Full News
Common Shareholder, Loan given, Deemed Dividend
Loan given by a company to another is deemed as dividend in the hands of shareholder holding substantial interest in lending and borrowing companies.
Loan given by a company to another is deemed as dividend in the hands of shareholder holding substantial inte…
The case involves an assessee (Sahir Sami Khatib) who held 15% shares in a lending company (MLPL) and 45% shares in a borrowing company (Oryx Fisheries Pvt. Ltd.). MLPL gave a loan to Oryx Fisheries. The Income Tax Officer treated this loan as a deemed dividend under Section 2(22)(e) of the Income Tax Act and added it to the assessee's income. The Tribunal upheld this addition, ruling that since the assessee had a substantial interest in both companies, the loan qualified as a deemed dividend taxable in his hands.
Case Name:
Income-tax Officer-8 (2)-3, Mumbai vs Sahir Sami Khatib
IT APPEAL NO. 25 (MUM.) OF 2011 (ITAT Mumbai)
Key Takeaways:
- Loans given by a company to another concern where a common shareholder has substantial interest in both can be treated as deemed dividends taxable in that shareholder's hands under Section 2(22)(e).
- The entire loan amount is taxable as deemed dividend for the common shareholder meeting the criteria, not just a proportionate amount based on shareholding.
- Having over 20% voting power is considered "substantial interest" in a company under this section.
Issue:
Whether the loan given by MLPL to Oryx Fisheries Pvt. Ltd. should be treated as a deemed dividend taxable in the hands of the assessee Sahir Sami Khatib under Section 2(22)(e) of the Income Tax Act.
Facts:
- The assessee Sahir Sami Khatib held 15% shares in MLPL (the lending company) and 45% shares in Oryx Fisheries Pvt. Ltd. (the borrowing company).
- MLPL gave an advance/loan of Rs. 91,85,874 to Oryx Fisheries Pvt. Ltd.
- The Income Tax Officer treated this loan as a deemed dividend under Section 2(22)(e) and added it to the assessee's income.
- The Commissioner of Income Tax (Appeals) deleted this addition, but the Tribunal reversed this.
Arguments:
Assessee's Arguments:
- The loan was not received by the assessee directly but by Oryx Fisheries.
- If any addition is made under Section 2(22)(e), it should only be a proportionate amount based on the assessee's 45% shareholding in the borrower company.
Revenue's Arguments:
- The assessee met both conditions under Section 2(22)(e) - holding over 10% voting power in the lending company (MLPL) and having substantial interest (45% shares) in the borrowing company (Oryx Fisheries).
- The entire loan amount should be taxed as deemed dividend in the assessee's hands.
- There is no provision for proportionate addition based on shareholding percentage.
Key Legal Precedents:
- Section 2(22)(e) of the Income Tax Act, 1961:
Defines "deemed dividend" to include loans given by a company to a shareholder with over 10% voting power, or to a concern where such shareholder is a member/partner with substantial interest.
- Section 2(32) and Explanation to Section 40A(2):
Defines "substantial interest" as beneficial ownership of at least 20% voting power in a company.
- CIT v. Universal Medicare (P.) Ltd. [2010] 324 ITR 263 (Bom):
Held that deemed dividend under Section 2(22)(e) has to be taxed in the hands of the shareholder, not the company receiving the loan.
Judgment:
The Tribunal ruled in favor of the Revenue and upheld the addition of the entire loan amount as deemed dividend in the assessee's hands under Section 2(22)(e) for the following reasons:
1) The assessee held over 10% voting power (15%) in the lending company MLPL.
2) The assessee had substantial interest (45% shares) in the borrowing company Oryx Fisheries, as per the definition of "substantial interest" under Sections 2(32) and 40A(2).
3) Since both conditions of Section 2(22)(e) were met, the loan qualified as a deemed dividend taxable in the assessee's hands.
4) There is no provision for proportionate addition based on shareholding percentage. The assessee was the only shareholder meeting the criteria, so the entire loan amount was taxable.
5) The Tribunal distinguished the case law cited by the assessee as it dealt with a different issue.
FAQs:
Q1: What is the significance of this case?
A1: This case clarifies the application of Section 2(22)(e) of the Income Tax Act, which deems certain loans given by companies as dividends taxable in the hands of shareholders. It establishes that when a shareholder meets the criteria of having substantial voting power in both the lending and borrowing companies, the entire loan amount is taxable as a deemed dividend for that shareholder.
Q2: What constitutes "substantial interest" under Section 2(22)(e)?
A2: As per Sections 2(32) and 40A(2) of the Income Tax Act, having at least 20% beneficial ownership/voting power in a company is considered "substantial interest" for the purposes of Section 2(22)(e).
Q3: Can the deemed dividend addition be made proportionate to the shareholder's stake in the borrower company?
A3: No, the Tribunal clearly stated that there is no provision for proportionate addition based on shareholding percentage. If the conditions of Section 2(22)(e) are met, the entire loan amount is taxable as deemed dividend for that shareholder.
Q4: What are the key conditions for Section 2(22)(e) to apply?
A4: The two key conditions are: 1) The shareholder must hold at least 10% voting power in the lending company, and 2) The shareholder must have substantial interest (at least 20% voting power) in the concern receiving the loan.
Q5: What was the impact of this decision on the assessee?
A5: The entire loan amount of Rs. 91,85,874 given by MLPL to Oryx Fisheries Pvt. Ltd. was treated as a deemed dividend and added to the assessee Sahir Sami Khatib's taxable income for that assessment year.
