Laxmi Jewellery, CHENNAI V. ACIT, CHENNAI

ITA 316/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64269 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-09-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 11-09-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 14-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR S MOHARANA
• Assessee Lawyers: T BANUSEKAR
• Keywords: Question of law; Deemed dividend
• Section: 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI [BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER] I.T.A.NO.316/MDS/2012 ASSESSMENT YEAR : 2008-09 M/S LAXMI JEWELLERY 65, NSC BOSE ROAD SOWCARPET CHENNAI 600 079 VS THE ACIT BUSINESS CIRCLE XI CHENNAI [PAN AAAFL 0161F ] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI T. BANUSEKAR, CA RESPONDENT BY : DR. S.MOHARANA, CIT/DR DATE OF HEARING : 11-09-2012 DATE OF PRONOUNCEMENT : 13-09-2012 O R D E R PER N.S. SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE ASSESSE E AGAINST THE ORDER OF THE CIT(A)-IV, CHENNAI, DATED 15.12.2011. 2. THE ONLY ISSUE INVOLVED IN THE GROUNDS OF APPEAL TA KEN BY THE ASSESSEE IS THAT THE CIT(A) ERRED IN CONFIRMIN G THE ADDITION OF ` 2.50 CRORES AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. I.T.A.NO.316/12 :- 2 -: 3. THE BRIEF FACTS OF THE CASE ARE THE ASSESSING OFFIC ER OBSERVED THAT SHRI ASHOK KUMAR JAIN WAS HOLDING 19% SHARES O F THE COMPANY M/S SHREE LAXMI JEWELLERY PVT. LTD. THE SAID COMPA NY HAS GIVEN LOAN OF ` 2.50 CRORES TO M/S LAXMI JEWELLERY, THE ASSESSEE- FIRM, IN WHICH SHRI ASHOK KUMAR JAIN WAS HAVING 20% SHARE OF PROFI TS. THEREFORE, THE ASSESSING OFFICER MADE AN ADDITION U/S 2(22)(E ) OF THE ACT BY OBSERVING THAT LOAN WAS GIVEN BY M/S SHREE LAXMI JE WELLERY PVT. LTD TO THE ASSESSEES PARTNERSHIP FIRM AND TREATED IT AS DEEMED DIVIDEND. THE ASSESSING OFFICER RELIED ON THE BOARDS CIRCULA R NO.495 DATED 23.09.1987 WHEREIN IT WAS STATED THAT IF THE LOAN I S GIVEN BY A COMPANY TO PARTNERSHIP CONCERN, THE SAME CAN BE ADD ED IN THE HANDS OF THE FIRM. 4. ON APPEAL BEFORE THE CIT(A), THE ASSESSEE CLAIMED THAT THE DEEMED DIVIDEND CANNOT BE ADDED IN THE HANDS OF THE PARTNERSHIP CONCERN AS THE FIRM WAS NOT A SHAREHOLDER IN THE C OMPANY. THE OTHER ARGUMENT OF THE A.R BEFORE THE CIT(A) WAS THAT THE SHARE HOLDING OF MR.ARUN JAIN WAS LESS THAN 10% IN THE COMPANY. THE OTHER ARGUMENT OF THE ASSESSEE WAS THAT IT RELIED ON THE HON'BLE MADRAS HIGH COURT AND OTHER HIGH COURTS DECISIONS WHEREIN IT WAS HEL D THAT IF THE PARTNERSHIP CONCERN IS NOT A SHAREHOLDER OF COMPANY , THEN IT CAN BE ADDED ONLY IN THE HANDS OF THE PARTNERS WHO ARE THE SHAREHOLDERS OF I.T.A.NO.316/12 :- 3 -: THE COMPANY, BUT NOT IN THE HANDS OF PARTNERSHIP FI RM. THE CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, HAS CONFIRMED THE ACTION OF THE ASSESSING OFFICER BY OBSERVING AS UND ER: 7.2 I HAVE CONSIDERED