Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 : A.Y. 2003-04 : Loans and advances from one company to another with common shareholder with substantial interest : Deemed dividend to be assessed in the hands of the shareholder and not in the hands o

[CIT v. Universal Medicare Pvt. Ltd. (Bom.); ITA No.
2264 of 2009, dated 22-3-2010]

An amount of Rs.32,00,000 was transferred from the bank
account of a company CSPL to the bank account of the assessee in the Chembur
branch of the State Bank of India. There was a common shareholder holding the
number of shares in the two companies as specified in S. 2(22)(e) of the
Income-tax Act, 1961. The amount was misappropriated by an employee of the
assessee and the transaction was not entered in the accounts of the assessee.
The Assessing Officer treated the said amount as deemed dividend u/s.2(22)(e)
of the Act and made the addition of the said amount. The Tribunal held that
the amount was part of a fraud committed on the assessee and the transaction
was not reflected in its books of account. The Tribunal therefore held that S.
2(22)(e) was not applicable. The Tribunal further held that even otherwise,
the amount would have to be taxed in the hands of the shareholder who obtained
the benefit and not in the hands of the assessee-company.

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

“(i) The Tribunal has found that as a matter of fact no
loan or advance was granted to the assessee, since the amount in question had
actually been defalcated and was not reflected in the books of account of the
assessee. Consequently, according to the Tribunal the first requirement of
there being an advance or loan was not fulfilled. In our view, the finding is
a pure finding of fact which does not give rise to any substantial question of
law.

(ii) Even on the second aspect which has weighed with the
Tribunal, we are of the view that the construction which has been placed on
the provisions of S. 2(22)(e) is correct.

(iii) The effect of clause (e) of S. 22 is to broaden the
ambit of the expression ‘dividend’ by including certain payments which the
company has made by way of a loan or advance or payments made on behalf of or
for the individual benefit of a shareholder. The definition does not alter the
legal position that dividend has to be taxed in the hands of the shareholder.
Consequently, in the present case the payment, even assuming that it was a
dividend, would have to taxed not in the hands of the assessee, but in the
hands of the shareholder.”