvt. Ltd. cannot be treated as deemed dividend within the meaning of section 2(22)( e ). HELD THAT:- In the present case, Shri Naresh Goyal, Shri Surender Goyal and Jet Enterprises Pvt. Ltd. are the registered shareholders of M/s. Jetair Pvt. Ltd. They are the partners in the present assessee partnership firm having share in profit of 35 per cent, 15 per cent and 50 per cent respectively. M/s. Jetair Enterprise Pvt. Ltd. is holding shares in Jetair Pvt. Ltd. only to the extent of 8.77 per cent, which is less than the 10 per cent of voting power. Similarly, Shri Surender Goyal is a shareholder in M/s. Jetair Pvt. Ltd. to the extent of 7.02 per cent, which is also less than 10 per cent of the voting power. However, Shri Naresh Goyal is a registered shareholder in M/s. Jetair Enterprise Pvt. Ltd. with 51 per cent of shareholding satisfying the first limb of section 2(22)( e ). Insofar as the new category of payment which has been considered as dividend by the Finance Act, 1987 with effect from 1-4-1988, Shri Naresh Goyal is holding more than 20 per cent of shares in the present partnership firm to which the loan has been granted by M/s. Jetair Pvt. Ltd. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Act. 4. The issue involved in the assessment year 2004-05 is with regard to the addition of Rs. 95,78,000 made by the Assessing Officer, but deleted by the ld. CIT(A), on account of loan treated as deemed dividend under section 2(22)( e ) of the Income-tax Act. 5. In the assessment year 2003-04, it was observed by the Assessing Officer that the assessee, a partnership firm, consisting of three partners, namely, Shri Naresh Goyal having 35 per cent profit sharing ratio, Shri Surender Goyal having 15 per cent profit sharing ratio and M/s. Jet Enterprises Pvt. Ltd. having 50 per cent profit sharing ratio, is engaged in the business as general sales agent for passenger sales and cargo for M/s. Kuwait Average Corporation and American Airlines in India. On perusal of the audit report of the accounts, it was noticed by the Assessing Officer that the assessee had procured or taken a loan totalling to Rs. 28,52,41,516 from M/s. Jetair Pvt. Ltd., Jetair House, 13 Community Centre, Yusuf Sarai, New Delhi, during the year under consideration. The Assessing Officer required the assessee to furnish the details of shareholding of the assessee-firm or its partners in M/s. Jet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Shri Surinder Goyal 7.02% ( iii ) M/s. Jet Enterprises Pvt. Ltd. 8.77% 7. The Assessing Officer obtained and collected certified copy of annual return of M/s. Jetair Pvt. Ltd. from the Registrar of Companies, and from the details so furnished by the Registrar of Companies in the form of annual return of M/s. Jetair Pvt. Ltd., it was noticed by the Assessing Officer that out of the total issued share capital of 2,98,800 numbers of shares, the assessee firm M/s. National Travel Services held 1,43,988 equity shares of M/s. Jetair Pvt. Ltd. through its partners, Shri Naresh Goyal and Shri Surender Goyal. The Assessing Officer observed that the assessee-firm had taken loan of Rs. 28,51,41,516 from M/s. Jetair Pvt. Ltd., and the assessee-firm had 1,43,988 equity shares of Rs. 100 each of M/s. Jetair Pvt. Ltd. These shares were purchased through the partners of the assessee-firm, namely, Shri Naresh Goyal and Shri Surender Goyal. The Assessing Officer, therefore, had taken a view that assessee-firm was the beneficial owner with shareholding of 48.18 per cent of the voting power in M/s. Jetair Pvt. Ltd., and since the assessee-firm was the bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed dividend, and added the same to the assessee s total income as deemed dividend assessable under the head "Income from other sources." 10. Being aggrieved, the assessee preferred an appeal before the ld. CIT(A). After considering the totality of the facts and circumstances of the case and considering the Assessing Officer s order as well the submission of the assessee, the ld. CIT(A) held that the assessee-firm was not a shareholder as per law and, therefore, the loan received by it from the company M/s. Jetair Pvt. Ltd. cannot be treated as deemed dividend within the meaning of section 2(22)( e ) of the Act. 11. Being aggrieved with the ld. CIT(A) s order, the department has filed the present appeal before the Tribunal. 12. We have heard both the parties and have carefully gone through the orders of the authorities below. We have perused the material on record. 13. In the course of hearing of this appeal, the ld. counsel for the assessee has submitted that the scope and meaning of section 2(22)( e ) has recently been considered by the Special Bench of the Hon ble ITAT, Mumbai Bench in the case of Asstt. CIT v. Bhaumik Colour (P.) Ltd. [2009] 27 SOT 270. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of section 2(22)( e ) would not apply. The Special Bench further hold that the deeming provisions of section 2(22)( e ) as it applies to case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on presumption that the loans or advances would ultimately be made available to shareholders of company giving loan or advance, and, therefore, intention of Legislature is to tax dividend only in the hands of shareholder and not in the hands of concern. 