THE WRITTEN SUBMISSIONS AND THE CASES LAW RELIED ON BY THE APPELLANT. THE MADRAS HI GH COURT'S DECISION OF COMMISSIONER OF INCOME-TAX VS T.P.S.H. SELVA SAROJA 244 ITR 671 MADRAS RELIED ON BY THE APPELLAN T IS NOT ON SIMILAR FACTS AND DISTINGUISHABLE. IN THAT CASE, HO NOURABLE MADRAS HIGH COURT HAS DELIVERED JUDGEMENT WHILE DE ALING WITH THE ASPECTS OF PERQUISITE UNDER. SECTION 17(2) AND WHETHER THE SURRENDERED CREDITS CAN BE TREATED AS DEEMED DIVID END OR NOT. IN THE PRESENT CASE BEFORE US, THERE IS NO SUCH ISS UE AND HENCE THE RELIANCE PLACED BY THE ID. AR ON THE ABOVE CITE D MADRAS HIGH COURT CASE IS INCORRECT AND HENCE REJECTED. T HE ID. AR HAS RELIED ON SOME OTHER HIGH COURT'S DECISIONS. B UT THERE IS A CENTRAL BOARD OF DIRECT TAXES CIRCULAR NO.495 DATED 23.09.1987 WHICH CLEARLY WAS THAT IF THE LOAN IS G IVEN BY A COMPANY TO PARTNERSHIP CONCERN, THEN THE DEEMED DI VIDEND UNDER SECTION 222(E) IS TO BE COMPUTED IN THE HAND S OF PARTNERSHIP CONCERN ONLY AND NOT IN THE HANDS OF PARTNERS. IN VIEW OF THIS CLEAR BOARD CIRCULAR, I A M OF THE VIEW THAT THE ADDITION MADE BY THE ASSESSING OFFICER IS CONFIRMED AND THE ARGUMENTS OF THE ID. AR ARE REJECTED. 5. THE A.R OF THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE CIT(A) AND RELIED ON THE FOLLOWING DECIS IONS: CIT VS HOTEL HILL TOP [2009] 313 ITR 116 (RAJ) CIT VS RAJ KUMAR SINGH & CO. [2007] 295 ITR 9 (ALL ) ACIT VS BHAUMIK COLOUR (P) LTD [2009] 120 TTJ (MUMBAI)(SB)865 CIT VS ANKITECH (P) LTD & ORS [2012] 340 ITR 14 (DE L) CIT VS GOPAL CLOTHING CO.(P) LTD IN I.T.A.NO. 333/2 006 CIT VS UNIVERSAL MEDICARE (P) LTD [2010] 324 ITR 26 3 (BOM.) I.T.A.NO.316/12 :- 4 -: 6. HE SUBMITTED THAT IN THE ABOVE DECISIONS, IT HAS BE EN HELD THAT ADDITION U/S 2(22)(E) OF THE ACT CAN BE MADE IN THE HANDS OF THE SHAREHOLDER ONLY. HE ALSO SUBMITTED THAT CIRCULAR NO.495 DATED 23.09.1987 RELIED ON BY THE ASSESSING OFFICER, HAS ALSO BEEN CONSIDERED IN THE ABOVE DECISIONS AND IT HAS BEEN H ELD THAT SUCH OBSERVATIONS ARE NOT BINDING ON COURTS. ONCE IT IS FOUND THAT LOAN OR ADVANCE CANNOT BE TREATED AS DEEMED DIVIDEND IN THE HANDS OF SUCH CONCERN WHICH IS NOT A SHAREHOLDER WHICH IS THE CU RRENT LEGAL POSITION, SUCH CIRCULAR WOULD BE OF NO AVAIL. HENCE, HE SUB MITTED THAT THE ORDERS OF THE LOWER AUTHORITIES SHOULD BE REVERSED AND THE APPEAL OF THE ASSESSEE SHOULD BE ALLOWED. 7. THE CIT/DR, ON THE OTHER HAND, RELIED ON THE DECISI ON OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS BHAR TI OVERSEAS TRADING CO., REPORTED IN [2012] 21 TAXMANN.COM 543(DEL), WH EREIN FOLLOWING ITS OWN DECISION IN THE CASE OF CIT VS NATIONAL T RAVEL SERVICES [2011] 14 TAXMANN.COM 14(DEL), THE HON'BLE HIGH COURT HELD THAT THE PARTNERSHIP FIRM WHICH HAD PURCHASED SHARES OF COMP ANY THROUGH ITS PARTNERS, THOUGH NOT REGISTERED SHAREHOLDER, BEING BENEFICIAL OWNER, WAS TO BE TREATED AS SHAREHOLDER