By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Chartered Accountants
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32 2008 TIOL 641 ITAT Mum-SB
ACIT v. Bhaumik Colour Pvt. Ltd.
ITA No. 5030/Mum./2004
A.Y. : 1997-98. Dated : 19-11-2008
S. 2(22)(e) of the Income-tax Act, 1961 — Assessee received
interest-bearing loan of Rs.9 lakhs from Umesh Pencils Pvt. Ltd. (UPPL) —
Narmadaben Nandlal Trust (NMT), a shareholder holding 20% shares in assessee
company held 10% shares in UPPL — Trustees of NMT were the registered
shareholders in both the companies, but the beneficiaries of NMT were different
from the trustees – Assessing Officer taxed the amount of loan received by
assessee as deemed dividend u/s.2(22)(e) — Whether deemed dividend can be
assessed in the hands of a person other than a shareholder of the lender — Held,
No — Whether the words ‘such shareholder’ in S. 2(22)(e) of the Act refer to a
shareholder who is both the registered shareholder and also the beneficial
shareholder — Held, Yes.
Facts :
Bhaumik Colour Pvt. Ltd. (BCPL), the assessee, was a company
engaged in the business of manufacture of pencil-paints. The assessee took an
interest-bearing loan of Rs.9 lakhs from UPPL. The AO found that though the
assessee was not a shareholder of UPPL, both the companies had one common
shareholder i.e., NNT. The said trust was holding 20% shares in
assessee-company i.e., holding substantial interest and 10% shares in
UPPL. The shares were held by the trust in the name of three trustees for and on
behalf of the trust and the beneficiaries of the trust were five in number and
none of the trustees was the beneficiary of the trust. The AO was of the view
that this transaction was covered by the second limb of provisions of S.
2(22)(e) of the Act. The AO taxed the sum of Rs.9 lakhs in the hands of 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 S. 2(22)(e) could not be applied vis-à-vis
the assessee. Aggrieved by the order of the CIT(A), the Revenue preferred an
appeal to the Tribunal. The Division Bench noted that there was a direct
conflict between the decisions in Nikko Technologies (I) Pvt. Ltd. and Seamist
Properties (P) Ltd., and was, therefore, of the opinion that the matter should
be heard by a Special Bench on the following questions :
(a) Whether deemed dividend u/s.2(22)(e) of the Act, can be
assessed in the hands of a person other than a shareholder of the lendor ?
(b) Whether the words ‘such shareholder’ occurring in S.
2(22)(e) refer to a shareholder who is both the ‘registered’ shareholder and
also the ‘beneficial’ shareholder ?
The Special Bench held as under :
(1) The provisions of S. 2(22)(e) of the Act, and the
provisions of S. 2(6A)(e) of the Income-tax Act, 1922 were considered. The
Bench analysed the amendments made in S. 2(22)(e) from time to time and
observed that under the 1922 Act, two categories of payment were considered as
dividend viz. (a) any payment by way of advances or loan to a
shareholder was considered as dividend paid to the shareholder, or (b) any
payment by any such company on behalf of or for the individual benefit of a
shareholder was considered as dividend. In the 1961 Act, the very same two
categories of payment 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.,
share-holding which carries not less than twenty percent of the voting power,
was introduced.
(2) The Apex Court has in the case of C. P. Sarathy
Mudaliar (83 ITR 170), while dealing with provisions of S. 2(6A)(e),
(synonymous to the provisions of S. 2(22)(e) of the 1961 Act,) held that when
the Act speaks of shareholder, it refers to the registered shareholder. This
decision was followed by the Apex Court in Rameshwarlal Sanwarmal (122 ITR 1).
It is clear from these pronouncements that to attract the first limb of S.
2(22)(e), the payment must be to a person who is a registered holder of
shares.
(3) The word ‘shareholder’ is followed by the words ‘being
a person who is the beneficial owner of shares’. These provisions 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.
Thus the expression ‘shareholder being a person who is the beneficial owner of
shares’ referred first time in S. 2(22)(e) means both a registered shareholder
and beneficial shareholder. If a person is a registered shareholder but not
the beneficial shareholder or vice versa, then the provisions of S.
2(22)(e) will not apply.
(4) There are divergent views on this issue of the person
in whose hands dividend is to be taxed viz. the ‘concern’ or the
‘shareholder’. The Rajasthan High Court in the case of Hotel Hilltop (217 CTR
527), held that the liability of tax, as deemed dividend, could be attracted
in the hands of the ‘shareholder’ and not the ‘concern’.
(5) The provisions of S. 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. Since the provisions are ambiguous, the intention behind enacting the
provisions of S. 2(22)(e) should be examined. The intention of the Legislature
is to tax dividend only in the hands of the shareholder and not in the hands
of the concern.
(6) The decision of the Apex Court in the case of Kantilal
Manilal (41 ITR 275), explained the basic characteristic of dividend.
Provisions of S. 206 of the Companies Act prohibits payment of dividend to
persons other than shareholders and in the case of Nalin Beharilal (74 ITR
849), the Apex Court considered what can come within the artificial definition
of dividend u/s.2(22).