17. Now, the first question that falls for our consideration is to decide as to whether the present assessee partnership firm can be said to be a registered shareholder of M/s. Jetair Pvt. Ltd. On the facts placed on record, we find that M/s. Naresh Goyal and Shri Surender Goyal are the shareholders to the extent of 1,33,180 numbers of shares and 10,800 number of shares respectively. It is not in dispute that they have become shareholder of M/s. Jetair Ltd. representing the present assessee firm i.e., M/s. National Travels Services. The expression "shareholder" used in section 2(22)( e ) has been considered and interpreted by the Special Bench of the ITAT, Mumbai Bench E in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits." Explanation 3 to section 2(22)( e ) is as follows : " Explanation 3 : For the purpose of this clause ( a ) concern means a Hindu Undivided Family, or a firm or an association of persons or a body of individuals or a company; ( b )A person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern;" Section 2(32) defines the expression "person who has a substantial interest in the company", in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power. 16. Under the 1922 Act, two categories of payment were considered as dividend viz., ( a ) any payment by way of advance or loan to a shareholder was considered, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g power. Second limb ( b )or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest hereafter in this clause referred to as the said concern). Third limb ( c )or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits." 20. In the case of C.P. Sarathy Mudaliar ( supra ) provisions of section 2(6A)( e ) of the Act, 1922, which was synonymous to section 2(22)( e ) of the Income-tax Act, 1961 came up for consideration. In the said case, members of HUF acquired shares in a company with the fund of the family. Loans were granted to HUF and the question was whether the loans could be treated as dividend income of the family falling within section 2(6A)( e ) of the Act, 1922. The Apex Court held that only loans advanced to shareholders could be deemed to be dividends under section 2(6A)( e ) of the 1922 Act, the HUF could not be considered to be a shareholder under section 2(6A)( e ) of the Act and hence, loans given to the HUF will not be considered as loans advanced to "shareholder" of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entioned the condition under the 1922 Act and the 1961 Act regarding the payee being a shareholder remains the same and it is the condition that such shareholder should be beneficial owner of the shares and the percentage of voting power that such shareholder should hold that has been prescribed as an additional condition under the 1961 Act. The word "Shareholder" alone existed in the definition of dividend in the 1922 Act. The expression "Shareholder" has been interpreted under the 1922 Act to mean a registered shareholder. This expression "Shareholder" found in the 1961 Act has to be, therefore, construed as applying only to registered shareholder. It is a principle of interpretation of statutes that where once certain words in an Act have received a judicial construction in one of the superior courts, and the Legislature has repeated them in a subsequent statute, the Legislature must be taken to have used them according to the meaning which a court of competent jurisdiction has given them. 23. In the 1961 Act the word "Shareholder" is followed by the following words "being a person who is the beneficial owner of shares". This expression used in section 2(22)( e ) both in the 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law in the 1922 Act vis-a-vis the expression used in 1961 Act, and then has come to conclusion that the expression "shareholder" used in section 2(22)( e ) of the 1961 Act would mean a registered shareholder as was so interpreted under the 1922 Act also. 19. In the case of C.P. Sarathy Mudaliar ( supra ), the company advance the loans to the assessee Hindu undivided family, who was the beneficial owners of the shares in the company, but the shares were registered in the name of the individual Karta, who held the shares for and on behalf of the Hindu undivided family. On the above facts, the Hon ble Supreme Court held that the Hindu undivided family being only the beneficial shareholder and not a registered shareholder would not fall within the purview of section 2(6A)( e ) of the 1922 Act, this position is applicable in the 1961 Act also as so observed by the Special Bench of the Tribunal. 20. In the light of the discussions made above and the view taken by the Special Bench, we, therefore, hold that the present partnership firm, for on whose behalf the partners have become the shareholder in a company, which has given the loan to the partnership firm, cannot be sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve must also be a member or a partner in the concern holding substantial interest in the concern viz., when the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than twenty per cent of the income of such concern; and where the concern is a company he must be the owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power. ( d )If the above conditions are satisfied then the payment by the company to the concern will be dividend. 