FOR THE PURPOSES O F SECTION 2(22)(E) OF THE ACT. I.T.A.NO.316/12 :- 5 -: 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD. THE UNDISPUTED FACTS IN THE INSTANT CASE ARE THAT DURIN G THE YEAR UNDER CONSIDERATION THE ASSESSEE-FIRM RECEIVED A LOAN OF ` 2.50 CRORES FROM M/S SHREE LAXMI JEWELLERY PVT. LTD WHEREIN ONE OF T HE PARTNERS SHRI ASHOK KUMAR JAIN, WHO WAS HAVING 20% SHARE OF PROFI TS IN THE FIRM WAS ALSO A 19% SHAREHOLDER OF THE COMPANY M/S SHREE LAXMI JEWELLERY PVT. LTD. THE ASSESSING OFFICER, BY INVO KING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT TAXED THE AMOUNT OF LOA N OF ` 2.50 CRORES RECEIVED BY THE ASSESSEE-FIRM AS DEEMED DIVIDEND W HICH WAS CONFIRMED IN APPEAL BY THE CIT(A) RELYING UPON CBDT CIRCULAR NO.495 DATED 23.09.1987. 9. WE FIND THAT IN THE INSTANT CASE, IT IS NOT IN DISP UTE THAT THE ASSESSEEFIRM IS NEITHER A REGISTERED SHAREHOLDER N OR A BENEFICIAL SHAREHOLDER OF THE COMPANY M/S SHREE LAXMI JEWELLER Y PVT. LTD. FROM WHICH IT HAS RECEIVED A LOAN OF ` 2.50 CRORES. THE ISSUE WHICH REQUIRES OUR ADJUDICATION IS THAT WHETHER IN THE HANDS OF SU CH NON-SHAREHOLDER DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT CAN BE ASS ESSED OR NOT. WE FIND THAT THE MUMBAI SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS BHAUMIK COLOUR (P) LTD [2009] 313 ITR (AT) 146 ( MUM)(SB) HAS HELD AS UNDER: I.T.A.NO.316/12 :- 6 -: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE HIST ORICAL BACKGROUND OF SECTION 2(22)(E) IS AS FOLLOWS : (A) SECTION 2(6A)(E) OF THE INDIAN INCOME-TAX ACT, 1922, AS INTRODUCED BY THE FINANCE ACT, 1955, CORRESPONDING TO SECTION 2(22)(E) OF THE INCOME- TAX ACT, 1961, WAS AS FOLLO WS : ' ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED WITHIN THE MEAN ING OF SECTION 23A, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COM- PANY OR OTHERWISE) BY WAY OF ADVANCE OR LO AN TO A SHAREHOLDER, OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT OF A SHAREHOLDER, TO TH E EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED P ROFITS.' (B) SECTION 2(22) OF THE INCOME-TAX ACT, 1961 DEFIN ES DIVIDEND. SECTION 2(2)(E) OF THE ACT, WHICH IS EQUIVALENT TO SECTION 2(6A)(E) OF THE 1922 ACT, AS IT EXISTED ORIGINALLY IN THE I NCOME-TAX ACT, 1961, READ AS FOLLOWS : ' SECTION 2(22) ` DIVIDEND` INCLUDES,-. . . (E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY I N WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SU M (WHETHER AS REPRESENT ING A PART OF THE ASSETS OF THE COMPANY O R OTHERWISE) BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO HAS A SUB- STANTIAL INTEREST IN THE COMPANY, OR ANY PAYMENT BY ANY SUCH COM- PANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE C OMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS.' (C) THE AFORESAID CLAUSE (E) OF THE ACT HAS BEEN AM ENDED WITH EFFECT FROM APRIL 1, 1988, THE AMENDED CLAUSE (E) OF THE ACT READS AS FOLLOWS : '(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) MADE AFTER THE MAY 31, 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 TEN PER CENT. OF THE VOTING POWER, O R TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEM- BER OR A PARTNE R 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, O F ANY SUCH I.T.A.NO.316/12 :- 7 -: SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS.' EXPLANATION 3 TO SECTION 2(22)(E) IS AS FOLLOWS : ` EXPLANATION 3.-FOR THE PURPOSE 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 TIM E DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS TH AN TWENTY PER CENT. OF THE INCOME OF SUCH CONCERN.` ' SECTION 2(32) DEFINES THE EXPRESSION ' PERSON WHO HAS A SUBSTANTIAL INTEREST IN THE COMPANY' , IN RELATION TO A COMPANY, MEANS A PERSON WHO IS THE BENEFICIAL OWNER OF SHAR ES, NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHE R WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS, CARRYING NOT LE SS THAN TWENTY PER CENT. OF THE VOTING POWER. UNDER THE 1922 ACT, TWO CATEGORIES OF PAYMENT WERE CONSIDERED AS DIVIDEND, VIZ., (A) ANY PAYMENT BY WAY OF ADVAN CE OR LOAN TO A SHAREHOLDER WAS CONSIDERED AS DIVIDEND PAID TO S HAREHOLDER OR (B) ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF A SHAREHOLDER WAS CONSIDERE D AS DIVIDEND. IN THE 1961 ACT, THE VERY SAME TWO CATEGORIES OF P AYMENT WERE CONSIDERED AS DIVIDEND BUT AN ADDITIONAL CONDITION THAT PAYMENT SHOULD BE TO A SHAREHOLDER BEING A PERSON WHO IS T HE BENEFICIAL OWNER OF SHARES AND WHO HAS A SUBSTANTIAL INTEREST IN THE COMPANY, VIZ., SHAREHOLDING WHICH CARRIES NOT LESS THAN TWENTY PER CENT. OF THE VOTING POWER, WAS INTRODUCED. BY THE 1987 AMENDMENT WITH EFFECT FROM APRIL 1, 198 8, THE CONDITION THAT PAYMENT SHOULD BE TO A SHAREHOLDER WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTIT LED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT T O PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT. OF TH E VOTING POWER WAS SUBSTITUTED. THUS, THE PERCENTAGE OF VOTING POW ER WAS REDUCED FROM TWENTY PER CENT. TO TEN PER CENT. BY T HE VERY SAME AMENDMENT A NEW CATEGORY OF PAYMENT WAS ALSO CONSID ERED AS DIVIDEND VIZ., PAYMENT TO ANY CONCERN IN WHICH SUC H SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUB STANTIAL INTEREST. SUBSTANTIAL INTEREST HAS BEEN DEFINED TO MEAN HOLDING OF SHARES CARRYING 20 PER CENT. OF VOTING POWER. THE PROVISIONS OF SECTION 2(22)(E) CREATES A FICTION BRINGING IN A MOUNTS PAID I.T.A.NO.316/12 :- 8 -: OTHERWISE THAN AS DIVIDEND INTO THE NET OF DIVIDEND S. THEREFORE, THIS CLAUSE MUST BE GIVEN A STRICT INTERPRETATION AS HELD BY THE HONOURABLE SUPREME COURT IN THE CASE OF CIT V. C. P. SARATHY MUDALIAR [1972] 83 ITR 170. IN THE CASE OF THE ASS ESSEE AS WELL AS THE INTERVENER, THERE IS NO DISPUTE THAT THE CO MPANIES WHICH GAVE THE LOAN