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TMI Blog2008 (11) TMI 273X X X X Extracts X X X X X X X X Extracts X X X X ..... e ownership. Trust property is, in fact, owned by two persons simultaneously in the sense that one is under an obligation to use the property for the benefit of the other. As between trustee and third party ownership conferred on the trustee fictitiously by law prevails, i.e., the trustee is clothed with the rights of the beneficiary and is so enabled to personate or represent him in dealings with the world at large. The main purpose of trusteeship is to protect the rights and interest of person who for any reason are unable effectively to protect them for themselves. Such protection is required for four classes of people, (a) unborn persons; (b) infants, lunatics, or other disqualified persons; (c) a large number of persons who are interested in common; and (d) persons having conflicting interest in the same property, Le., an owner and an encumbrancer or different kinds of encumbrances. Therefore, the first requirement of holding of shares both as a legal registered owner and beneficial owner of such shares is not satisfied in the case of the assessee. Therefore, provisions of s. 2(22)(e) would not be applicable at all to the case of the assessee. We therefore hold that deem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e also beneficiaries of the trust. The assessee contended that to invoke the second limb of the provisions of Section 2(22)(e) the primary condition was that NNT must be both a registered shareholder and also beneficial shareholder. Since the trustees of NNT held the shares on behalf of the trust only as legal owners and were not the beneficial owners of the shares, the provisions of Section 2(22)(e) could not be invoked. The AO however did not agree with the contentions on behalf of the assessee and taxed Rs. 9 lakhs in the hands of BCPL as deemed dividend. 3. On appeal by the assessee, the CIT(A) deleted the addition made by the AO for the reason that NNT was not beneficial shareholder of shares in BCPL or UPPL and therefore the second limb of the provisions of Section 2(22)(e) could not be applied vis-a-vis the assessee. 4. Aggrieved by the order of CIT(A), the Revenue has preferred the aforesaid appeal before the Tribunal raising the following grounds of appeal: (1) Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) is right in deleting the addition of Rs. 9 lakhs made on account of deemed dividend ignoring provision of Section 2(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of money with M/s Paliwal Industries (P) Ltd. (PIPL). There were four partners in the firm M/s Weaveland. These four partners held shares in PIPL, the details of which were as follows: 1. Mr. Avinash Chander Sharma 30% 2. Mrs. Rani Paliwal 27.50% 3. Mr. Abhishek Paliwal 30% 4. Mr. Sandeep Goyal 12.5% The above four persons shared the profits of the partnership also in the same proportion set out above. The AO applied the provisions of Section 2(22)(e) in respect of the net outstanding by M/s Weaveland to PIPL and brought the same to tax in the hands of M/s Weaveland. The order of AO was reversed by the CIT(A) on the ground that deemed dividend under Section 2(22)(e) cannot be brought to tax in the hands of a non-shareholder. The Revenue is in appeal against the said order in which the first question formulated for consideration by the Special Bench arises for consideration. 10. Mr. Arvind Sonde, advocate, appeared on behalf of the assessee. Mr. Satish K. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consequently Section 2(22)(e) does not apply to the case of the assessee. 12. On the first question formulated for consideration by the Special Bench, according to him the same does not arise for consideration in his case but nevertheless, he relied on the decision of the Hon'ble Rajasthan High Court in the case of CIT v. Hotel Hilltop (2008) 217 CTR (Raj) 527, wherein it has been held by the Hon'ble Rajasthan High Court that deemed dividend cannot be brought to tax in the hands of a non-shareholder. 13. The learned Counsel for the intervener filed written submissions. His submissions on the issues for consideration before the Special Bench were identical. The summary of the same is as follows: (i) Section 2(22)(e) is a deeming provision and it extends the normal meaning of dividend and enlarges its scope. (ii) Those provisions do not spell out as to in whose hands the dividend or such deemed dividend are to be taxed. (iii) Normally dividend is taxable only in the hands of a shareholder and not in the hands of a non-shareholder. (iv) The legal fiction by which a loan or advance or any payment for the benefit of a shareholder is treated as dividend cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he non-shareholder is also possible. (iv) According to him the Hon'ble Rajasthan High Court in the case of Hotel Hilltop (supra) has not dealt with the second limb of Section 2(22)(e) of the Act and that case only dealt with the third limb of Section 2(22)(e) of the Act. 15. We have considered the rival submissions. The historical background of Section 2(22)(e) is as follows: (a) Section 2(6A)(e) of the IT Act, 1922, as introduced by the Finance Act, 1955 corresponding to Section 2(22)(e) of the IT Act, 1961 was as follows: Any payment by a company, not being a company in which the public are substantially interested within the meaning of Section 23A, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, or any payment by any such company on behalf, or for the individual benefit, of a shareholder to the extent to which the company in either case possesses accumulated profits. (b) Section 2(22) of the IT Act, 1961, defines dividend. Section 2(22)(e) of the Act, which is equivalent to Section 2(6A)(e) of the 1922 Act, as it existed originally in the IT Act, 1961, read as follows: Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan to a shareholder was considered as dividend paid to shareholder; or (b) any payment by any such company on behalf or for the individual benefit of a shareholder was considered as dividend. 