Section 2(22)(e)

Loan by a company A to company B having common shareholder - Dividend to be deemed in the hands of receiving company or shareholder

During the assessment proceedings, AO noticed that the assessee-company had received advances of Rs. 6,32,72,265 by way of book entry from JGPL and the shareholders having substantial interest in the assessee-company were also having 10 per cent of the voting power in JGPL. The AO was of the view that as the two Guptas were the members holding substantial interests in JGPL which had provided loans and advances to the assessee-company and these very Guptas had substantial interest even in the assessee-company, for the purpose of section 2(22)(e) the amount received by the assessee from JGPL which constituted "advances and loans" would be treated as deemed dividend within the meaning of section 2(22)(e) and added the aforesaid amount to the income of the assessee. The assessee had specifically pleaded that the provisions of section 2(22)(e) would not be attracted as the assessee was not a shareholder in JGPL. According to the assessee, for the purposes of application of section 2(22)(e), one of the essential conditions is that the concern receiving the said money has to be that income is to be assessed at the hands of shareholder. The AO rejected this contention. ITAT held that though the amount received by the assessee by way of book entry is a deemed dividend within the meaning of Section 2(22)(e), the same cannot be assessed in the hands of assessee company, as it was not the shareholder in the company JGPL. A dividend cannot be paid to a non-shareholder. It would have to be taxed, if at all, in the hands of the shareholders who have a substantial interest in the assessee concern and also holding not less than 10 per cent of the voting power in JGPL. Held: Under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under section 2(22)(e). One has to keep in mind that this legal provision relates to "dividend". Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to "shareholder". When this aspect is kept in mind, the conclusion would be obvious, viz., loan or advance given under the conditions specified under section 2(22)(e) would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non-members. The second category specified under section 2(22)(e), viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of "deeming shareholder", then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the revenue to argue that if this position is taken, then the income "is not taxed at the hands of the recipient". Such an argument based on the scheme of the Act as projected by the revenue on the basis of sections 4, 5, 8, 14 and 56 of the Act would be of no avail. Simple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance. It is not in dispute that the conditions stipulated in section 2(22)(e) treating the loan and advance as deemed dividend are established in these cases. Therefore, it would always be open to the Revenue to take corrective measure by treating this dividend income at the hands of the shareholders and tax them accordingly. As otherwise, it would amount to escapement of income at the hands of those shareholders.-Vide CIT v. Ankitech (P) Ltd (2011) 39 (I) ITCL 365 (Del-HC)