OR ADVANCE WERE ONE IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED. NOR IS THERE ANY DISPUTE THAT THESE COMPANIES POSSESS ACCUMULATED PROFITS TO THE EXTENT OF THE LOAN OR ADVANCE. THE THREE LIMBS OF SECTION 2(22)(E) AR E AS FOLLOWS : ' ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WH ETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER THE MAY 31, 1987, BY WAY OF ADVANCE OR LOAN. FIRST LIMB :- (A) TO A SHAREHOLDER, BEING A PERSON WHO IS THE BEN EFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RAT E OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER. SECOND LIMB :- (B) OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTERE ST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN). THIRD LIMB :- (C) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, O R FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE P OSSESSES ACCUMULATED PROFITS.' IN THE CASE OF CIT V. C. P. SARATHY MUDALIAR [1972] 83 ITR 170 (SC), THE PROVISIONS OF SECTION 2(6A)(E) OF THE AC T, 1922, WHICH WAS SYNONYMOUS TO SECTION 2(22)(E) OF THE INCOME-T AX ACT, 1961 CAME UP FOR CONSIDERATION. IN THE SAID CASE, MEMBE RS OF A HINDU UNDIVIDED FAMILY ACQUIRED SHARES IN A COMPAN Y WITH THE FUND OF THE FAMILY. LOANS WERE GRANTED TO THE HINDU UNDIVIDED FAMILY AND THE QUESTION WAS WHETHER THE LOANS COULD BE TREATED AS DIVIDEND INCOME OF THE FAMILY FALLING WITHIN SEC TION 2(6A)(E) OF THE ACT, 1922. THE APEX COURT HELD THAT ONLY LOANS ADVANCED TO SHAREHOLDERS COULD BE DEEMED TO BE DIVIDENDS UNDER SECTION 2(6A)(E) OF THE ACT, THE HINDU UNDIVIDED FAMILY CO ULD NOT BE CONSIDERED TO BE A ' SHAREHOLDER' UNDER SECTION 2( 6A)(E) OF THE I.T.A.NO.316/12 :- 9 -: ACT AND HENCE, LOANS GIVEN TO THE HINDU UNDIVIDED FAMILY WILL NOT BE CONSIDERED AS LOANS ADVANCED TO ' SHAREHOLDER' OF THE COMPANY AND COULD NOT, THEREFORE, BE DEEMED TO BE I TS INCOME. THE APEX COURT FURTHER HELD THAT WHEN THE ACT SPEA KS OF SHAREHOLDER IT REFERS TO THE REGISTERED SHAREHOLDE R. THE AFORESAID DECISION OF THE APEX COURT IN THE CAS E OF C. P. SARATHY MUDALIAR [1972] 83 ITR 170 HAS BEEN FOLLOW ED BY THE APEX COURT IN THE CASE OF RAMESHWARLAL SANWARMAL V . CIT [1980] 122 ITR 1. IN THIS CASE, THE COM- PANY ADVAN CED THE LOANS TO THE ASSESSEE-HINDU UNDIVIDED FAMILY WHO WA S THE BENEFICIAL OWNERS OF THE SHARES IN THE COMPANY, BUT THE SHARES WERE REGISTERED IN THE NAME OF THE INDIVIDUAL KART A, WHO HELD THE SHARES FOR AND ON BEHALF OF THE HINDU UNDIVIDED FA MILY. ON THE ABOVE FACTS, THE QUESTION BEFORE THE SUPREME COURT WAS WHETHER THE LOANS ADVANCED TO THE HINDU UNDIVIDED FAMILY-THE BENEFICIAL OWNER OF THE SHARES-WOULD BE TAXED AS D EEMED DIVIDEND IN THE HANDS OF THE HINDU UNDIVIDED FAMILY . THE SUPREME COURT HELD THAT THE HINDU UNDIVIDED FAMILY BEING ONLY THE BENEFICIAL SHAREHOLDER AND NOT A REGISTERED SH AREHOLDER WOULD NOT FALL WITHIN THE PURVIEW OF