By Kishor Karia, Chartered Accountant, Atul Jasani, Advocate
(Continued
from the last issue)
2.6 As stated in para 1.4
of Part I of this write-up, under the New Provisions, loan given to two
categories of persons are covered u/s. 2(22) (e) viz. i) certain shareholders
(first limb of the provisions) and ii) the ‘concern’ in which such shareholder
has substantial interest (second limb of the provisions). As mentioned in para
1.5 of Part I of this write-up, in cases where the requisite conditions of the
second limb of the New Provisions are satisfied, the issue is under debate
that, in such cases where the loan is given to a ‘concern’, whether the amount
of loan is taxable as deemed dividend in the hands of the shareholder or the
‘concern’ which has received the amount of the loan. As also mentioned in that
para, the judicial precedents [including the Special Bench in Bhaumik Colour’s
case reported in (2009) 18 DTR 451] largely, directly or indirectly, showed
that, in such cases, deemed dividend should be taxed in the hands of the
shareholder and on the other hand, in CBDT circular [No. 495 dtd. 22/9/1987], a
view is taken that the same should be taxed in the hands of the ‘concern’. As
further mentioned in para 2.5 read
with para 2.4 of Part I of this write-up, the Delhi High Court decided this
issue in favour of the assessee company on the short ground that the deemed
dividend can not be assessed in the hands of the assessee company which was not
a shareholder of the lending company [i.e. BPOM] as dividend can be assessed
only in the hands of the shareholder of the lending company and can not be
assessed in the hands of a non-shareholder. For this, the Delhi High Court
merely relied on its judgement in the case of Ankitech P. Ltd. [ITA No
462/2009] and passed a short order to this effect (Ref: para 2.4 of Part I of this
write-up). Therefore, it is necessary to analyse, that judgement of the Delhi
High Court also, more so as that has been ultimately approved by the Apex
Court.
CIT vs.
Ankitech[P]Ltd[(2012)40ITR14(Del)-ITA No. 462/2009] & connected Appeals
3.1 In the above, the High Court dealt with and simultaneously
disposed of number of appeals relating to different assessees by a common order
by taking the facts of the case of Ankitech P. Ltd. [ITAT No.462/2009] as the
base.
3.2 In the above case, the brief facts were that the assessee company
had received advances of Rs. 6,32,72,265 by way of a book entry from M/s
Jackson Generator (P) Ltd. [JGPL]. There was sufficient accumulated profit with
JGPL to cover this amount. So far as the shareholding pattern of the two
companies is concerned, the undisputed facts revealed that the same
shareholders (Guptas) were holding (it seems beneficially) more than 10% of
equity shares carrying voting power in JGPL and the same shareholders were also
holding (it seems beneficially) equity shares carrying voting power in the
assessee company much more than 20% and accordingly, were having substantial
interest therein. As such, the facts would reveal that the conditions of the
second limb of the New Provisions were satisfied. It is also worth noting that
the assessee company itself was neither a registered shareholder nor the
beneficial shareholder in JGPL(i.e. lending company). On these facts, the
Assessing Officer (AO), while completing the assessment for the Asst. Year. 2003-04,
assessed the above referred amount of advances as deemed dividend in the hands
of the assessing company. While doing so, the AO rejected the specific
contention raised by the assessee company that since the assessee company is
not a shareholder in JGPL, the provisions of section 2(22) (e) will not be
attracted as one of the essential conditions for taxing deemed dividend u/s.
2(22) (e) was that such income is to be assessed in the hands of the
shareholder. The view of AO was confirmed by the Commissioner of Income-tax
(Appeals). However, the Tribunal deleted the addition by taking a view that
though the amount received by the assessing company by way of book entry is
deemed dividend u/s. 2(22)(e), the same cannot be assessed in the hands of the
assessee company as it was not a shareholder in JGPL and a dividend cannot be
paid to a non-shareholder.
The Tribunal also took the view that it would
have to be taxed, if at all, in the hands of the shareholders who have
substantial interest in the assessee company and also holding not less than 10%
shares carrying voting power in the lending company. For this, it appears that
the Tribunal had relied on the Special Bench decision in Bhaumik Colour’s case
(supra).
