DCIT, New Delhi V. M/s Japna Chemicals Pvt. Ltd., New Delhi

ITA 2464/DEL/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 0292 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 25-02-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 24-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAVI RAMCHANDRAN
• Assessee Lawyers: R S AHUJA
• Keywords: Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH D : NEW DELHI) BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.2464/DEL./2010 (ASSESSMENT YEAR : 2006-07) DCIT, CIRCLE 4 (1), VS. M/S. JAPNA CHEMICALS PVT . LTD., NEW DELHI. 186, SAINIK VIHAR, PITAMPURA, NEW DELHI 110 034. (PAN : AAACJ1862E) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R.S. AHUJA, ADVOCATE REVENUE BY : SHRI RAVI RAM CHANDRAN, DR ORDER PER B.C. MEENA, ACCOUNTANT MEMBER : THIS APPEAL FILED BY THE REVENUE ARISES OUT OF THE ORDER OF CIT (APPEALS)-VII, NEW DELHI DATED 12.3.2010. THE GROUNDS OF APPEAL READ AS UNDER :- 1. THE ORDER OF THE LEARNED CIT (APPEALS) IS ERRON EOUS & CONTRARY TO FACTS & LAW. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT (APPEALS) HAS ERRED IN DELETING THE ADD ITION OF RS.11,25,000/- MADE BY THE A.O. UNDER SECTION 2(22) (E) OF THE I.T. ACT BEING THE DEEMED DIVIDEND. 2.1 THE LD. CIT (A) IGNORED THE FACT THAT MRS. ANGE LA BHASIN AND SH. G.S. BHASIN ARE HAVING MORE THAN20% SHARES IN B OTH THE DONOR AND DONEE COMPANY. 3. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER OR A MEND ANY GROUNDS OF THE APPEAL RAISED ABOVE AT THE TIME OF H EARING. 2. THE ONLY ISSUE INVOLVED IN THE APPEAL IS DELETIN G THE ADDITION OF RS.11,25,000/- MADE BY THE ASSESSING OFFICER UNDER SECTION 2(22)(E) OF THE INCOME- TAX ACT BEING THE DEEMED DIVIDEND. ITA NO.2464/DEL./2010 2 3. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF MOSQUITO REPELLANTS, MATS, LIQUIDS AND MACHINES. T HE RETURN OF INCOME WAS FILED FOR THE YEAR UNDER CONSIDERATION DECLARING TOTAL LOSS O F RS.39,94,081/- ON 27.11.2006 AND THE ASSESSMENT WAS FINALIZED UNDER SECTION 143( 3). THE ASSESSEE COMPANY TOOK THE LOAN OF RS.11,25,000/- FROM M/S. GSB CONSTRUCTI ONS (P) LIMITED, THE COMPANY IN WHICH THE DIRECTORS OF THE ASSESSEE COMPANY HAS SUBSTANTIAL INTEREST. 4. THE LEARNED DR RELIED ON THE ORDER OF THE ASSESS ING OFFICER. 5. THE LEARNED AR SUBMITTED THAT THIS ISSUE IS COVE RED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF ITAT, SPECIAL BENCH, MUMBAI IN T HE CASE OF ACIT VS. BHAUMIK COLOUR (P.) LIMITED REPORTED IN 118 ITD 1 (MUM.)(SB ) AND ALSO BY THE DECISION OF HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. HOTEL HILLTOP 313 ITR 116. 6. AFTER HEARING BOTH THE SIDES, WE HOLD THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF SPECIAL BENCH OF IT AT IN THE CASE OF ACIT VS. BHAUMIK COLOUR (P.) LIMITED, CITED SUPRA. THE TRIB UNAL IN THE SAID DECISION HELD AS UNDER :- SECTION 2(32) DEFINES THE EXPRESSION PERSON WHO HA S A SUBSTANTIAL INTEREST IN THE COMPANY, IN RELATION TO A COMPANY, MEANS A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES, NOT BEING SH ARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RI GHT TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN TWENTY PER CENT OF THE VOTING POWER. UNDER THE INDIAN INCOME-TAX ACT, 1922, TWO CATEGORI ES OF PAYMENT WERE CONSIDERED AS DIVIDEND, VIZ., (A) ANY PAYMENT BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER WAS CONSIDERED AS DIVIDEND PAID TO SHAREHOLDER OR (B) ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF A SHAREHOLDER WAS CON SIDERED AS DIVIDEND. IN THE 1961 ACT, THE VERY SAME TWO CATEGORIES OF PA YMENT WERE CONSIDERED AS DIVIDEND, BUT AN ADDITIONAL CONDITION , THAT PAYMENT SHOULD BE TO A SHAREHOLDER BEING A PERSON WHO IS TH E BENEFICIAL OWNER OF SHARES AND WHO HAS A SUBSTANTIAL INTEREST IN THE COMPANY, VIZ., SHAREHOLDING WHICH CARRIES NOT LESS THAN TWEN TY PER CENT OF THE VOTING POWER, WAS INTRODUCED. BY THE 1987 AMENDMENT WITH EFFECT FROM 1-4-1988, TH E CONDITION THAT PAYMENT SHOULD BE TO A SHAREHOLDER WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RAT E OF DIVIDEND ITA NO.2464/DEL./2010 3 WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN P ROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER WAS SUBS TITUTED. THUS, THE PERCENTAGE OF VOTING POWER WAS REDUCED FROM TWENTY PER CENT TO TEN PER CENT. BY THE VERY SAME AMENDMENT A NEW CATEGORY OF PAYMENT WAS ALSO CONSIDERED AS DIVIDEND, VIZ., PAYMENT TO A NY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST. SUBSTANTIAL INTEREST HAS BE EN DEFINED TO MEAN HOLDING OF SHARES CARRYING 20 PER CENT OF VOTING PO WER. THE PROVISIONS OF SECTION 2(22)(E) CREATE A FICTION BRINGING IN AMOUNTS PAID OTHERWISE THAN AS DIVIDEND INTO THE NE T OF DIVIDENDS. THEREFORE, CLAUSE (E) OF SECTION 2(22) MUST BE GIVE N A STRICT INTERPRETATION. IN THE INSTANT CASE, THERE WAS NO D ISPUTE THAT THE COMPANIES WHICH GAVE THE LOAN OR ADVANCE WERE ONE I N WHICH PUBLIC WAS NOT SUBSTANTIALLY INTERESTED. NOR WAS THERE ANY DISPUTE THAT THESE COMPANIES POSSESSED ACCUMULATED PROFITS TO THE EXTE NT OF THE LOAN OR ADVANCE. IN VIEW OF THE JUDGMENTS OF THE SUPREME COURT IN TH E CASES OF CIT V. C.P. SARATHY MUDALIAN [1972] 83 ITR 170 AND RAMESHW ARLAL SANWARLAL V. CIT [1980] 122 ITR 1/3 TAXMAN 1 (AP), IT IS CLEAR THAT TO ATTRACT THE FIRST LIMB OF THE PROVISIONS OF SECT ION 2(22)(E) THE PAYMENT MUST BE TO A PERSON WHO IS A REGISTERED HOL DER OF SHARES. AS ALREADY MENTIONED THE CONDITION UNDER THE 1922 ACT AND THE 1961 ACT REGARDING THE PAYEE BEING A SHAREHOLDER REMAINS THE SAME AND IT IS THE CONDITION THAT SUCH SHAREHOLDER SHOULD BE BE NEFICIAL OWNER OF THE SHARES AND THE PERCENTAGE OF VOTING POWER THAT SUCH SHAREHOLDER SHOULD HOLD HAS BEEN PRESCRIBED AS AN ADDITIONAL CO NDITION UNDER THE 1961 ACT. THE WORD 'SHAREHOLDER' ALONE EXISTED IN T HE DEFINITION OF DIVIDEND IN THE 1922 ACT. THE EXPRESSION 'SHAREHOLD ER' HAS BEEN INTERPRETED UNDER THE 1922 ACT TO MEAN A REGISTERED SHAREHOLDER. THIS EXPRESSION 'SHAREHOLDER' FOUND IN THE 1961 ACT HAS TO BE, THEREFORE, CONSTRUED AS APPLYING ONLY TO REGISTERED SHAREHOLDER. IN THE 1961 ACT THE WORD 'SHAREHOLDER' IS FOLLOWED BY THE FOLLOWING WORDS 'BEING A PERSON WHO IS THE BENEFICIAL OWNER O F SHARES: THIS EXPRESSION USED IN SECTION 2(22)(E) BOTH IN THE 196 1 ACT AND IN THE