SECTION 2(6A) (E) OF THE 1922 ACT. THE APEX COURT OBSERVED AS FOLLOWS (PAGE 8) : 'WHAT SECTION 2(6A)(E) IS DESIGNED TO STRIKE AT IS ADVANCE OR LOAN TO A ` SHAREHOLDER` AND THE WORD ` SHAREHOLD ER` CAN MEAN ONLY A REGISTERED SHAREHOLDER. IT IS DIFFICULT TO SEE HOW A BENEFICIAL OWNER OF SHARES WHOSE NAME DOES NOT APP EAR IN THE REGISTER OF SHAREHOLDERS OF THE COMPANY CAN BE SAI D TO BE A ` SHAREHOLDER` . HE MAY BE BENEFICIALLY ENTITLED TO THE SHARE BUT HE IS CERTAINLY NOT A ` SHAREHOLDER` . IT IS ONLY THE PERSON WHOSE NAME IS ENTERED IN THE REGISTER OF THE SHAREHOLDERS OF THE COMPANY AS THE HOLDER OF THE SHARES WHO CAN BE SAID TO BE A SHAREHOLDER QUA THE COMPANY AND NOT THE PERSON BENE FICIALLY ENTITLED TO THE SHARES. IT IS THE FORMER WHO IS A ` SHAREHOLDER` WITHIN THE MATRIX AND SCHEME OF THE COMPANY LAW AN D NOT THE LATTER. WE ARE, THEREFORE, OF THE VIEW THAT IT IS ONLY WHERE A LOAN IS ADVANCED BY THE COMPANY TO A REGISTERED SHAREHO LDER AND THE OTHER CONDITIONS SET OUT IN SECTION 2(6A)(E) ARE S ATISFIED THAT THE AMOUNT OF THE LOAN WOULD BE LIABLE TO BE REGARDED AS ` DEEMED DIVIDEND` WITHIN THE MEANING OF SECTION 2(6A)(E). ' IT IS THUS CLEAR FROM THE AFORESAID PRONOUNCEMENT OF THE HON'BLE SUPREME COURT THAT TO ATTRACT THE FIRST LIMB OF THE PROVISIONS OF SECTION 2(22)(E) THE PAYMENT MUST BE TO A PERSON W HO IS A REGISTERED HOLDER 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 CONDI TION THAT SUCH SHAREHOLDER SHOULD BE BENEFICIAL OWNER OF THE SHAR ES AND THE I.T.A.NO.316/12 :- 10 -: PERCENTAGE OF VOTING POWER THAT SUCH SHAREHOLDER SH OULD HOLD THAT HAS BEEN PRESCRIBED AS AN ADDITIONAL CONDITION UNDER THE 1961 ACT. THE WORDS ' SHAREHOLDER' ALONE EXISTED IN THE DEFINITION OF DIVIDEND IN THE 1922 ACT. THE EXPRES SION ' SHAREHOLDER' HAS BEEN INTERPRETED UNDER THE 1922 ACT TO MEAN A REGISTERED SHAREHOLDER. THIS EXPRESSION ' SHAREHO LDER' FOUND IN THE 1961 ACT HAS TO BE, THEREFORE, CONSTRUED AS APPLYING ONLY TO REGISTERED SHAREHOLDER. IT IS A PRINCIPLE OF IN TERPRETATION OF STATUTES THAT WHERE ONCE CERTAIN WORDS IN AN ACT H AVE RECEIVED A JUDICIAL CONSTRUCTION IN ONE OF THE SUPERIOR COU RTS, AND THE LEGISLATURE HAS REPEATED THEM IN A SUB- SEQUENT STA TUTE, THE LEGISLATURE MUST BE TAKEN TO HAVE USED THEM ACCORD- ING TO THE MEANING WHICH A COURT OF COMPETENT JURISDICTION HAS GIVEN THEM. IN THE 1961 ACT, THE WORD ' SHAREHOLDER' IS FOLLOW ED BY THE FOLLOWING WORDS ' BEING A PERSON WHO IS THE BENEFI CIAL OWNER OF SHARES' . THIS EXPRESSION USED IN SECTION 2(22)(E) BOTH IN THE 1961 ACT AND IN THE AMENDED PRO- VISIONS WITH EFFEC T FROM APRIL 1, 1988, ONLY QUALIFIES THE WORD ' SHARE- HOLDER' AND DOES NOT IN ANY WAY ALTER THE POSITION THAT THE SHAREHOLDER HAS TO BE A REGISTERED SHAREHOLDER. THESE PROVISIONS ALSO DO NO T SUBSTITUTE THE AFORESAID REQUIREMENT TO A REQUIREMENT OF MERE LY HOLDING A BENEFICIAL INTEREST IN