SC : Ankitech ruling on ‘deemed dividend’ requires re-consideration, refers matter to larger bench

SC division bench refers to larger bench on the issue of whether shareholder must be a 'registered shareholder' and also a ‘beneficial shareholder’ to trigger deemed dividend taxability us. 2(22)(e), ‘prima facie’ opines that the co-ordinate bench ruling in Ankitech Pvt. Ltd.  requires reconsideration; SC notes that assessee (a partnership firm) had taken a loan from a company in which it beneficially held 48.19% shareholding in the name of 2 of its partners who were on company's register as members; Assessee had argued that in view of the recent co-ordinate bench ruling approving Delhi HC ruling in Ankitech Pvt. Ltd., provisions of Sec. 2(22)(e) would not apply to assessee firm which is not a registered shareholder of lender company; Firstly, SC examines the legislative history of 'deemed dividend' provisions including provisions under 1922 Act, perusing 1988 amendment to Sec. 2(22)(e) of the Income-tax Act, 1961, observes that under amended provisions, a ‘shareholder’ is a person who is the beneficial owner of shares and a new category was added to the definition by introducing concerns in which such shareholder is a member or partner; SC then takes note of Delhi HC rulings in Ankitech Pvt. Ltd. (approved by co-ordinate bench) and Madhur Housing and Development Company wherein it was held that the expression ‘shareholder’ would continue to mean a registered shareholder even after the amendment; Further, SC notes that HC in present assessee’s case had held that the expression ‘being a person who is a beneficial owner of shares’ would be in addition to the shareholder first being a registered shareholder of the Company, but it had ruled that a partnership firm can be treated as a shareholder even if its not a registered shareholder, observes that "it is very difficult to accept the reasoning of the Division Bench";  SC remarks that “the whole object of the amended provision would be stultified if the Division Bench judgment were to be followed. Ankitech’s case, in stating that no change was made by introducing the deeming fiction insofar as the expression ‘shareholder’ is concerned is, according to us, wrongly decided.”; Referring to Explanatory memorandum to 1988 amendment, SC notes that purpose was to get over the two SC judgments in C.P. Sarathy Mudaliar and Rameshwari Lal Sanwarmal and “'shareholder’ now, post amendment, has only to be a person who is the beneficial owner of shares”, explains that one cannot be a registered owner and beneficial owner in the sense of a beneficiary of a trust or otherwise at the same time; Further, referring to additional condition of beneficial owner holding not less than 10% of voting power, remarks that “This is another indicator that the amendment speaks only of a beneficial shareholder who can compel the registered owner to vote in a particular way”; Observing that "To state, therefore, that two conditions have to be satisfied, namely, that the shareholder must first be a registered shareholder and thereafter, also be a beneficial owner is not only mutually contradictory but is plainly incorrect", places the matter before the Chief Justice to constitute an appropriate Bench of three Judges in order to have a relook at the entire question.:SC