Mukul K. Shrawat, Judicial Member - This is an appeal filed by the Revenue arising from the order of CIT(Appeals)-II, Nagpur and the grounds raised are as follows:
| "1. |
In the facts and circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs. 70,26,663/- made by the A.O. on the ground that the provision of section 2(22)(e) are not attracted in his case. |
2. |
In the facts and circumstances of the case and in law, the CIT(A) erred in that he did not consider the fact that the assessee's shareholding was more than 10% both at the beginning and the end of the financial year. |
3. |
In the facts and circumstances of the case and in law, the CIT(A) did not appreciate the legislative intent of section 2(22)(e) which is pronounced in Explanation 3(b) to section 2(22)(e) where the words ……… at any time during the previous year are used." |
2. From the side of the Revenue additional ground has also been raised which is reproduced below :
"On the facts and circumstances of the case and in law, the CIT(A) erred in not considering the colorable device by which assessee to avoid applicability of section 2(22)(e) by which he transferred 2500 shares on 15.04.2004 to his father and then obtained 4900 shares on 30.05.2004 from members just to show that loan is obtained from company at the time when he has less than 10% Vito Power."
3. A notice under section 148 was issued on the ground that a company, namely Jaswantsingh Oberoi Construction P. Ltd. had given a loan of Rs. 70,26,663/- to a Director, namely, Shri Jaswantsingh J. Oberoi, the respondent assessee. The Assessing Officer was of the view that the loan was in the nature of "deemed dividend". The assessee has objected that the share holding was less than the prescribed limit, therefore, the loan amount should not be considered as deemed dividend in the hands of the assessee. On the other hand, the allegation of the Assessing Officer was that the company had issued 21445 equity shares of Rs. 100/- each out of which the assessee was holding 3000 shares as on 31-03- 2004. The Assessing Officer has also noted that the assessee had transferred 2500 shares on 15-04-2004 to his father. Thereafter 4900 shares were allotted to the assessee by the said company. According to the Assessing Officer during the financial year 2004-05 the assessee was holding 5400 shares which were not less than 10% of the voting power. The Assessing Officer has held that the assessee was a beneficial owner, hence the loan was a deemed dividend. On the other hand, the assessee has challenged the share holding pattern as per the following reply :
"In reply, during the course of assessment proceedings the assessee stated, "as on 01-04-2004, I was holding 3000 shares of Jaswantsingh Oberoi Construction Pvt. Ltd. which was 30% of the total share capital. I sold 2500 shares on 15.04.2004, thus, my share holding in the company went down to 5% on 15.04.2004. The advances given to me by the company as stated by you are after 15.04.2004 i.e.when my share holding was below 10% therefore the question of treating the said amount as deemed dividend does not arise. I further states that as per my return of income for A.Y. 2005-06, I have shown capital gain of Rs. 2,18,310/- as the sale of 2500 shares of Jaswantsingh Oberoi Construction Private Limited which means the fact that my shares holding was gone down is evident from records. No new point has arisen for the issue of notice U/s. 148. It is thus, requested to cancel the notice and accept my return as filed."
However, the Assessing Officer was not convinced and held that the share holding was not less than 10% of voting power. Therefore, the amount of loan was in the nature of deemed dividend, which was taxed in the hands of the assessee.
4. When the matter was carried before the first appellate authority, learned CIT(Appeals) has examined the provisions of section 2(22)(e) of the I.T. Act and also discussed the decision of Kerala High Court in the case of CIT v. Smt. S. Parvathavarthini Ammal [1996] 219 ITR 661/87 Taxman 370. On the basis of the said judgment, learned CIT(Appeals) has held that on the date of advance when loan was given by M/s JOCPL, the percentage of voting power of the assessee in the said company was less than 10%. He has held that the provisions of section 2(22)(e) were wrongly attracted, hence directed the Assessing Officer to delete the addition.
5. From the side of the Revenue, learned D.R. Mr. A.R. Ninawe has supported the order of the Assessing Officer and pleaded that in terms of the provisions of section 2(22)(e) Explanation 3(b) the assessee was having substantial interest in the company during the previous year, hence the Assessing Officer has rightly invoked the provisions of section 2(22)(e) of the I.T. Act. Learned D.R. has contested that the share holding pattern was to be examined at any time during the previous year and not on a particular date. Therefore, the loan was rightly considered as deemed dividend.
6. On the other side, learned A.R. Mr. K.P. Dewani has pleaded that Explanation 3(b) is not in respect of a company but in respect of a "Concern". Therefore, the deeming provision was wrongly invoked. He has placed reliance on the decision of Hon'ble Allahabad High Court pronounced in the case of CIT v. H.K. Mittal [1996] 219 ITR 420/88 Taxman 208.
7. After hearing the submissions of both the sides and in the light of the facts as narrated above, we have noted that a legal issue has emerged that the condition qualify under Explanation 3(b) annexed to section 2(22)(e) represents the 2(22)(e)(i) or (ii) of section 2(22)(e) of the I.T. Act. To resolve this issue, at first the relevant provisions are needed to be reproduced below, as under :
'Section 2(22):
(e) any payment by a company not being a company, in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [mandate after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than 10 per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ;
but "dividend" does not include-
(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets.
(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalized profits of the company representing bonus shares allotted to its equity shares after the 31st day of March, 1964, [and before the 1st day of April, 1965];]
(ii) any advance or loan made to shareholder [or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company.