27. In the case of the assessee it is seen that conditions ( b ) and ( c ) are not satisfied inasmuch as NNT held shares in UPPL and BCPL only as a legal and registered owner but not as a beneficial owner. In the case of the assessee it is seen that the three trustees of NNT held shares in UPPL and BCPL only as a legal and registered owner. They held shares for and on behalf of 5 beneficiaries of the trust who are different individuals. They were, therefore, not beneficial owners of the shares. Trust ownership is a peculiar instance of duplicate ownership. Trust prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this question needs to be answered. The facts in the case of the intervener have already been narrated earlier and are not being repeated here. 30. At the outset it has to be mentioned that provisions of section 2(22)( e ) which brought in a new category of payment which was to be considered as dividend as introduced by the Finance Act, 1987 with effect from 1-4-1988 viz., payment by a company "to any concern in which such shareholder is a member or a partner and in which he has a substantial interest" do not say as to in whose hands the dividend has to be brought to tax, whether in the hands of the "concern" or the "shareholder". We have already seen the divergent views on this issue which have been referred to in the earlier part of this order. 31. The above provisions were subject-matter of consideration before the Hon ble Rajasthan High Court in the case of Hotel Hill Top ( supra ). The facts of the case before the Hon ble Court were as follows : The assessee was one M/s. Hotel Hill Top a partnership firm. This firm received an advance of Rs. 10 lakhs from a company M/s. Hill Top Palace Hotels (P.) Ltd. The shareholding pattern of M/s. Hill Top Palace Hotels (P.) Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company, whether to the shareholder, or to the concerned firm. In which event, it would fall within the expression deemed dividend . Obviously, income from dividend, is taxable as income from the other sources under section 56, and in the very nature of things the income has to be of the person earning the income. The assessee in the present case is not shown to be one of the persons, being shareholder. Of course, the two individuals being R and D are the common persons, holding more than requisite amount of share holding and are having requisite interest, in the firm, but then, thereby the deemed dividend would not be deemed dividend in the hands of the firm, rather it would obviously be deemed dividend in the hands of the individuals, on whose behalf or on whose individual benefit, being such shareholder, the amount is paid by the company to the concern. Thus, the significant requirement of section 2(22)( e ) is not shown to exist. The liability of tax, as deemed dividend, could be attracted in the hands of the individuals, being the shareholders, and not in the hands of the firm." 32. The aforesaid decision of the Hon ble Rajasthan High Court which is the only decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 2(22)( e ) of the Act. 35. The intention behind enacting provisions of section 2(22)( e ) are that closely held companies ( i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend, because if so distributed the dividend income would became taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions such payment by the company is treated as dividend. The intention behind the provisions of section 2(22)( e ) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en away. In the light of the intention behind the provisions of section 2(22)( e ) and in the absence of indication in section 2(22)( e ) to extend the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of a non-shareholder. 38. The basic characteristic of dividend as held by the Apex Court in the case of Kantilal Manilal v. CIT [1961] 41 ITR 275 is a share of profits of the company given to its shareholders. Further section 206 of the Companies Act, 1956 prohibits payment of dividend to any person other than the registered shareholder. If one were to break up the natural meaning the following to components emerge ( a ) dividend is a share of profits of the company ( b ) paid to its shareholders. Section 2(22) of the Act artificially extends the scope of dividend from being more than only a distribution of profits to cover certain other types disbursements such as loans paid etc. (the first ingredient mentioned above). It does not, however, alter the second component of its natural meaning viz., paid to its shareholder. In other words all that sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid down in the case of Nikko Technologies (I) (P.) Ltd. ( supra ) is not correct. We, therefore, hold that deemed dividend under section 2(22)( e ) of the Income-tax Act, 1961 can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person. 41. In the light of the above discussion, the questions referred to the Special Bench are answered as follows : On the first question : Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. On the second question : The expression shareholder referred to in section 2(22)( e ) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder than the provisions of section 2(22)( e ) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provisions of section 2(22)( e ) will not apply." 22. From the said decision of Special Bench, it is, thus, clear that even in the light of the amendment introduced by the Finance Act, 1987 with effect from 198 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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