A two-judge bench of the Supreme Court has upheld the order of the Delhi High Court wherein the Court observed that section 2(22)(e) of the Income Tax Act, 1961 would not attract in a case where the recipient is not a shareholder.
Justices Rohinton Fali Nariman and Sanjay Kishan Kaul were hearing a series of appeals wherein the appellants challenged the above observation.
In the above case, In the above case, the assessee, a company, received advances of Rs. 6.32 crores by way of book entry from Jacksons Generators Pvt. Ltd, a closely held company. The shareholders having substantial interest in the assessee company were also having 10% of the voting power in Jacksons Generators.
Both the AO and the first appellate authorty held that as the shareholders who held substantial interest in Jacksons Generators also also had substantial interest in the assessee company, for purposes of s. 2(22)(e), the amount received by the assessee from Jacksons constituted “advances and loans” and was assessable as deemed dividend.
When the matter was brought before the High Court in the year 2011, Justices A K Sikri and M L Mehta had said that any payment by a closely-held company by way of advance or loan to a concern in which a substantial shareholder is a member holding a substantial interest is deemed to be “dividend” on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance. However, the legal fiction in s. 2(22)(e) does not extend to, or broaden the concept of, a “shareholder”, the division bench said.
The Apex Court has, now confirmed the above view.
Read the full text of the Order below.