AMENDED PROVISIONS WITH EFFECT FROM 1-4-1988 ONLY Q UALIFIES THE WORD 'SHAREHOLDER' AND DOES NOT IN ANY WAY ALTER TH E POSITION THAT THE SHAREHOLDER HAS TO BE A REGISTERED SHAREHOLDER. THE SE PROVISIONS ALSO DO NOT SUBSTITUTE THE AFORESAID REQUIREMENT TO A RE QUIRE MEN T OF MERELY HOLDING A BENEFICIAL INTEREST IN THE SHARES WITHOUT BEING A REGISTERED HOLDER OF SHARES. THE EXPRESSION 'BEING' IS A PRESENT PARTICIPLE. A PARTICIPLE IS A WORD WHICH IS PARTLY A VERB AND PARTLY AN ADJECTIVE. IN SECTION 2(22)(E), THE PRESENT PARTICI PLE 'BEING 'IS USED TO ITA NO.2464/DEL./2010 4 DESCRIBE THE NOUN SHAREHOLDER LIKE AN ADJECTIVE. TH E EXPRESSION 'BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHAR ES' IS, THEREFORE, A FURTHER REQUIREMENT BEFORE A SHAREHOLDER CAN BE SAI D TO FALL WITHIN THE PARAMETERS OF SECTION 2(22)(E). IN THE 1961 ACT , SECTION 2(22)(E) IMPOSES A FURTHER CONDITION THAT THE SHAREHOLDER HA S ALSO TO BE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITL ED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PART ICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING PO WER. THUS, IT WAS NOT POSSIBLE TO ACCEPT THE CONTENTION OF THE REVENU E THAT UNDER THE 1961 ACT THERE WAS NO REQUIREMENT OF A SHAREHOLDER BEING A REGISTERED HOLDER AND THAT EVEN A BENEFICIAL OWNERS HIP OF SHARES WOULD BE SUFFICIENT. THE EXPRESSION 'SHAREHOLDER BEING A PERSON WHO IS T HE BENEFICIAL OWNER OF SHARES' REFERRED TO IN FIRST LIMB OF SECTI ON 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BENEFICIAL SHAREH OLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL SHAREHOLDER THAN THE PROVISIONS OF SECTION 2(22)(E) WOULD NOT APPLY; SIM ILARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SH AREHOLDER THEN ALSO THE FIRST LIMB OF PROVISIONS OF SECTION 2(22)(E) WO ULD NOT APPLY. THE NEW CATEGORY OF PAYMENT WHICH WAS CONSIDERED AS DIVIDEND INTRODUCED BY THE FINANCE ACT, 1987 WITH EFFECT FRO M 1-4-1988 BY THE SECOND LIMB OF SECTION 2(22)(E) IS PAYMENT 'TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST. THE FOLLOWING CONDITIONS ARE REQUIRED TO BE SATISFI ED FOR APPLICATION OF THE ABOVE CATEGORY OF PAYMENT TO BE REGARDED AS DIVIDEND: (A) THERE MUST BE A PAYMENT TO A CONCERN BY A COMPA NY. (B) A PERSON MUST BE SHAREHOLDER OF THE COMPANY BEI NG A REGISTERED HOLDER AND BENEFICIAL OWNER OF SHARES (N OT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER. THIS IS BECAUSE O F THE EXPRESSION 'SUCH SHAREHOLDER' FOUND IN THE RELEVANT PROVISION. THIS EXPRESSION ONLY REFERS TO THE SHAREHOLDER REFE RRED TO IN THE EARLIER PART OF SECTION 2(22)(E), VIZ., A REGIS TERED AND A BENEFICIAL HOLDER OF SHARES HOLDING 10 PER CENT VOT ING POWER. (C) THE VERY SAME PERSON REFERRED TO IN (B) ABOVE M UST ALSO BE A MEMBER OR A PARTNER IN THE CONCERN HOLDING SUBSTANT IAL INTEREST IN THE CONCERN VIZ., WHEN THE CONCERN IS N OT A ITA NO.2464/DEL./2010 5 COMPANY, HE MUST AT ANY TIME DURING THE PREVIOUS YE AR, BE BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PER C ENT OF THE INCOME OF SUCH CONCERN; AND WHERE THE CONCERN IS A COMPANY HE MUST BE THE OWNER OF SHARES, NOT BEING S HARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH O R WITHOUT A RIGHT TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN TWENTY PER CENT OF THE VOTING POWER. (D) IF THE ABOVE CONDITIONS ARE SATISFIED THEN THE PAYMENT BY THE COMPANY TO THE CONCERN WILL BE DIVIDEND. IN THE CASE OF THE ASSESSEE, AFORESAID CONDITIONS ( B) AND (C) WERE NOT SATISFIED INASMUCH AS NNT HELD SHARES IN UPPL AND B CPL ONLY AS A LEGAL AND REGISTERED OWNER BUT NOT AS A BENEFICIAL OWNER. THE THREE TRUSTEES OF NNT HELD SHARES IN UPPL AND BCPL ONLY A S A LEGAL AND REGISTERED OWNER. THEY HELD SHARES FOR AND ON BEHAL F OF 5 BENEFICIARIES OF THE TRUST WHO WERE DIFFERENT INDIV IDUALS. THEY WERE, THEREFORE, NOT BENEFICIAL OWNERS OF THE SHARES. TRU ST OWNERSHIP IS A PECULIAR INSTANCE OF DUPLICATE OWNERSHIP. TRUST PRO PERTY IS, IN FACT, OWNED BY TWO PERSONS SIMULTANEOUSLY IN THE SENSE TH AT ONE IS UNDER AN OBLIGATION TO USE THE PROPERTY FOR THE BENEFIT O F THE OTHER. THE OWNERSHIP OF THE TRUSTEE CALLED TRUST OWNERSHIP IS NOMINAL RATHER THAN REAL. THE BENEFICIARY INTEREST IS CALLED THE BENEFICIAL INTEREST. THE TRUSTEE IS TO ADMINISTER THE PROPERTY OF ANOTHE R PERSON BUT THE OWNERSHIP RIGHT IN THE TRUSTEE IS TO BE USED ONLY O N BEHALF OF THE REAL OWNER. AS BETWEEN TRUSTEE AND THIRD PARTY OWNERSHIP CONFERRED ON THE TRUSTEE FICTITIOUSLY BY LAW PREVAILS, THAT IS, THE TRUSTEE IS CLOTHED WITH THE RIGHTS OF THE BENEFICIARY AND IS SO ENABLE TO PERSONATE OR REPRESENT HIM IN DEALINGS WITH THE WORLD AT LARGE. THE MAIN PURPOSE OF TRUSTEESHIP IS TO PROTECT THE RIGHTS AND INTERES T OF PERSONS WHO FOR ANY REASON ARE UNABLE EFFECTIVELY TO PROTECT THEM F OR THEMSELVES. SUCH PROTECTION IS REQUIRED FOR FOUR CLASSES OF PEO PLE, (A) UNBORN PERSONS; (B) INFANTS, LUNATICS, OR OTHER DISQUALIFI ED PERSONS; (C) A LARGE NUMBER OF PERSONS WHO ARE INTERESTED IN COMMO N; AND (D) PERSONS HAVING CONFLICTING INTEREST IN THE SAME PRO PERTY, I.E., AN OWNER AND AN ENCUMBRANCER OR DIFFERENT KINDS OF ENC UMBRANCERS. THEREFORE, THE FIRST REQUIREMENT OF HOLDING OF SHAR ES BOTH AS A LEGAL REGISTERED OWNER AND BENEFICIAL OWNER OF SUCH SHARE S WAS NOT SATISFIED IN THE CASE OF THE ASSESSEE. THEREFORE, P ROVISIONS OF SECTION 2(22)(E) WOULD NOT BE APPLICABLE AT ALL TO THE CASE OF THE ASSESSEE. THE PROVISIONS OF SECTION 2(22)(E) WHICH BROUGHT IN A NEW CATEGORY OF PAYMENT WHICH WAS TO BE CONSIDERED AS DIVIDEND A S INTRODUCED BY THE FINANCE ACT, 1987 WITH EFFECT FROM 1-4-1988, VI Z., PAYMENT BY A COMPANY 'TO ANY CONCERN IN WHICH SUCH SHAREHOLDER I S A MEMBER OR A ITA NO.2464/DEL./2010 6 PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST' DO NOT SAY AS TO IN WHOSE HANDS THE DIVIDEND HAS TO BE BROUGHT TO TAX, WHETHER IN THE HANDS OF THE 'CONCERN' OR THE 'SHAREHOLDER. THE INTENTION BEHIND ENACTING PROVISIONS OF SECTION 2(22)(E) ARE THAT CLOSELY HELD COMPANIES (I.E., COMPANIES IN WHICH PU BLIC ARE NOT SUBSTANTIALLY INTERESTED), WHICH ARE CONTROLLED BY A GROUP OF MEMBERS, EVEN THOUGH THE COMPANY HAS ACCUMULATED PR OFITS WOULD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEND BECAUSE IF S O DISTRIBUTED THE DIVIDEND INCOME WOULD BECOME TAXABLE IN THE HANDS O F THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED P ROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS LOAN OR ADVANCES TO SH AREHOLDERS OR TO CONCERN IN WHICH SUCH SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENE FIT OF SUCH SHAREHOLDER. IN SUCH AN EVENT, BY THE DEEMING PROVI SIONS SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)(E) IS TO TAX DIVIDE ND IN THE HANDS OF SHAREHOLDER. THE DEEMING PROVISIONS AS IT APPLIES T O THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHIC H ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON T HE PRESUMPTION THAT THE LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAIL ABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVA NCE. THE INTENTION OF THE LEGISLATURE IS, THEREFORE, TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF TH E CONCERN. THE BASIS OF BRINGING IN THE AMENDMENT TO SECTION 2 (22)(E) BY THE FINANCE ACT, 1987 WITH EFFECT FROM 1-4-1988 IS TO E NSURE THAT PERSONS WHO CONTROL THE AFFAIRS OF A COMPANY AS WEL L AS THAT OF A FIRM CAN HAVE THE PAYMENT MADE TO A CONCERN FROM TH E COMPANY AND THE PERSON WHO CAN CONTROL THE AFFAIRS OF THE CONCE RN CAN DRAW THE SAME FROM THE CONCERN INSTEAD OF THE COMPANY DIRECT LY MAKING PAYMENT TO THE SHAREHOLDER AS DIVIDEND. THE SOURCE OF POWER TO CONTROL THE AFFAIRS OF THE COMPANY AND THE CONCERN IS THE BASIS ON WHICH THESE PROVISIONS HAVE BEEN MADE. IT IS, THERE FORE, PROPER TO CONSTRUE THOSE PROVISIONS AS CONTEMPLATING A CHARGE TO TAX IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF A NON-SHAREHOLDER, VIZ., CONCERN. A LOAN OR ADVANCE RECEIVED BY A CONC ERN IS NOT IN THE NATURE OF INCOME. IN OTHER WORDS, THERE IS A DEEMED ACCRUAL OF INCOME EVEN UNDER SECTION 5(L)(B) IN THE HANDS OF T HE SHAREHOLDER ONLY AND NOT IN THE HANDS OF THE PAYEE, VIZ., NON-S HAREHOLDER (CONCERN). SECTION 5(L)(A) CONTEMPLATES THAT THE RE CEIPT OR DEEMED RECEIPT SHOULD BE IN THE NATURE OF INCOME. THEREFOR E, THE DEEMING FICTION CAN BE APPLIED ONLY IN THE HANDS OF THE SHA REHOLDER AND NOT THE NON-SHAREHOLDER, VIZ., THE CONCERN. ITA NO.2464/DEL./2010 7 THE DEFINITION OF DIVIDEND UNDER SECTION 2(22)(E) I S AN INCLUSIVE DEFINITION. SUCH INCLUSIVE DEFINITION ENLARGES THE MEANING OF THE TERM 'DIVIDEND' ACCORDING TO ITS ORDINARY AND NATUR AL MEANING TO INCLUDE EVEN A LOAN OR ADVANCE. ANY LOAN OR ADVANCE CANNOT BE DIVIDEND ACCORDING TO ITS ORDINARY AND NATURAL MEAN ING. THE ORDINARY AND NATURAL MEANING OF THE TERM 'DIVIDEND' WOULD BE A SHARE IN PROFITS TO AN INVESTOR IN THE SHARE CAPITAL OF A LI MITED COMPANY. TO THE EXTENT THE MEANING OF THE WORD 'DIVIDEND' IS EX TENDED TO LOANS AND ADVANCES TO A SHAREHOLDER OR TO A CONCERN IN WH ICH A SHAREHOLDER IS SUBSTANTIALLY INTERESTED DEEMING THEM AS DIVIDEN D IN THE HANDS OF A SHAREHOLDER THE ORDINARY AND NATURAL MEANING OF T HE WORD 'DIVIDEND' IS ALTERED. TO THIS EXTENT THE DEFINITIO N OF THE TERM 'DIVIDEND' CAN BE SAID TO OPERATE. IF THE DEFINITIO N OF 'DIVIDEND' IS EXTENDED TO A LOAN OR ADVANCE TO A NON-SHAREHOLDER, THE ORDINARY AND NATURAL MEANING OF THE WORD 'DIVIDEND' IS TAKEN AWA Y. IN THE LIGHT OF THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22 )(E) AND IN THE ABSENCE OF INDICATION IN SECTION 2(22)(E) TO EXTEND THE LEGAL FICTION TO A CASE OF LOAN OR ADVANCE TO A NON-SHAREHOLDER ALSO , THE LOAN OR ADVANCE TO A NON-SHAREHOLDER CANNOT BE TAXED AS DEE MED DIVIDEND IN THE HANDS OF A NON-SHAREHOLDER. THE BASIC CHARACTERISTIC OF DIVIDEND IS A SHARE OF PROFITS OF THE COMPANY GIVEN TO ITS SHAREHOLDERS. FURTHER, SECTION 206 OF THE COMPANIES ACT, 1956 PROHIBITS PAYMENT OF DIVIDEND T O ANY PERSON OTHER THAN THE REGISTERED SHAREHOLDER. IF ONE WAS T O BREAK UP THE NATURAL MEANING THE FOLLOWING COMPONENTS EMERGE (A) DIVIDEND IS A SHARE OF PROFITS OF THE COMPANY (B) PAID TO ITS SHA REHOLDERS. SECTION 2(22) ARTIFICIALLY EXTENDS THE SCOPE OF DIVIDEND FR OM BEING MORE THAN ONLY A DISTRIBUTION OF PROFITS TO COVER CERTAIN OTH ER TYPES OF DISBURSEMENTS SUCH AS LOANS PAID ETC. (THE FIRST IN GREDIENT MENTIONED ABOVE). IT DOES NOT, HOWEVER, ALTER THE SECOND COMP ONENT OF ITS NATURAL MEANING, VIZ., PAID TO ITS SHAREHOLDER. IN OTHER WORDS ALL THAT SECTION 2(22) SEEKS TO DO IS TO EXPAND THE VARIOUS TYPES OF PAYMENTS THAT MAY BE REGARDED AS DIVIDEND. THE CONTENTION OF THE REVENUE THAT PROVISIONS OF SE CTION 8(A) CREATED A FICTION BY WHICH EVEN PAYMENTS TO NON-SHAREHOLDER S COULD BE CONSTRUED AS DIVIDEND COULD NOT BE ACCEPTED. THOSE PROVISIONS MERELY FIX THE YEAR IN WHICH DIVIDEND HAS TO BE TAX ED. IT IS, THEREFORE, CLEAR THAT THE SHAREHOLDER ALONE CAN, IF AT ALL, BE SUBJECTED TO TAX FOR HAVING EARNED DIVIDEND. FURTHER, IN THE EVENT OF THE PAYMENT OF LOAN OR ADV ANCE BY A COMPANY TO A CONCERN BEING TREATED AS DIVIDEND AND TAXED IN THE HANDS OF THE CONCERN THEN, THE BENEFIT OF SET OFF C ANNOT BE ALLOWED TO ITA NO.2464/DEL./2010 8 THE CONCERN, BECAUSE THE CONCERN CAN NEVER RECEIVE DIVIDEND FROM THE COMPANY WHICH IS ONLY PAID TO THE SHAREHOLDER, WHO HAS SUBSTANTIAL INTEREST IN THE CONCERN. THE ABOVE PROV ISIONS ALSO, THEREFORE, CONTEMPLATE DEEMED DIVIDEND BEING TAXED IN THE HANDS OF A SHAREHOLDER ONLY. IN VIEW OF AFORESAID, IT WAS OPINED THAT DEEMED DIV IDEND CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO IS A SHA REHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTH ER THAN A SHAREHOLDER. FURTHER, THE EXPRESSION 'SHAREHOLDER' REFERRED TO IN SECTION 2(22)(E) REFERS TO BOTH A REGISTERED SHAREH OLDER AND BENEFICIAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHAREHOLDE R BUT NOT THE BENEFICIAL SHAREHOLDER THEN THE PROVISIONS OF SECTI ON 2(22)(E) WOULD NOT APPLY. SIMILARLY, IF A PERSON IS A BENEFICIAL S HAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE PROVISIONS OF SECTION 2(22)(E) WOULD NOT APPLY. IN VIEW OF AFORESAID, THERE WAS NO MERIT IN APPEAL FILED BY THE REVENUE AND, THEREFORE, SAME WAS TO BE DISMISSED. IN VIEW OF THIS, WE SUSTAIN THE ORDER OF THE CIT (A ) AND DISMISS THE REVENUES APPEAL. 7. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 28 TH DAY OF FEBRUARY, 2011. SD/- SD/- (C.L. SETHI) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 28 TH DAY OF FEBRUARY, 2011 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-VIII, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.