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Deemed dividend provisions won't apply if you're just a registered or beneficial shareholder and not both.
Deemed dividend provisions won't apply if you're just a registered or beneficial shareholder and not both.
This case revolves around the interpretation of Section 2(22)(e) of the Income Tax Act, 1961, which deals with the taxation of deemed dividends. The key question was whether deemed dividends can be taxed in the hands of non-shareholders or only in the hands of shareholders of the lending company. The Special Bench of the Income Tax Appellate Tribunal (ITAT) ruled that deemed dividends under Section 2(22)(e) can only be assessed in the hands of shareholders and not in the hands of non-shareholders.
Case Name:
Assistant Commissioner of Income-tax, Circle-33, Mumbai v. Bhaumik Colour (P.) Ltd. IT APPEAL NO. 5030 (MUM.) OF 2004 (ITAT Mumbai)
Key Takeaways:
- Deemed dividends under Section 2(22)(e) can only be taxed in the hands of shareholders of the lending company, not in the hands of non-shareholders.
- The term "shareholder" in Section 2(22)(e) refers to both registered and beneficial shareholders.
- If a person is only a registered shareholder but not a beneficial shareholder, or vice versa, the provisions of Section 2(22)(e) will not apply.
- The intention behind Section 2(22)(e) is to tax dividends in the hands of shareholders, not non-shareholders.
Issue:
The central legal question in this case was whether deemed dividends under Section 2(22)(e) of the Income Tax Act, 1961, can be assessed in the hands of a person other than a shareholder of the lending company.
Facts:
Bhaumik Colour Pvt. Ltd. (BCPL) took an interest-bearing loan of Rs.9 lakhs from Umesh Pencils Pvt. Ltd. (UPPL). The Assessing Officer noticed that although BCPL was not a shareholder of UPPL, both companies had a common shareholder, Narmadaben Nandlal Trust (NNT). NNT held 20% shares in BCPL and 10% shares in UPPL. The Assessing Officer invoked Section 2(22)(e) and taxed Rs. 9 lakhs in the hands of BCPL as deemed dividend.
BCPL argued that the shares were held by three trustees of NNT on behalf of the trust, and the beneficial owners were the five beneficiaries of the trust, who were different individuals. Therefore, the provisions of Section 2(22)(e) could not be invoked.
Arguments:
- Revenue's argument:
The expression "being a person who is the beneficial owner of shares" in Section 2(22)(e) qualifies the word "shareholder." Therefore, the provisions would apply in this case as the beneficial owners of NNT (the beneficiaries) were the same individuals.
- BCPL's argument:
The term "shareholder" in Section 2(22)(e) refers to both registered and beneficial shareholders. Since the trustees were only registered shareholders and not beneficial owners, the provisions could not be invoked.
Key Legal Precedents:
- CIT v. C.P. Sarathy Mudaliar [1972] 83 ITR 170 (SC):
The provisions of Section 2(22)(e) create a fiction and must be given a strict interpretation.
- Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1 (SC):
To attract the provisions of Section 2(22)(e), the payment must be to a registered shareholder.
- CIT v. Hotel Hill Top [IT Appeal No. 25 (Raj.) of 2005]:
The Hon'ble Rajasthan High Court held that deemed dividends cannot be taxed in the hands of a non-shareholder.
Judgment:
The Special Bench of the ITAT held that deemed dividends under Section 2(22)(e) can be assessed only in the hands of a person who is a shareholder of the lending company and not in the hands of a non-shareholder. The expression "shareholder" in Section 2(22)(e) refers to both registered and beneficial shareholders. If a person is only a registered shareholder but not a beneficial shareholder, or vice versa, the provisions of Section 2(22)(e) will not apply.
The intention behind Section 2(22)(e) is to tax dividends in the hands of shareholders, not non-shareholders. The court reasoned that a loan or advance received by a non-shareholder is not in the nature of income, and the deeming fiction can only be applied in the hands of shareholders.
FAQs:
Q1. What is the significance of this case?
A1. This case clarifies the interpretation of Section 2(22)(e) and establishes that deemed dividends can only be taxed in the hands of shareholders of the lending company, not in the hands of non-shareholders.
Q2. What is the reasoning behind the court's decision?
A2. The court reasoned that the intention behind Section 2(22)(e) is to tax dividends in the hands of shareholders, not non-shareholders. A loan or advance received by a non-shareholder is not in the nature of income, and the deeming fiction can only be applied in the hands of shareholders.
Q3. What is the impact of this case on the law?
A3. This case sets a precedent for the interpretation of Section 2(22)(e) and clarifies that the term "shareholder" refers to both registered and beneficial shareholders. It also establishes that if a person is only a registered shareholder or only a beneficial shareholder, the provisions of Section 2(22)(e) will not apply.
Q4. What does this mean for the parties involved?
A4. For BCPL, the deemed dividend of Rs.9 lakhs will not be taxed in its hands as it is not a shareholder of UPPL. The revenue's appeal was dismissed, and the deemed dividend cannot be assessed in the hands of BCPL.
Q5. Are there any exceptions to this ruling?
A5. The judgment does not mention any specific exceptions. However, it is based on the interpretation of Section 2(22)(e) and the intention behind the provision. Any future amendments or changes to the law may impact the applicability of this ruling.