3.3 When the issue came-up
before the High Court at the instance of the Revenue with four questions
raised, the Court, in this context, felt that real question is one and stated
as under [pg 16]:
“Though as many as
four questions are framed, it is with singular viz., whether the assessee who
was not the shareholders of M/S. Jackson Generators (P) Ltd. (JGPL) could be
treated as covered by the definition of “dividend“ as contained in section
2(22)(e) of the Income-tax Act (hereinafter referred to as “the Act”).”
3.3.1 To decide the issue,
the Court referred to the relevant provisions of section 2(22) (e) along with the share holding
pattern of both the companies and stated that the payment of advance given by
JGPL to the assessee company (‘concern’) would be treated as deemed dividend u/s.
2(22)(e). With these undisputed facts, the Court, in the context of the issue
on hand, stated as under [pg 19]:
“…….. The dispute
which has arisen, in the scenario is to whether this is to be treated as
dividend income in the form of dividend advance of the shareholders or advance
of the said concern,(i.e. the assessees herein). Whereas the Department has
taken it as income at the hands of the assessee, as per the assessee it cannot
be treated as dividend income to their account. The Tribunal has accepted this
plea of the assessee holding that such dividend income is to be taxed at the
hands of the shareholders.”
3.3.2 The Court then referred to the historical background of the
provisions from 1922 Act to the New Provisions narrated by the Special Bench in
Bhaumik Colour’s case (supra) and observed as under [pg 21]:
“It is clear from the
above that under the 1922 Act, two categories of payments were considered as
dividend viz., (a) any payment by way of advance or loan to a shareholder was
considered as dividend paid to 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
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 voting power, was introduced, By the
1987 amendment with effect from April 1, 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, 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 interest has been defined to mean holding shares carrying 20 per
cent. of voting power.”
3.3.3 After referring to the
above referred historical background, the Court noted that the controversy in
the present case refers to the second limb of the New Provisions. The Court
then stated that a Special Bench in Bhaumik Colour’s case has analysed the New
provisions and spelt out the conditions [Ref. para 1.4.1. of Part I of this
write-up] which are required to be satisfied for attracting this category of
the New Provisions. These include the view that the expression ‘such
shareholder’ found in the second limb of the New Provisions refers to
registered shareholder [for this, basically reliance was placed on Apex Court’s
judgement in the case of C. P. Sarathy Mudaliar (supra)] and the
beneficial holder of the shareholding carrying 10% voting power. In this
context, the Court also referred to the relevant part of the order of the
Special Bench and noted that the Special Bench held that the intention behind
this provision is to tax dividend in the hands of the shareholders. The Court
then also referred to the judgements of the Bombay High Court in the case of
Universal Medicare (P) Ltd [(2010)324 ITR 263] and Rajasthan High Court in the
case of Hotel Hilltop [(2009) 313 ITR 116] in which also similar view was
taken.
