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TMI Blog2016 (4) TMI 310X X X X Extracts X X X X X X X X Extracts X X X X ..... er causing enquiries as to the prevailing rent that similar property would fetch in the posh locality at Koramangala? 2. Whether on the facts and circumstances of the case, the Tribunal was justified in allowing interest on the loan borrowed without appreciating that the assessee had failed to substantiate with documentary proof, the nexus between the acquisition of the property and the funds borrowed from its related party M/s.Tayana Consult Pvt. Ltd"? 3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in considering the advance received from M/s.Jupiter Capital Pvt. Ltd. as deemed dividend under section 2(22)(e) of the Act on the basis that the conditions laid down in the said provision are not satisfied without considering the fact that the assessee owns 95% of the shares in M/s.Vectra Holding Pvt. Ltd., which in turn owns 99% shares of M/s.Jupiter Capital Pvt. Ltd., and thus becomes the beneficial owner of M/s.Jupiter Capital Pvt. Ltd.,?" 4. We have heard Mr.E.I.Sanmathi, learned Counsel appearing for the appellants-Revenue and Mr.Parthasarathi, learned Counsel for the respondent-assessee. 5. On the first question, the Tribunal at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed." 9. It may also be recorded that on facts, the question for utilization of the fund of the loan ta ken from ING Vysya Bank for the purpose of repayment of the loan taken from M/s.Tayana Consult Pvt. Ltd., w as considered by CIT (Appeals) and at paragraph-4.4 of the said order, it has been recorded as under: "4.4 I have considered the appellant's submissions and the reasons given by the AO in the assessment order. As mention in preceding para that property bearing No.407, 408 and 409 acquired during the financial year 2002-03 and total investment made thereon of Rs. 5,42,36,338/-. Initially loan was borrowed from ING Vysya Bank which was repaid by obtaining loan from M/s Innovision Properties Pvt. Ltd. amounting to Rs. 5,19,00,000/-. Here it would be worthwhile to mentioned that said loan was taken for purchase of four sites i.e. site No.407, 408, 409 and 445 at Koramangala and investment made in site No.445 at Rs. 1,70,37,600/- and remaining Rs. 3,48,62,400/- towards purchase of site No.407, 408 and 409. Further it is also observed that the outstanding loan as on 29/06/2004 was repaid after obtaining loan from M/s Tayana Consult Pvt. Ltd. of Rs. 5,61,81,550/- on 29/06/2004 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty percent of the income of such concern;" 23. 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 percent of the voting power. 24. An analysis of the above provisions shows that there are three limbs to Sec.2(22)(e) which are as follows:- "Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31-5-1987 , by way of advance or loan First limb (a) to a shareholder, being 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) holding not less than ten per cent of the voting power, Second limb (b) or to any concern in which such shareholder is a member o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holder. The Special Bench on the above issue has observed as follows:- 30. At the outset it has to be mentioned that provisions of Sec.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 w.e.f.1-4-88 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 CIT Vs. Hotel Hilltop. 217 CTR 527(Raj). The facts of the case before the Hon'ble Court were as follows. The Assessee was one M/S.Hotel Hilltop a partnership firm. This firm received an advance of Rs. 10 lacs from a company M/S.Hilltop palace Hotels (P) Ltd. The shareholding pattern of M/S.Hillltop Palace Hotels (P) Ltd., was as follows: 1. Shri Roop Kumar Khurana : 23.33% 2. Smt. Saroj Khurana : 4.67% 3. V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Of course, the two individuals being R and D. are the common persons, holding more than requisite amount of shareholding 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 divided, 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 of High Court, should be sufficient to answer question No.2 which has been referred to the Special Bench by holding that 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. The argument of the learned D.R. that the Hon'ble Rajasthan High Court did not deal with the second limb of Sec.2(22)(e) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of a non-shareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words there is a deemed accrual of income even u/s.5(1)(b) in the hands of the shareholder only and not in the hands of the payee viz., non-shareholder (Concern). Sec.5(1)(a) contemplates that the receipt or deemed receipt should be in the nature of income. Therefore the deeming fiction can be applied only in the hands of the shareholder and not the nonshareholder viz., the concern. 37. The definition of Dividend U/s.2(22)(e) of the Act is an inclusive definition. Such inclusive definition enlarges the meaning of the term "Dividend" according to its ordinary and natural meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word "Dividend" is extended to loans and advances to a shareholder or to a concern in which a shareholder is substantially interested deeming them as Dividend in the hands of a shareholder the ordi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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