Explanation 3.— For the purposes of this clause,-
| (a) |
"concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company; |
(b) |
a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty percent of the income of such concern;' |
8. To deal with this issue, it is worth to mention that undisputedly the Legislature is competent to enact a deeming provision for the purpose of assuming the existence of fact which does not really exist. By enacting section 2(22)(e) the legislature has created a fiction. The fiction created by these provisions is so comprehensive that substantial shareholders who borrows from the company will have to pay tax on an amount which might far in excess of what he would obtain by way of dividend. But side by side it is also an established law that the fiction cannot be extended further or so interpreted as to go beyond the Legislature's intention in creating the fiction. This is so, because legal fictions are created only for a definite purpose and, therefore, they are limited to the purpose for which they are created. Naturally a legal fiction is to be carried to its logical conclusion, hence the issue in hand is to be decided keeping this in mind.
8.1 We all are aware that "dividend" in its ordinary connotation means the sum paid to or received by a shareholder proportionate to his share holding in company out of the total sum distributed. So the dividend distributed by a company is a share of its profits declared as distributor among the shareholders. As, payment of dividend is related to a proportionate to the share held by shareholders, any payment may unrelated to his shares cannot be treated as dividend under the general law. But by the creation of the fictionvide section 2(22)(e) any advance or loan to a shareholder is also included in the definition of "dividend", subject to the exceptions prescribed under this sub-section. This artificial definition does not check whether dividend is actually declared or received. The "dividend" taken note of by that provision is a "deemed dividend" and not a "real dividend". This is so because of the reason that the loan granted to a shareholder has to be returned to the company. It does not become the income of the shareholder. But for certain purposes, as described in this subsection, the legislature has deemed such a loan as dividend.
8.2 With this background, if we consider the provisions so enacted, then we have found that section 2(22)(e) has three categories which are carved out as under from sub-section "(e)" as under :
| (a) |
by way of loan or advance to a shareholder holding not less than 10% of the voting power. |
(b) |
by way of loan or advance to any concern in which such shareholder is a member or a partner. |
(c) |
any payment by any such company on behalf of or for the individual benefit of any such shareholder. |
8.3 This sub-section, therefore, has prescribed the three categories of tax payers who have taken advance or loan either as a shareholder, secondly, as a member/partner of a concern or thirdly, as a benefit to an individual for and on behalf of shareholder. It may not be out of place to mention that under certain conditions exception is prescribed according to which certain transaction would not be considered as "deemed dividend", for example, if advance or loan is given in the ordinary course of the business. Right now we are not on the issue of the exceptions prescribed in this sub-section. The issue before us is revolving around the interpretation of Explanation 3 annexed to this sub-section.
8.4 As reproduced above, Explanation 3 has prescribed two types of tax payers on which the provisions of sub-section (e) are to be applied. First category is a "concern" which means a Hindu Undivided Family" or a "Firm" or an "Association of Persons" or a "Company". In the second category i.e. Explanation 3(b) a person shall be deemed to have substantial interest in a concern, other than a company, if he is at any time during the previous year beneficially entitled to not less than 20% of the income of such concern. As per Explanation 3(a), concern means a company also, but further explaining the intent of the section videExplanation 3(b) it is prescribed that a person shall be deemed to have a substantial interest in a concern, other than a company. Therefore, the Company is excluded and the remaining entities such as HUF, Firm, AOP or BOI are left in view of Explanation 3(b). Therefore, the words caught the attention of the Assessing Officer i.e. "at any time during previous year", belong to Explanation 3(b) in respect of "concern", namely, HUF, Firm, AOP or BOI. The percentage of shareholding as prescribed in this section do not apply to the "company" because Explanation 3(b) has purposely mentioned that for the purpose of this clause other than a Company is a concern. Hence the percentage of share holding at any time during the previous year is required to be taken into account in respect of a concern and not in respect of any other category of persons described in section 2(22)(e) of I.T. Act. However, as per the facts of this case, the entity involved is not a "concern" but a "company". Because of this reason, even if at any time during the previous year the shareholding of Shri Oberoi has gone up, then also not to be applied because the transaction was not with a "concern" but with a "company". Although the assessee has transferred 2500 shares to his father and at that point of time the shareholding was less than the prescribed limit but the Assessing Officer cannot extend the fiction to presume that the transaction has happened between the assessee and a Concern. Rather the admitted factual position was that the transaction was between the assessee and a Company. Therefore, the clause "any time during the previous year" should not apply to the assessee. According to us, Explanation 3(b) where the term "any time during the previous year" is to be applied only in respect of a "Concern". Since the assessee had the transaction with a company, namely, Jasvant S. Oberoi P. Ltd. Co., therefore, the loan given to the assessee should not be treated as "deemed dividend" for the purpose of invoking provisions of section 2(22)(e).
9. In the light of the reasons assigned herein above, we hereby confirm the finding of learned CIT(Appeals), although given other reasons for granting relief to the assessee. Learned CIT(Appeals) has placed reliance on a decision of Hon'ble Kerala High Court pronounced in the case of Smt. S. Parvathavarthini Ammal(supra). Finally the result is that the ground raised by the Revenue has no force in the eyes of law. Hence dismissed.
10. In the result, the Revenue's appeal is dismissed.