17. In the 1961 Act, the very same two categories of payments were considered as dividend but an additional condition that payment should be to a shareholder being a person who is the beneficial owner of shares and who has a substantial interest in the company viz., shareholding which carries not less than twenty per cent of the voting power, was introduced. 18. By the 1987 amendment w.e.f. 1st April, 1988, the condition that payment should be to a shareholder 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 was substituted. Thus, the percentage of voting power was reduced from twenty per cent to ten per cent. By the very same amendment to a new category of payment was also considered as dividend viz., payment to any concern in which such shareholder is a member or a partner and in which he has a substantial interest. Substantial i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholder of the company and could not, therefore, be deemed to be its income. The apex Court further held that when the Act speaks of shareholder it refers to the registered shareholder. 21. The aforesaid decision of the apex Court in the case of C.P. Sarathy Mudaliar (supra) has been followed by the apex Court in the case of Rameshwarlal Sanwarmal v. CIT (supra). In this case, the company advanced the loans to the assessee HUF 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 HUF. On the above facts, the question before the Supreme Court was whether the loans advanced to the HUF-beneficial owner of the shares-would be taxed as deemed dividend in the hands of the HUF. The Supreme Court held that the HUF 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. The apex Court observed as follows: ...What Section 2(6A)(e) is designed to strike at is advance or loan to a 'shareholder' and the word 'shareholder' can mean only a registered shareholder. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e.f. 1st April, 1988 only qualifies the word shareholder and does not in any way alter the position that the shareholder has to be a registered shareholder. These provisions also do not substitute the aforesaid requirement to a requirement of merely holding a beneficial interest in the shares without being a registered holder of shares. The expression being is a present participle. A participle is a word which is partly a verb and partly an adjective. In Section 2(22)(e), the present participle being is used to described the noun 'shareholder' like an adjective. The expression being a person who is the beneficial owner of shares is therefore a further requirement before a shareholder can be said to fall within the parameters of Section 2(22)(e) of the Act. In the 1961 Act, Section 2(22)(e) imposes a further condition that the shareholder has also to be 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. It is not possible to accept the contention of the learned Departmental Representative that under the 1961 Act there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d before a noun in a latter part of a sentence, the proper construction in the English language is to hold that the same noun is being used after the word 'such' with all its characteristics which might have been indicated earlier in the same sentence. (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 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 trustee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat arises for consideration in the case of the assessee viz., as to whether deemed dividend under Section 2(22)(e) of the IT Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender ? However, in the case of the intervener viz., Asstt. CIT v. Weaveland ITA No. 5036/Del/2008 (supra) 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 w.e.f 1st April, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any such company, on behalf or for the individual benefit of any such shareholder.... Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any such shareholder. Obviously, the provision is intended to attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is paid by 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 shareholding and are having requisite interest, in the firms, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pined that deemed dividend would be taxed in the hands of a concern (non-shareholder) also if the conditions mentioned in the section are satisfied. 34. We are of the view that the provisions of Section 2(22)(e) do 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 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 become 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 provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 (SC) 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 two components emerge (a) dividend is a share of profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concern then the benefit of set off cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial interest in the concern. The above provisions also therefore contemplate deemed dividend being taxed in the hands of a shareholder only. For the reasons stated above, we are of the view that the law laid 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 IT Act, 1961 can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other 42. 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 sha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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