3.4 The Court then noted that
despite the above referred judgements of the High Courts of Bombay and
Rajasthan, the learned counsel appearing on behalf of the Revenue (Ms. Bansal)
made a frantic afford to persuade the Court to take a contrary view. Her
endeavour was to demonstrate on first principle that by this deeming provision
fictionally the ‘concern’ which receives the amount would be treated as
shareholder for the purpose of this provision and the same should be treated as
dividend in the hands of the recipient (i.e. ‘concern’). In this regard, her
contention was that under the New provisions, deeming fiction is specifically
created to tax the amount of such loan given to a ‘concern’ as deemed dividend
and when this legal fiction is created, it was to be taken to its logical
conclusion and as such, the ‘concern’ which had received the amount should be
taxed. For this, she placed reliance on certain judgements including of the Apex
Court dealing with the effects of creation of a legal fiction. According to
her, this is the effect of the second limb of the New Provisions read with Explanation 3. She also relied on the
CBDT Circular No. 495 dtd 22/9/1987 in which such a view is taken (Ref. para
2.6 above)
3.4.1 The Court then dealt
with the contentions of the learned counsel for the Revenue and pointed out
that we have already referred to the relevant provisions of section 2(22)(e)
and requisite conditions for invoking the same as well as the historical
background of section 2(22)(e). Considering the intention behind enacting these
provisions, the Court stated as under [pg 35]:
“…… The intention behind the provisions of section 2(22)(e)
of the Act is to tax dividend in the hands of shareholders. The deeming
provisions as it applies to the case of loans or advances by a company to a
concern in which its shareholder has substantial interest, is based on the
presumption that the loans or advances would ultimately be made available to
the shareholders of the company giving the loan or advance. “
3.4.2 The Court then proceeded
further to deal with the contention with regard to creation of deeming fiction
and its effects and stated as under [pg 35]:
“Further, it is an
admitted case that under the normal circumstances, such a loan or advance given
to the shareholders or to a concern, would not qualify as dividend. It has been
made so by a legal fiction created u/s. 2(22)(e) of the Act. We have to keep in
mind that this legal provision relates to “dividend”. Thus, by a deeming
provision, it is the definition of dividend which is enlarged. Legal fiction
does not extend to “shareholder”. When we keep in mind this aspect, the
conclusion would be obvious, viz., loan or advance given under the conditions
specified u/s. 2(22) (e) of the Act would also be treated as dividend. The
fiction has to stop here and is not to be extended further for broadening the
concept of shareholders by way of legal fiction. It is common case that any
company is supposed to distribute the profits in the form of dividend to its
shareholders/members and such dividend cannot be given to non members. The
second category specified u/s. 2(22) (e) of the Act, viz., a concern (like the
assessee herein), which is given the loan or advance is admittedly not a
shareholder/member of the payer company. Therefore, under no circumstances, it
could be treated as shareholder/member receiving divided. If the intention of
the Legislature was to tax such loan or advance as deemed dividend at the hands
of “deeming shareholder”, then the Legislature would have inserted a deeming
provision in respect of shareholder as well, that has not happened. Most of the
arguments of the learned counsel for the Revenue would stand answered, once we
look into the matter from this perspective.”
3.4.3 Finally, rejecting the argument with regard to creation of
deeming fiction and its logical effect as contented by the learned counsel for
the Revenue, the Court stated as under [pg 36]:
“No doubt, the legal
fiction/deemed provision created by the Legislature has to be taken to “logical
conclusion” as held in Andaleeb Sehgal [2010] 173 DLT 296 (Delhi) [FB].
The revenue wants the deeming provision to be extended which is illogical and
the attempt is to create a real legal fiction, which is not created by the
Legislature. We say at the cost of repetition that the definition of
shareholder is not enlarged by any fiction.”
3.4.4 With regard to the view
expressed in the CBDT Circular, the Court stated that it is inclined to agree
with the observations of the Special Bench in Bhaumik Colour’s case (supra)
that the same is not binding on the courts. In this regard, the Court further
observed as under [pg 36]:
“…..Once it is found that such loan or advance cannot be
treated as deemed dividend at the hands of such a concern which is not a
shareholder, and that, according to us, is the correct legal position, such a
circular would be of no avail. ”
3.5 Having taken a view
that such deemed dividend cannot be assessed in the hands of the assessee
company which is not the shareholder of JGPL, the Court further concluded as
under [pg 36]:
“Before we part with,
some comments are to be necessarily made by us. As pointed out above, it is not
in dispute that the conditions stipulated in section 2(22)(e) of the Act
treating the loan and advance as deemed dividend are established in these cases
Therefore, it would always be open to the Revenue to take corrective measure by
treating this dividend income at the hands of the shareholders and tax them
accordingly. As otherwise, it would amount to escapement of income at the hands
of those shareholders.”
3.6 In the above
judgement, the Court took the view that once the requisite conditions of the
second limb of the New Provisions are satisfied, the amount of loan can be
assessed as deemed dividend in the hands of the shareholder only and not in the
hands of a ‘concern’ (non-shareholder). On this basis, the Court also
simultaneously disposed of all other connected appeals. However, in addition to
this, the Court also passed further orders in respect of four other appeals,
which are based on specific facts of these cases with which we are not
concerned in this write-up. These additional four orders are in the cases of
Timeless Fashions Pvt Ltd. [ITA No. 1588 of 2010], Nandlala Securities Pvt.
