Delhi H.C : no deemed dividend even if the common director of the company is holding more than 20% share in both the donor & donee companies

High Court Of Delhi

CIT vs. MCC Marketing (P.) Ltd.

Assessment Year : 2006-07

Section : 2(22)

Sanjiv Khanna And R.V. Easwar, JJ.

IT Appeal No. 599 Of 2011

November 21, 2011


R.V. Easwar, J. – The Revenue has sought to raise the following questions as substantial questions of law in this appeal filed u/s.260A of the Income Tax Act, 1961 (“Act” for short ) against the order of the Income Tax Appellate Tribunal (“Tribunal”) dated 13th August 2010 in ITA No.1430/Del./2010:

“2.1 Whether provisions of section 2(22)(e) were correctly invoked by the Assessing officer when the director of the company is holding more than 20% share in both the donor & donee companies?

2.2 Whether learned ITAT erred in deleting the addition of Rs. 37,66,432/- made by the Assessing officer under section 2(22)(e) of Act, being deemed dividend?”

2. The assesse-respondent is a private limited company and the assessment year involved is 2006-07. In the assessment made u/s.143(3) of the Act, the Assessing Officer had made an addition of Rs. 37,66,432/-by invoking sec.2(22)(e) of the Act for the following reason, that the above sum was received by the assessee as unsecured loan from another sister-concern by the name of MCC Imaging Pvt. Ltd. (“MIPL”) and that one Ajay Mehta was the major common shareholder in both MIPL and the assessee company. He was found to be holding 90% shares and 50% shares respectively in the assessee and MIPL. On these facts he invoked the aforesaid statutory provision and brought the amount to tax in the assessee — company’s hands.

3. On appeal, the CIT(A) held that since the assessee-company did not hold any shares in MIPL, the provisions of sec.2(22)(e) are not attracted, following the order of the Special Bench of the Tribunal, Mumbai in the case of Asstt. CIT v Bhaumik Colours (P.) Ltd. [2009] 27 SOT 270/118 ITD 1 wherein it was held that an addition for deemed dividend u/s.2(22)(e) can be made only in the hands of the shareholder of the company from whom he had received a loan or advance and, where the recipient of the loan or advance is not a shareholder in the company, no addition can be made in his hands by invoking the said section.

4. The Revenue filed an appeal before the Tribunal which, following the order of the Special Bench (supra), held that the view taken the CIT(A) was correct. The appeal of the revenue was thus dismissed.

5. We find that the matter is now concluded by the judgment of a Division Bench of this Court delivered on 11th May, 2011 in the case of CIT v. Ankitech (P.) Ltd. [2011] 199 Taxman 341/ 11 100 and the connected appeals. A copy of the judgment has been filed before us. We have carefully gone through the same. After an elaborate discussion of the issue, and the case-law on the subject, the Division Bench has held that an assessee who was not a shareholder of the company from which he received a loan or an advance cannot be treated as covered by the definition of the word “dividend” as contained in sec.2(22)(e) of the Act. It has been held :-

“24. The intention behind enacting provisions of section 2(22)( e) is that closely held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions, such payment by the company is treated as dividend. 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.

25. Further, it is an admitted case that under 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 legal fiction created under section 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 under section 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 a 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 under section 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 circumstance, it could be treated as shareholder/member receiving dividend. 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 deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspective.”

6. In the present case, it is an admitted fact that the assessee-company is not a shareholder in MIPL. Therefore, the judgment of this Court in Ankitech (P.) Ltd (supra) fully applies to the present case. We accordingly hold, following the said judgment, that no substantial question of law arises from the order of the Tribunal.

7. The appeal is accordingly dismissed with no order as to costs.

[Citation : 343 ITR 350]

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