THE question before the Bench is - Whether the provisions of
deemed dividend extend to related parties also. And the answer is NO.
Facts of the
case
Assessee, a
company, had filed ROI declaring a total income of Rs.9,88,598/-. During the
search at the office of M/s. Goa Golf Club Pvt. Ltd., from the ledger extract,
it was found that M/s. Goa Golf Club Pvt. Ltd., advanced loan to M/s. Brito
Amusement Pvt.Ltd. It was further noted that Dr. William Britto and Mrs. Muriel
Britto, were the share holders of M/s. Goa Golf Club Pvt. Ltd.,, holding 75% and
25% shareholding therein. It was further found that the said
sharehoders were
also holding shares in the assessee company in the ratio of 26:26:48 thus Dr.
William Britto and his wife were having more than 10% voting rights in M/s. Goa
Golf Club Pvt. Ltd. It was further found that they had substantial interest in
assessee company, where the said M/s. Goa Golf Club Pvt. Ltd., was running a
casino. Assessee received operating fees from M/s. Goa Golf Club Pvt. Ltd., and
AO was of the view that in addition to the operating fees, assessee received
loans or advances which, constituted deemed dividend u/s 2(22)(e). AO also
computed accumulated profit of M/s. Goa Golf Club Pvt. Ltd., which were in
excess of Rs.33,55,076/-. As such, AO by applying the provisions of Section
2(22)(e), treated the amount of Rs.33,55,076/- to be deemed dividend u/s
2(22)(e). On appeal, CIT(A) had confirmed the addition by holding that the
assessee had confirmed in its submission before the DDIT(Inv) Panaji, that it
had borrowed funds from M/s. Goa Golf Club Pvt. Ltd., and that the assessee
failed to provide any explanation substantiating the claim that the money was
received as a normal business transaction. On further appeal, Tribunal
allowed the
Appeal of assessee by concluding that in the Order passed u/s 253 for the AY
2003-2004 in the case of M/s. Goa Golf Club Pvt. Ltd., the amount paid to the
assessee company of Rs.2,23,94,763/-, was treated as revenue expenditure.
However, the ledger account in respect of payment received from M/s. Goa Golf
Club Pvt. Ltd., it was clear that the payments made to the assessee company
includes the payment against expenditure and also the loan and advances which
had been admitted in the audited balance sheet.
Before the HC, Revenue's counsel
had pointed out that dividends include any payments by a Company not being a
Company in which the public are substantially interested of any sum by way of
advance or loan to a shareholder being a person who has a substantial interest
in the company. It was pointed out that as there were accumulated profits in the
said Company and as Mr. William Britto was a beneficial shareholder with more
than 10% voting rights in M/s. Goa Golf Club Pvt. Ltd., and had a substantial
interest therein, the amount of advance was to be construed to be deemed
dividend in his hands. It was further pointed out that as the material on record
establishes that Dr. Britto had a substantial interest in the said Company the
advance was to be continued to be deemed dividend. On the other hand, assessee's
counsel had pointed out that the assessee does not hold any shares in M/s. Goa
Golf Club Pvt. Ltd., and that Mr. William Britto and his wife Mrs. Muriel
Britto, were the shareholders of M/s. Goa Golf Club Pvt. Ltd., having 75% and
25% share holding while Dr. William Britto and M/s. Goa Golf Club Pvt. Ltd.,
were the shareholders of the assessee company having 26%, 26% and 48%
shareholding respectively. It was further pointed out that in such
circumstances, advances can be considered deemed dividends only in the hands of
the shareholders of the Company. The Counsel further pointed out that these
advances can be at the most considered as deemed dividends in the hands of Mr.
and Mrs. William Britto and not in the hands of non-shareholders. It was further
pointed out that the deemed dividends cannot be assessed in the hands of the
assessee as it was not a shareholder of M/s. Goa Golf Club Pvt. Ltd.