Ltd. [ITA No. 211 of 2010], Roxy Investment [ITA No. 2014 of 2010] and Indian
Technocraft Ltd. [ITA No. 352 of 2011].
CIT vs. Madhur Housing
and Development Company (Appeal No. 3961 of 2013-
SC)
4.1 As mentioned in para 2.6 above, in the above case, the Delhi High
Court decided the issue of taxation of deemed dividend in the hands of the
assessee company [i.e. ‘concern’] on the short ground that the deemed dividend
cannot be assessed in its hands, as it was not a shareholder of the lending
company (i.e. BPOM) and for that purpose, the Court merely followed its earlier
decision in the case of Ankitech (P) Ltd. [ITA No 462/2009] (supra).
4.2 The above judgement of
the Delhi High Court along with number of appeals relating to different
assessees invoking similar issue came-up before the Apex Court and the Apex
Court disposed of all of them, by a common order, by referring to the judgement
and the order of the Delhi High Court in the above case (i.e. Madhur Housing’s
case) by passing the following order:
“The impugned
judgement and order dated 11.05.2011 has relied upon a judgement of the same
date by a Division Bench of the High Court of Delhi in ITA No. 462 of 2009.
Having perused the judgement and having heard arguments, we are of the view
that the judgement is a detailed judgment going into section 2(22)(e) of the
Income-tax Act which arises at the correct construction of the said Section. We
do not wish to add anything to the judgment except to say that we agree
therewith.
These appeals are
disposed of accordingly. “
4.3
From the above, it would appear that the Apex Court took note of the
fact that the judgment of the Delhi High Court in the case of Ankitech (P) Ltd.
(supra) is a detailed judgement considering this aspect of the
provisions of section 2(22)(e) of the Act and approved the same. It is worth
noting that the Apex Court has approved the judgement of the Delhi High Court
only in the case of Ankitech (P) Ltd. [ITA No 462/2009] which is analysed in
para 3 above. For this purpose, it seems that the Apex Court has not considered
separate orders simultaneously passed by the Delhi High Court in four other
connected appeals [Ref. para 3.6 above].
Conclusion
5.1 The above judgement of
the Division Bench of the Apex Court directly dealt with and decided the issue
referred to in para 2.6 above [read with para 1.5 of Part I of this write-up]
that in a case where the conditions for invoking the second limb of the New
Provisions of section 2(22) (e) are
satisfied, the amount of loan given to a ‘concern’, which is treated as deemed
dividend, should be assessed only in the hands of the common shareholder with
requisite shareholding in the lending company and who is also having
substantial interest in the ‘concern’ and not in the hands of the ‘concern’
receiving the loan. As such, the issue referred to in para 2.6 above read with
para 1.5 of part I of this write-up now could be treated as settled. Based on
this, the judicial precedents supporting this view, referred to in para 1.5 of
Part I of this write-up, could also be treated as impliedly approved. In this
respect, based on this, the view expressed in the CBDT Circular [No. 495 dtd.
22/9/1987] referred to in para 2.6 above could be treated as incorrect position
in law.
5.1.1 In the above case, the
Apex Court has also specifically considered the effect of a legal fiction
created in section 2(22)(e) and its logical effect. In this context, the Court
has emphatically taken a view that the legal fiction created in section 2(22)(e) only expands the meaning of
the expression ‘dividend’ and it does not, in anyway, enlarge the meaning of
the expression ‘shareholder’ as contemplated in the said provisions. In fact,
this and the general principles that dividend can be paid by the company only
to its shareholders/members and it cannot be given to non-shareholders/members
are the main basis of conclusion arrived by the Apex Court in the above case.
