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TMI Blog2004 (8) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... 2)(e) are, in no way, applicable. It is the objective of s. 2(22)(e) to tax shareholders intending to avoid dividend tax. Non-shareholders cannot be taxed taking recourse to this section. The Hon'ble Allahabad High Court, in CIT vs. H.K. Mittal [ 1995 (12) TMI 39 - ALLAHABAD HIGH COURT] , has held that the chief ingredient of dividend as defined in s. 2(22)(e) is that the recipient should be a shareholder on the date the loan was advanced and if such fact does not stand established, the advance cannot be taken as deemed dividend. In that case, the fact that the assessee was not a shareholder had not been challenged. As such, no question of law was held to have arisen. Likewise, in the present case, the assessee is not a shareholder of Silvasa. So, s. 2(22)(e) is inapplicable. The Hon'ble Supreme Court has held in CIT vs. Shaan Finance (P) Ltd.[ 1998 (3) TMI 8 - SUPREME COURT] , inter alia, that in interpreting a fiscal statute, the Court cannot proceed to make good the deficiencies if there be any. It must interpret the statute as it stands and in case of doubt, in a manner favourable to the taxpayer. So, while taxing notional income, the provisions relating to deemed divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n amount of Rs. 2,33,31,427 from M/s Silvasa Estate (P) Ltd., in pursuance of memorandum of understanding dt. 9th Feb., 1997. As per this memorandum of understanding, the assessee and M/s Silvasa Estate (P) Ltd. wanted to start a new company with a view to carry out editing, shooting, dubbing, recording and allied business in the name and style of M/s Silvasa Entertainment (P) Ltd. 4. The AO noted that the intended new business did not start and the amount of Rs. 2,33,31,427 given to the assessee remained with the assessee. It is stated on behalf of the assessee that the amount had been advanced in pursuance of the said memorandum of understanding. M/s Silvasa Estate (P) showed accumulated profits/reserves and surplus of Rs. 11,06,475 in its balance sheet, as on 31st March, 1997. The AO also found that Mr. Premchand Godha was holding about 50 per cent of the total shares of the assessee and about 36 per cent of the shares of M/s Silvasa Estate (P) Ltd. One Mr. Nirmal Jain had about 50 per cent holding of the total shares of the assessee and about 43 per cent holding of M/s Silvasa Estate (P) Ltd. In view of these facts, the AO observed that it could be concluded that both the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deposit of Rs. 2.25 crores was returned. Sec. 2(22)(e) applies to loans and advances, and not to deposit like the one in question here. The provisions of s. 2(22)(e) comprise a deeming fiction, where loan or advance is treated as dividend. The objective of the legislature in enacting the deeming provisions was to prevent evasion of tax on dividend by closely-held companies by resorting to loans to substantially interested shareholders, instead of paying dividend. This view was expressed by the Hon'ble Supreme Court in the case of Navnit Lal C. Javeri vs. K.K. Sen, AAC (1965) 56 ITR 198 (SC). The object of s. 2(22)(e), as per the Hon'ble Allahabad High Court in the case of CIT vs. H.K. Mital (1996) 219 ITR 420 (All), is to tax shareholders avoiding dividend tax. Non-shareholders cannot be taxed. In the assessee's case, the assessee-company is not a shareholder of M/s Silvasa Estate (P) Ltd. Hence, the provisions of s. 2(22)(e) cannot be applied. A deeming fiction should be carried to its logical end and according to the purpose for which it has been enacted. It cannot be extended further and interpreted to go beyond the legislative intent in creating it. Provisions r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of the said section, payments by way of loans or advances to shareholders having substantial interest in a company to the extent to which the company possessed accumulated profits, were treated as dividend. The shareholders having substantial interest were those having a shareholding carrying not less than 20 per cent voting power as per the provisions of s. 2(32). The amendment of the definition extended its application to payments made to a shareholder holding not less than 10 per cent of the voting power, or to a concern in which the shareholder was having substantial interest. 12. The amended provisions of s. 2(22)(e) are, thus, to apply in a case where a shareholder has 10 per cent or more of the equity capital, so explains the Board in the said circular. Further, deemed dividend is to be taxed in the hands of a concern where all the following conditions are satisfied : (i) where the company makes the payment by way of loans or advances to a concern; (ii) where a member or a partner of the concern holds 10 per cent of the voting power in the company; and (iii) where the member or partner of the concern is also beneficially entitled to 20 per cent of the income of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v) CIT vs. Shrishakti Trading Co. (1994) 118 CTR (Bom) 196 : (1994) 207 ITR 442 (Bom). In the case before us, however, the taxing authorities have stretched the deeming fiction contained in s. 2(22)(e) beyond its outer reaches in applying the said provision to the assessee who clearly does not come within its four corners. 16. The Hon'ble Supreme Court has held in CIT vs. Shaan Finance (P) Ltd. (1998) 146 CTR (SC) 110 : (1998) 231 ITR 308 (SC), inter alia, that in interpreting a fiscal statute, the Court cannot proceed to make good the deficiencies if there be any. It must interpret the statute as it stands and in case of doubt, in a manner favourable to the taxpayer. So, while taxing notional income, the provisions relating to deemed dividend, like the ones comprised in s. 2(22)(e) of the IT Act, need to be interpreted, not loosely, as the lower authorities have chosen to do, but strictly. 17. That deposits are not loans stands well settled by the following judicial pronouncements, amongst others : (i) A.M. Shamsunder vs. Union of India (2000) 164 CTR (Mad) 466 : (2000) 244 ITR 266 (Mad) (ii) CIT vs. Eetachi Agencies (2001) 248 ITR 525 (Bom) (iii) Baidya Nath Plastic Ind. (P) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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