Held
that,
++
upon comparing the provisions of the said Act as they stood prior to the
amendment, the Tribunal noted that in the 1961 Act, an additional condition was
introduced that the payment should be to a shareholder being a person who is the
beneficial holder of shares and who has a substantial interest in the Company
i.e. a shareholding which carries not less than 20% of the voting power. By the
1987 amendment, the power of the voting rights were reduced to 10%. The Tribunal
further noted that in the present case, the shareholder who is a registered and
beneficial holder of shares, 10% voting powers are Mr. William Britto and Mrs.
Muriel Britto as each of them is holding more than 20% share holding in the
assessee capital. It is further noted that the assessee is neither a registered
nor a beneficial holder of the shares. The Tribunal has also taken note of the
Judgment of this Court and noted that the provisions of Section 2(22)(e), cannot
be applied in the case of the assessee. The Tribunal also considered the
Judgment of the Special Bench and found that it had taken the same view that
deemed dividend cannot be assessed in the hands of a person who is not a
shareholder of the Company. The Tribunal, as such, set aside the Order of the
Commissioner of Income Tax and deleted the additions made by the Assessing
Officer as deemed dividend in the hands of the assessee who is not the
shareholder of M/s. Goa Golf Club Pvt. Ltd;
++
the findings arrived at by the Tribunal that the assessee is not assessee of
M/s. Goa Golf Club Pvt. Ltd., has not been disputed by the Apellants. In this
context, it would be appropriate to note the observations of the Division Bench
of this Court in the case of CIT vs. Universal Medical Pvt. Ltd (2010-TIOL-215-HC-MUM-IT), wherein it has been observed that
the finding that there was no advance or loan is a pure finding of fact which
does not give rise to any substantial question of law. However, even on the
second aspect which has weighed with the Tribunal, we are of the view that the
construction which has been placed on the provisions of Section 2(22)(e) is
correct. Section 2(22)(e) defines the ambit of the expression 'dividend'. All
payments by way of dividend have to be taxed in the hands of the recipient of
the dividend namely the shareholder. The effect of Section 2(22) is to provide
an inclusive definition of the expression dividend. Clause (e) expands the
nature of payments which can be classified as a dividend. Clause (e) of Section
2(22) includes a payment made by the company in which the public is not
substantially interested by way of an advance or loan to a shareholder or to any
concern to which such shareholder is a member or partner, subject to the
fulfillment of the requirements which are spelt out in the provision. Similarly,
a payment made by a company on behalf, of for the individual benefit, of any
such shareholder is treated by Clause (e) to be included in the expression
'dividend'. Consequently, the effect of Clause (e) of Section 2(22) is to
broaden the ambit of the expression 'dividend' by including certain payments
which the company has made by way of a loan or advance or payments made on
behalf of or for the individual benefit of a shareholder. The definition does
not alter the legal position that dividend has to be taxed in the hands of the
shareholder. Consequently in the present case the payment, even assuming that it
was a dividend, would have to be taxed not in the hands of the assessee but in
the hands of the shareholder. The Tribunal was, in the circumstances, justified
in coming to the conclusion that, in any event, the payment could not be taxed
in the hands of the assessee. We may in concluding note that the basis on which
the assessee is sought to be taxed in the present case in respect of the amount
of Rs. 32,00,000/- is that there was a dividend under Section 2(22)(e) and no
other basis has been suggested in the order of the Assessing Officer.
Hence, considering the
above observation, the Tribunal has rightly found that the Respondent is not a
shareholder of a Company known as M/s. Goa Golf Club Pvt. Ltd., and as such the
question of including the disputed amount as deemed dividend in terms of Section
2(22)(e) of the Income Tax Act, does not arise at all. Considering the said
Judgment of this Court and in view of the undisputed facts of the case referred
to in the impugned Judgment of the Income Tax Appellate Tribunal, we find that
no substantial question of law arises in the present Appeal.
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