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TMI Blog2018 (3) TMI 305X X X X Extracts X X X X X X X X Extracts X X X X ..... (22)(e) of the Income Tax Act, 1961 (Act). 3. The admitted factual position is that the assessee was not a share holder of M/s. Shining Emotional Surplus (P)Ltd from whom the loan was taken. However one Mr. S.B.Renee Jhola was the common shareholder and director of the assessee company as well as M/s. Shining Emotional Surplus (P)Ltd holding 95% of the shares in both the companies. The AO invoked the provision of section 2(22)(e) of the Act and treated the loan received as deemed dividend u/s 2(22)(e) of the Act. 4. On appeal by the assessee the CIT(A) deleted the addition made by the AO for the following reasons :- 3 . 1 Grounds of appeal no . a b -. Assessee Co . had taken a loan of Rs . 2,08,97,808 /- from another Group concern M / s . Shining Emotional Surplus ( P ) Ltd . Both the companies has common share holder and Director, Mr . S . B . Renee Jhola, holding 95 % of the shares in each of the two companies . A . O . has held the loan of Rs . 2,08,97,808 / - as deemed dividend u / s 2 ( 22 )( e ) . In appeal proceedings, assessee co . has submitted that it is not a share holder in M / s . Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 advance or loan 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, 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 ) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than twenty percent 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 percent of the voting power (d) If the above conditions are satisfied then the payment by the company to the concern will be dividend. 7.4. The Special Bench of ITAT, Mumbai, in the case of Bhaumik Color Labs ITA 5030/M/04, 118 ITD 1 (SB) (Mum), considered the question Whether deemed dividend u/s. 2(22)(e) of the Income Tax Act, 1961 can be assessed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs . 10 lacs as deemed dividend under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2 ( 22 )( e ) of the Act is not correct . 7.5. The Special Bench further held as follows:- 34 . We are of the view that the provisions of Sec . 2 ( 22 )( e ) does not spell out as to whether 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 shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning 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 ordinary and natural meaning of the word Dividend is altered . To this extent the definition of the term Dividend can be said to operate . If the definition 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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