5.2 Interestingly, as
mentioned in para 1.6 of part I of this write-up, the Division Bench of the
Apex Court in the case of Gopal and Sons HUF [ (2017) 391 ITR 1] also had an
occasion to indirectly deal with similar issue of the type referred to in para
2.6 above [read with para 1.5 of part I of this write-up] in the context of a
case of a loan given by closely held company to an HUF, which was the
beneficial owner of the shares with requisite shareholding in the lending
company. In that case, there was some debate as to whether the HUF itself was a
registered shareholder or its Karta was the registered shareholder of the
lending company. On these facts, the following question was raised before the
Apex Court:
“Whether in view of the settled principle that
HUF cannot be a registered shareholder in a company and hence, could not have
been both registered and beneficial shareholder, loan/ advances received by HUF
could be deemed as dividend within the meaning of section 2(22)(e) of the
Income-tax Act, 1961 especially in view of the term “concern” as defined in the
Section itself?”
5.2.1 Under the above
circumstances, in that case, the Apex Court, on peculiar facts of the case,
took the view that the amount of loan in question should be treated as deemed
dividend under the second limb of the New Provisions and it should be taxable
as such in the hands of the HUF, as the Karta of the HUF is having undisputedly
substantial interest in the HUF. The Court also further concluded that even if
it is presumed that HUF itself is not a registered shareholder of the lending
company, as per the provisions of section 2(22)(e), once the payment is
received by the HUF (which was admittedly beneficial owner of the shares) and
the registered shareholder of the lending company [it’s Karta] is a member of
the said HUF with substantial interest, the payment made to the HUF constitutes
deemed dividend u/s. 2(22) (e) and taxable as such in the hands of HUF.
According to the Court, that is the effect of Explanation 3 to the said
section. According to the Court, the judgment of C.P. Sarathy Mudaliar (supra)
will have no application as that was delivered u/s. 2(6A)(e) of the 1922 Act,
wherein there was no provision like
Explanation 3. Effectively, the Court concluded that, in view of the
Explanation 3 to section 2(22)(e), the amount of loan constitutes deemed
dividend under the second limb of the New Provisions of section 2(22)(e) in the
hands of the HUF, even if one presumes that HUF itself is not a registered
shareholder of the lending company.
5.2.2 From the above, it
would appear that in Gopal and Sons HUF’s case (supra), the Apex Court
impliedly decided the issue referred to in para 2.6 above read with para 1.5 of
Part I of this write-up, by taking a view that the deemed dividend under the
second limb of the New Provisions is taxable in the hands of the ‘concern’
(i.e. HUF). This gives support to the opinion expressed in CBDT circular
referred to in that para. This judgement has been analysed by us in this column
in April and May, 2017 issues of this journal.
5.3 Interestingly, in the above judgement of the Apex Court in the case
of Madhur Housing and Development Company, the Apex Court’s judgement in Gopal and Sons HUF’s case (supra)
has not been referred to or considered. Apex Court in the above case referred
to the judgement of the Delhi High Court in the case of Ankitech (P) Ltd. (Ref.
para 4.2 above) and approved the same and the judgement of the Apex Court in
the case of Gopal and Sons HUF(supra), which is the recent one, was not
available before the Delhi High Court in that case.
5.3.1 It is also worth noting
that in the case of Gopal and Sons HUF (supra), the facts were peculiar
and it was also noted that though the share certificates were issued in the
name of the Karta of the HUF but in the annual returns of the company filed
with the ROC, HUF was also shown as registered shareholder. Whether this
factual position could be regarded as relevant in the context of the issue on
hand (i.e. to determine the taxable person of deemed dividend) to distinguish
the effect of Gopal and Sons HUF’s case (supra) may be a matter of
consideration. However, this would be an uphill task in view of the conclusion
of the Apex court in the case of Gopal and Sons HUF (supra) referred to
in para 3.9 read with para 3.8 of part II of the write-up on that judgement
appeared in May, 2017 issue of this journal.
5.4 In
view of the above, an interesting issue is likely to come-up for consideration
as to which judgement of the Apex Court, between the two of the above, would be
relevant, for the purpose of determining the taxable person under the second limb
of the New Provisions in cases where the loan is given to a ‘concern’ and the
other conditions for treating such a loan as deemed dividend under these
provisions are satisfied. _
