Income: Deemed dividend: Section 2(22)(e): Advance or loan to a shareholder: Section 2(22) (e) cannot be invoked where the assessee is not a shareholder in the lending company:

The Assessing Officer found that the assessee company had received loans from a company and also found that the assessee had shareholding in a company which had controlling interest in the lending company. The Assessing Officer applied the provisions of section 2(22)(e) of the Income-tax Act, 1961 and held that the loan received by the assessee is deemed dividend u/s. 2(22)(e) of the Income-tax Act, 1961 and made the addition accordingly. The Tribunal found that the assessee company was not a shareholder of the lending company and therefore, by following the decision of the Special Bench in the case of ACIT vs. Bhaumik Colour Pvt. Ltd.; 313 ITR(AT ) 146 (Mum)(SB) deleted the addition.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) T he consistent view taken is that if the words as noted by us herein-above have been inserted in the definition so as to make reference to the beneficial owner of the shares, still the definition essentially covers the payment to the shareholder and the position of the shareholder as noted in the Supreme Court’s decision, cannot undergo any change. That legal position and the status of the shareholder being same, we do not see how the view prevailing from CIT vs. C. P. Sarthy; 83 ITR 170 (SC) is in any way said to be changed. That is how all the judgments subsequent thereto have been rendered.

ii) We have noted that the Delhi High Court, even after exhaustive amendment to section 2(22)(e) held that the payment made to any concern would not come within the purview of this sub-clause so long as it contemplated shareholders. The Division Bench of Delhi High Court has made detailed reference to all the decisions in the field. It has also referred to the order passed by the Special Bench of the Tribunal in arriving at the same conclusion.

iii) In CIT vs. Ankitech Pvt. Ltd.; 340 ITR 14(Del), The Hon’ble Delhi High Court referred to both Sarathi Mudaliar and Rameshwarlal Sanwarmal, extensively. It also referred to the arguments of the Revenue which are somewhat similar to those raised before us. It is in dealing with these arguments that the Division Bench concluded that all the three limbs of the section analysed in CIT vs. Universal Medicare; 324 ITR 263 (Bom) denote the intention that closely held companies in which public are not substantially interested which are controlled by a group of members, even though having accumulated profits would not distribute such profits 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 concerns in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholders. In such an event, by the deeming provision, such payment by the company is treated as dividend. The purpose is to tax dividend in the hands of the shareholder.

iv) We do not see how such a view taken by the Delhi High Court and which reaffirms that of this Court in Universal Medicare can be said to be contrary to the legal fiction or the intent or purpose of the legislature in enacting it.

v) We are of the view that so long as the Tribunal holds that the assessee company is not a shareholder in any of the entities which have advanced and lent sums, then, the addition is required to be deleted.”