In a significant ruling, M/s. Om Siddivinayak Creations Pvt Ltd v. ITO, the division bench of the ITAT Mumbai held that the section 2(22)(e) of the Income Tax Act, which deals with the provisions of deemed dividend would not apply if the assessee is neither share holder nor the beneficial share holder in the company.
Assessment was completed against the assessee, a company engaged in business of film making and film financing in the form of loans, by making addition on account of deemed dividend. The first appellate authority deleted the addition by relying upon the decision of ITAT in the own case of the assessee, wherein it was held that the provisions of deemed dividend is not applicable since the assessee-company is neither share holder nor the beneficial share holder in the company.
The Revenue appealed against the said order relying upon the CBDT’s circular No 495 dated 22.09.1987, wherein the provisions of section 2(22)(e) have been explained as under:
“The new provision would, therefore, be applicable in a case where a shareholder has 10 percent or more of the equity capital. Further deemed dividend would be taxed in the hands of a concern where all the following conditions are satisfied.
(i) Where the company makes the payment by way of loans or advances to a concern
(ii) Where a member or a partner of the concern holds 10 per cent of the voting power in the company; and
(iii) Where the member or partner of the concern is also beneficially entitled to 20 per cent of the income of such concern.
With a view to avoid the hardship in cases where advances or loans have already been given, the new provisions have been made applicable only in cases where loans or advances are given after 31st May 1987. These amendments will apply in relation to Assessment Year 1988-89 and subsequent years.”
The bench noted that the decision of the co-ordinate bench was on the basis of the order of Special bench of ITAT in ACIT vs. Bhaumik Colour P. Ltd. [2009] 118 ITD 1 (MUM.)(SB), wherein it has been held that Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder.Further, the expression ‘shareholder’ referred to in section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is registered shareholder but not the beneficial shareholder then the provisions of section 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered share holder then also the provisions of section 2(22)(e) will not apply.
While concluding the matter in favour of the assessee, the ITAT further noticed the Bombay High Court decision in CIT, Vs Universal Medicare Pvt Ltd (2010) 324 ITR 263 (Bom) wherein it has held that “Even assuming that it was a dividend, it would have to be taxed not in the hands of the assessee but in the hands of the shareholder”.
Rejecting the contentions of the revenue, and applying the ration of the above cases to the facts of the case in hand, the bench held that the provisions of section 2(22)(e) of the Act are not applicable in the case of the assessee and therefore, the finding of the learned CIT(A) in deleting the addition made by the AO under section 2(22)(e) of the Act was upheld.
Read the full text of the order below.