THE SHARES WITHOUT BEING A REGISTERED HOLDER OF SHARES. THE EXPRESSION ' BEING' IS A PRESENT P ARTICIPLE. A PARTICIPLE IS A WORD WHICH IS PARTLY A VERB AND PA RTLY AN ADJECTIVE. IN SECTION 2(22)(E), THE PRESENT PARTICIPLE ' BEIN G' IS USED TO DESCRIBE THE NOUN SHAREHOLDER LIKE AN ADJECTIVE. TH E EXPRESSION ' BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHA RES' IS THEREFORE A FURTHER REQUIREMENT BEFORE A SHAREHOLDE R CAN BE SAID TO FALL WITHIN THE PARAMETERS OF SECTION 2(22)(E) OF THE ACT. IN THE 1961 ACT, SEC- TION 2(22)(E) IMPOSES A FURTH ER CONDITION THAT THE SHAREHOLDER HAS ALSO TO BE THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN P ROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER. IT IS N OT POSSIBLE TO ACCEPT THE CONTENTION OF THE LEARNED DEPARTMENTAL R EPRESENTATIVE THAT UNDER THE 1961 ACT THERE IS NO REQUIREMENT OF A SHAREHOLDER BEING A REGISTERED HOLDER AND THAT EVEN A BENEFICI AL OWNERSHIP OF SHARES WOULD BE SUFFICIENT. THE EXPRESSION ' SHAREHOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES' REFERRED TO IN THE FI RST LIMB OF SECTION 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER A ND BENEFICIAL SHAREHOLDER. IF A PERSON IS A REGIS- TERED SHAREHOL DER BUT NOT THE BENEFICIAL SHAREHOLDER THEN THE PROVISIONS OF SECT ION 2(22)(E) WILL NOT APPLY. SIMILARLY IF A PERSON IS A BENEFICIAL SH ARE- HOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE FIRST LI MB OF THE PRO- VISIONS OF SECTION 2(22)(E) WILL NOT APPLY. I.T.A.NO.316/12 :- 11 -: THE NEW CATEGORY OF PAYMENT WHICH WAS CONSIDERED AS DIVIDEND INTRO- DUCED BY THE FINANCE ACT, 1987, WITH EFFECT FROM APRIL 1, 1988, BY THE SECOND LIMB OF SECTION 2(22)(E) IS PA YMENT ' TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST' . IT IS TH IS CATEGORY OF PAYMENT WITH WHICH WE ARE CONCERNED IN THIS REFERE NCE. THE FOLLOWING CONDITIONS ARE REQUIRED TO BE SATISFIED F OR APPLICATION OF THE ABOVE CATEGORY OF PAYMENT TO BE REGARDED AS DIV IDEND. THEY ARE : ' (A) THERE MUST BE A PAYMENT TO A CONCERN BY A CO MPANY. (B) A PERSON MUST BE A SHAREHOLDER OF THE COMPANY B EING A REGISTERED HOLDER AND BENEFICIAL OWNER OF SHARES (N OT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHE R WITH OR WITHOUT A RIGHT TO PAR- TICIPATE IN PROFITS) HOLDING NOT LE SS THAN TEN PER CENT. OF THE VOTING POWER. THIS IS BECAUSE OF THE EXPRESSION ` SUCH SHAREHOLDER` FOUND IN THE RELEVANT PROVISION . THIS EXPRESSION ONLY REFERS TO THE SHAREHOLDER REFERRED TO IN THE EARLIER PART OF SECTION 2(22)(E), VIZ., A REGISTERE D AND A BENEFICIAL HOLDER OF SHARES HOLDING 10% VOTING POWER. THE HON' BLE RAJASTHAN HIGH COURT IN THE CASE OF UNION OF INDIA V. WAZIR SINGH, AIR 1980 RAJ 252, WHILE DEALING WITH AN EXP RESSION ` NO SUCH APPLICATION` IN THE CONTEXT OF RULE 97 OF THE RAJASTHAN HIGH COURT RULES, 1952 HAS HELD AS FOLLOWS : GENERALLY THE WORD ' SUCH' REFERS