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TMI Blog2024 (4) TMI 320X X X X Extracts X X X X X X X X Extracts X X X X ..... (a concern) is not per se in the nature of income. It is in fact deemed accrual of income u/s. 5(1)(b) of the Act in the hands of the beneficial shareholder and not in the hands of the receiver (concern) who is a non-shareholder. Also, the definition of dividend under the Act is an inclusive definition which was expanded to include even a loan or advance though in the natural and ordinary course, it is not an income. The basic character of dividend is a share in profits of the company, given to its shareholder. Assessee and APL are in no way in a position to compel KSWPL in any way for exercising its voting rights in a particular manner. In fact, in the present case, it is the other way that KSWPL, because of its shareholding, is in a position to compel, both the assessee and APL, by exercising its voting power, to conduct in a particular way. Thus, even by going with the observations and findings in the case of National Travel Services [ 2018 (1) TMI 1159 - SUPREME COURT] the beneficial shareholder in the present case is KSWPL under whose controlling interest and influence, APL has given loan/advance to the assessee. Accordingly, the deeming provisions of section 2(22)(e) under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany called as Apeejay Private Ltd. (in short "APL"). Assessee is not a registered shareholder of APL who is a lender company. However, there is a common shareholder namely, Kathua Steel Works Pvt. Ltd. (in short "KSWPL") who holds substantial interest in both the assessee and the lender company. Details of common shareholding by KSWPL in the two companies is as under: (i) KSWPL holds 99.96% shares in APL (lender), (ii) KSWPL holds 57.86% shares in ASMSPL (assessee) 4.1. The above stated fact can be pictorially presented in the following manner for having a better understanding: 4.2. Accumulated profits available for distribution in the books of APL, the lender was Rs.3691 lakhs. Ld. AO thus, in view of these facts treated the amount of loans/advances received by the assessee from APL as deemed dividend u/s. 2(22)(e) of the Act since there was a common shareholding by KSWPL having substantial interest in both APL and ASMSPL. Assessee had made detailed and elaborate written submission in the course of assessment proceeding by placing reliance on various judicial precedents which could not convince the Ld. AO. Assessment was completed by making the addition. 4.3. Aggrieved, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel also referred to the decision of Hon'ble High Court of Delhi in the case of CIT Vs. Ankitech Pvt. Ltd. (2011) 340 ITR 14 (Del.) wherein Hon'ble Court held that the assessee who is not a shareholder of the company from which he received a loan or an advance cannot be treated as being covered by the definition of the word dividend u/s. 2(22)(e) of the Act. He further made an attempt to distinguish the decision of Hon'ble Supreme Court in the case of CIT Vs. National Travel Services (2018) 89 taxmann.com 332 (SC) by submitting that this case related to a partnership firm who had received loans from a company in which the partners of the firm were actually holding more than the prescribed percentage of shares in their individual names. According to him, the said decision is not applicable and distinguishable on facts. 5.3. Per contra, Ld. CIT, DR strongly supported the orders of the authorities below. He submitted that KSWPL is a common shareholder in both, the lender and the assessee company, having substantial interest therein and thus, the case squarely falls within the second limb of section 2(22)(e) of the Act. According to him, payments made by a company to a concern in wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of the assets of the company or otherwise) made after the 31st day of May, 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 - (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 ;" 6.1. The term substantial interest referred in clause (b) of Explanation (3) to section 2(22)(e) is of vital imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act, 1987 w.e.f. 01.04.1988 was to ensure that persons who controls the affairs of the company as well as that of a concern and for the payment made to a concern from the company and the person who can control the affairs of the concern and draw the same from the concern instead of the company directly making payment to the shareholder as dividend. Thus, the source of power to control the affairs of the company and the concern is the basis on which this amendment to the provision has been made. The scope of expansion of the definition of 'dividend' is to include certain transactions within the purview of 'income' under the Act by creating a fiction. 7.2. We note that so far as the first limb is concerned, the same is applicable to a shareholder of the company who gives such loan or advance and the shareholder is the beneficial owner of the shares as mentioned in the provisions of Section 2(22)(e) of the Act. Third limb applies in a case where payments are made by such company for individual benefit any such shareholder. So far as the second limb is concerned, where a concern in which such shareholder as referred in the first limb is a memberor a partner having substantial intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the terms dividend, member, voting right so as to understand the concept of beneficial ownership, creating a charge of income-tax, in accordance with section 5 of the Act. 9.1. When we look at the provisions of the Companies Act, 2013, relevant provisions are extracted as under: (a) 2. Definitions.- In this Act, unless the context otherwise requires,- (20) "company" means a company incorporated under this Act or under any previous company law; (22) "Company limited by shares" means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them; (35) "dividend" includes any interim dividend; (55) "member", in relation to a company, means- (i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members; (ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company; (iii) every person holding shares of the company and whose name is entered a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company or whose name is entered as a beneficial owner in the records of the depository. 10.1. In the case of a company limited by shares, the liability of its members is limited to the extent of amount paid on the shares held by the member. Share capital of a company limited by shares being equity share capital carries voting right or have differential rights as to dividend and voting, depending upon such rules as may be prescribed. In order to control the affairs of the company, a member of a company limited by shares and holding equity share capital thereunder has a right to vote on every resolution placed before the company to voting. Right of a member to vote is proportionate to its share in the paid-up equity share capital of the company. Also, payment of dividend is only to a member and in case of a company limited by shares, dividend is in proportion to the amount paid up on each share held by the member. 10.2. From the above understanding of the provisions of the Companies Act, 2013 and the legislative intent of bringing amendment to section 2(22)(e) by the Finance Act, 1987, the beneficial ownership is with KSWPL under whose substantial control, loan from APL is gran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares in the name of the two partners." 16. It answered the first question by stating that the expression "being a person who is a beneficial owner of shares" would be in addition to the shareholder first being a registered shareholder of the Company. The Division Bench of Hon'ble Delhi High Court then states that, therefore, in order to attract section 2(22)(e) both conditions have to be satisfied. So far as the second question is concerned, the Division Bench went on to state that a partnership firm can be treated as a shareholder but that it is not necessary that it has to be a registered shareholder. 17. We are of the view that it is very difficult to accept the reasoning of the Division Bench. It is not enough to say that Ankitech's case refers to the second limb ofthe amended definition, whereas the present case refers to the first limb, for the simple reason that the word "shareholder" in both limbs would mean exactly the same thing. This is for the reason that the 'expression "such shareholder" in the second limb would show that it refers to a person who is a "shareholder" in the first limb. 18. This being the case, we are of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court observed that shareholder now, post amendment, has only to be a person who is the beneficial owner of shares. According to the Hon'ble Court, the moment there is a shareholder, who need not necessarily be a member of the company on its register, who is the beneficial owner of share, the section gets attracted without more. We also take note of the vital observation made by the Hon'ble Court in respect of the amendment brought in respect of beneficial owner holding voting power not less than 10%. The said amendment, according to the Hon'ble Court, speaks only of a beneficial owner who can compel the registered owner to vote in a particular way. 11.2. Keeping these observations and findings of the Hon'ble Apex Court in perspective, we find that both, the assessee and APL are in no way in a position to compel KSWPL in any wayfor exercising its voting rights in a particular manner. In fact, in the present case, it is the other way that KSWPL, because of its shareholding, is in a position to compel, both the assessee and APL, by exercising its voting power, to conduct in a particular way. Thus, even by going with the observations and findings of Hon'ble Apex Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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