No deemed dividend u/s 2(22)(e) when assessee not the beneficial owner of shares. Issue pending before larger bench of Supreme Court was not relevant – High Court
ABCAUS Case Law Citation:
ABCAUS 2835 (2019) (03) HC
Important Case Laws Cited/relied upon by the parties
Universal Medicare [(2010) 190 Taxman 144 (Bom)]
National Travel Services Vs Commissioner of Income Tax
C.I.T. Vs Ankitech Private Ltd. (2012) 340 ITR 14 (Del.)
In the instant case, the Revenue had challenged the order passed by the ITAT on the issue of deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961 (the Act).
The respondent assessee is a limited company engaged in the manufacturing and export of jewelry. The assessee had claimed an exemption of its profits earned in the new units established in the Special Economic Zone under Section 10AA of the Act.
During the course of scrutiny, the Assessing Officer (AO) inter alia noted that the assessee had obtained unsecured loans from two related companies. From the details of shareholding pattern of the creditor companies, it was noted by the A.O. that one company was a substantial shareholder in both the creditor companies as well as the assessee company.
The AO further noted that these creditors had reserves and surplus in excess of the amounts advanced to the assessee company. In these circumstances, the AO came to the conclusion that the conditions for invoking of Section 2(22)(e) of the Act with respect of the concept of ‘deemed dividend’ were complied with.
Accordingly, the AO came to the conclusion that the loans given by the creditor companies were to be taxed as ‘deemed dividend’ in the hands of the assessee company.
Aggrieved by the order passed by the A.O., the assessee company filed an appeal before the Commissioner of Income Tax (Appeals). On the issue of deemed dividend, the CIT(A) held that the assessee company not being a shareholder in the lender/creditor companies, the provisions of section 2(22)(e) were not applicable.
Being aggrieved by this order of the CIT(A), the revenue preferred an appeal before the ITAT. The ITAT, by the impugned order confirmed the findings of the CIT(A), on the question of ‘deemed dividend’ and dismissed the appeal of the revenue.
Before the Tribunal, the case of the Revenue was that Section 2(22)(e) of the Act inter alia stipulates that the dividend includes any payment by a company, not being a company in which the public are substantially interested, by way of loans or advances to
(1) a shareholder being a person who is the beneficial owner of the shareholding not less than ten percent of the voting power or
(2) to any concern in which such shareholder is a member or a partner and in which he has a substantial interest.
It was submitted that “any concern” would also include a company. He submitted that from looking to this definition it was apparent that the payment by a private limited company (like in the present case) by way of loans or advances to a shareholder or to any concern is deemed to be a dividend, if all the conditions and percentage of shareholding are satisfied.
It was contended that looking at the shareholding pattern of the assessee company as well as the creditor companies, it was clear that the said shareholder company was holding 86.96 % of the shareholding in the assessee company as well as 99% shareholding in the creditor companies. This being the case, the loans given by the creditor companies to the assessee company would clearly fall within the definition of ‘deemed dividend’ as stipulated in Section 2(22)(e) of the Act.
The Hon’ble High Court observed that Section 2(22)(e) of the Act stipulates that any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) by way of an advance or loan to a shareholder, being a person who is the beneficial owner of shares, holding not less than ten per cent voting power, shall be deemed as dividend in the hands of such shareholder. Section 2(22)(e) further stipulates that if monies are paid by a company (not being a company in which the public are substantially interested) by way of an advance or loan to any concern in which such shareholder is a member or partner in which he has a substantial interest.
The Hon’ble High Court noted that in the instant case, admittedly the assessee company was not a beneficial owner of any shares in the creditor companies which had advanced the loans. Infact, the common shareholder having a substantial interest in the assessee company as well as in the creditor companies was another company which held 86 per cent of the shareholding in the assessee company and 99 per cent shareholding in the creditor companies. It was also an admitted fact that the loans given by the creditor companies was not to the said shareholder company but was to the assessee company.
Regarding the decision of the Hon’ble Supreme Court relied upon by the Revenue, the Hon’ble High Court observed that the judgment wherein the issue about the correctness of a previous Judgment had been referred to a larger bench.
The Hon’ble High Court noted that in the said case, the assessee was a partnership firm and relying upon the previous decision, it was sought to be argued before the Supreme Court that since the assessee firm was not a registered holder of the shares in creditor companies, any loan taken by the assessee firm from the said company could not be taxed as ‘deemed dividend’ in the hands of the assessee firm. It was in this light and considering the amended provisions of Section 2(22)(e), the Supreme Court was of the opinion that its previous decision was not correctly decided, and therefore, referred the matter to a larger bench.
The Hon’ble High Court opined that the issue which was pending before the larger bench of the Supreme Court had any relevance to the factual situation in the instant case.
In view of the above facts, the Hon’ble High Court opined that the CIT(A) as well as ITAT were fully justified in holding that this case did not fall within the provisions of Section 2(22)(e) of the Act.
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