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TMI Blog2016 (10) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived as loan should be treated as deemed dividend u/s. 2(22)(e) of the Income Tax Act, 1961 (Act). The assessee submitted that it was not a shareholder in M/s.Pataka Industries (P) Ltd., and consequently the amount could not be held to be deemed dividend by applying the provisions of section 2(22)(e) of the Act. 3. The AO however, was of the view that though the Assessee was not a shareholder in M/s.Pataka Industries (P) Ltd., one Shri.Abdul Kalam was a common shareholder in both the Assessee and M/s.Pataka Industries (P) Ltd., holding 12.93% and 20% paid up share capital respectively in the aforesaid two companies and therefore the provisions of Sec.2(22)( e) of the Act would be attracted. The AO ultimately passed an order treating the loan in question as a deemed dividend in the hands of the Assessee. 4. On appeal by the Assessee the CIT(A) deleted the addition made by the AO following the order of the Tribunal in Assessee s own case in the earlier year on identical issue. The following were the relevant observations of the CIT(A) in this regard: 5. The Ld. AR has submitted that the provisions of section 2(22)(e) was not attracted as the assessee was not a sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the jurisdictional ITAT, it is to be held that the sum of ₹ 3,62,46,645/- is not assessable as deemed dividend u/s 2(22)(e). The addition of ₹ 3,62,46,645/- is deleted. Ground No.2 and 3 is allowed. 5. Aggrieved by the order of the CIT(A), the revenue has preferred the present appeal before the Tribunal. 6. We have heard the submission of the learned DR who relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A) and filed before us copy of the order of the Hon ble High Court of Calcutta, in G.A.No.3188 of 2013 dated 11.11.2014 wherein the Hon ble High Court dismissed the appeal preferred by the Revenue against the order of the Tribunal in ITA No.1803/Kol/2012 dated 16.5.2013 based on which the CIT(A) allowed relief to the Assessee in AY 2009-10. 7. We have heard the submissions of the learned counsel for the Assessee. The provisions of Sec.2(22)(e) of the Act, reads as follows: (e) 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extent to which the company in either case possesses accumulated profits. 7.3. In the present appeal we are concerned with the second limb of Sec.2(22)(e) of the Act, viz., to any concern in which such shareholder is a member or a partner and in which he has a substantial interest . The following conditions are required to be satisfied for application of the above category of payment to be regarded as Dividend. They are:- (a) There must be a payment to a concern by a company. (b) A person must be Shareholder of the company being a registered holder and 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. This is because of the expression Such Shareholder found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of Sec.2(22)(e) viz., a registered and a beneficial holder of shares holding 10% voting power. (c)The very same person referred to in (b) above must also be a member or a partner in the concern holding substantial interest in the concern viz., when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Shri.Deshbandhu Khurana: 55% The AO assessed the sum of ₹ 10 lacs as deemed dividend u/s.2(22)(e) of the Act in the hands of the firm because the two partners of M/S.Hotel Hill Top were holding shares by which they had 10% voting power in M/S.Hill Top Palace Hotels (P) Ltd. They were also entitled to 20% of the income of the firm M/S.Hotel Hill Top. Therefore the loan by M/S.Hill Top Palace Hotels (P) Ltd. To the firm M/S.Hotel Hill Top was treated as deemed dividend in the hands of M/S.Hotel Hill Top, the firm under the Second limb of Sec.2(22)(e) of the Act. The CIT(A) held that since the firm was not the shareholder of the company the assessment as deemed dividend in the hands of the firm was not correct. The order of the CIT(A) was confirmed by the Tribunal. On Revenue s appeal before the Hon ble High Court, the following question of law was framed for consideration:- Whether on the facts and in the circumstances of the case and in law the learned Tribunal was justified in upholding the order of learned CIT(A) deleting the addition of ₹ 10 lacs as deemed dividend under Section 2(22)(e) of the IT Act? The Hon ble Court held as follows:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether the income has to be taxed in the hands of the shareholder or the concern(non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of Sec.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of Dividend is extended to a loan or advance to a non shareholder the ordinary and natural meaning of the word dividend is taken away. In the light of the intention behind the provisions of Sec.2(22)(e) and in the absence of indication in Sec.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. 7.6. The aforesaid view has since been approved in several decisions rendered by Hon ble High Court of Bombay and Delhi in the case of CIT Vs. Universal Medicare Pvt. Ltd., 324 ITR 263 (Bom) and CIT Vs. Ankitech Pvt.Ltd. others 340 ITR 14 (Del.). Since the Assessee in the present case is not a shareholder in the lender company, we are of the view that the above decision is squarely applicable to the facts of the Assessee s case. 7.7. In view of the aforesaid decision, we are of the view that the order of CIT(A) is just and proper and calls for no interference. We therefore uphold the order of the CIT(A) and dismiss the appeal by the Revenue. 8. In the result the appeal by the Revenue is dismissed. O ..... X X X X Extracts X X X X X X X X Extracts X X X X
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