ONLY TO PREVIOU SLY INDICATED, CHARACTERIZED OR SPECIFIED. ' SUCH' IS AN ADJECTIV E MEANING THE ONE PREVIOUSLY INDICATED OR REFERS ONLY TO SOMETHI NG WHICH HAS BEEN SAID BEFORE. THE HON` BLE ALLAHABAD HIGH COURT IN THE CASE OF MO HAN LAL V. GRAIN CHAMBERS LTD., AIR 1959 ALL 276, HAS HELD AS FOLLOWS : ` IN FACT IT APPEARS TO US THAT THE WORD ' SUCH' I S USED BEFORE A NOUN IN A LATER PART OF A SENTENCE, THE PROPER CON STRUCTION IN THE ENGLISH LANGUAGE IS TO HOLD THAT THE SAME NOUN IS BEING USED AFTER THE WORD ' SUCH' WITH ALL ITS CHARACTERISTI CS WHICH MIGHT HAVE BEEN INDICATED EARLIER IN THE SAME SENTENCE.` (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 NOT A COMPA NY, HE MUST AT ANY TIME DURING THE PREVIOUS YEAR, BE BENEFICIA LLY ENTITLED TO NOT LESS THAN TWENTY PER CENT. OF THE INCOME OF SU CH CONCERN; AND WHERE THE CONCERN IS A COMPANY HE MUST BE THE O WNER OF SHARES, NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND I.T.A.NO.316/12 :- 12 -: WHETHER WITH OR 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 IT IS SEEN THAT CONDIT IONS (B) AND (C) ARE NOT SATISFIED INASMUCH AS NNT HELD SHARES IN U PPL AND BCPL ONLY AS A LEGAL AND REGISTERED OWNER BUT NOT AS A BENEFICIAL OWNER. IN THE CASE OF THE ASSESSEE IT I S SEEN THAT THE THREE TRUSTEES OF NNT HELD SHARES IN UPPL AND BCPL ONLY AS A LEGAL AND REGISTERED OWNER. THEY HELD SHARES FOR AN D ON BEHALF OF 5 BENEFICIARIES OF THE TRUST WHO ARE DIFFERENT I NDIVIDUALS. THEY WERE THEREFORE NOT BENEFICIAL OWNERS OF THE SHARES. TRUST OWNERSHIP IS A PECULIAR INSTANCE OF DUPLICATE OWNE RSHIP. TRUST PROPERTY IS, IN FACT, OWNED BY TWO PERSONS SIMULTA NEOUSLY IN THE SENSE THAT ONE IS UNDER AN OBLIGATION TO USE THE P ROPERTY FOR THE BENEFIT OF THE OTHER. THE OWNERSHIP OF THE TRUSTEE CALLED TRUST OWNERSHIP IS NOMINAL RATHER THAN REAL. THE BENEFICI ARY INTEREST IS CALLED THE BENEFICIAL INTEREST. THE TRUSTEE IS TO A DMINISTER THE PROPERTY OF ANOTHER PERSON BUT THE OWNERSHIP RIGHT IN THE TRUSTEE IS TO BE USED ONLY ON 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 PERSO NATE OR REPRESENT HIM IN DEALINGS WITH THE WORLD AT LARGE. THE MAIN PURPOSE OF TRUSTEESHIP IS TO PROTECT THE RIGHTS AND INTEREST OF PERSON WHO FOR ANY REASON ARE UNABLE EFFECTIVELY T O PROTECT THEM FOR THEMSELVES. SUCH PROTECTION IS REQUIRED FOR FO UR CLASSES OF PEOPLE. (A) UNBORN PERSONS ; (B)INFANTS, LUNATICS, OR OTHER DISQUALIFIED PERSONS; (C) A LARGE NUMBER OF PER- SO NS WHO ARE INTERESTED IN COMMON ; AND (D) PERSONS HAVING CONFL ICTING INTEREST IN THE SAME PROPERTY, I.E., AN OWNER AND A N ENCUMBRANCER ORDIFFERENT KINDS OF ENCUMBRANCERS. TH EREFORE THE FIRST REQUIREMENT OF HOLDING OF SHARES BOTH AS A L EGAL REGISTERED OWNER AND BENEFICIAL OWNER OF SUCH SHARES IS NOT S ATISFIED IN THE CASE OF THE ASSESSEE. THEREFORE, THE PROVISIONS OF SECTION 2(22)(E) WOULD NOT BE APPLICABLE AT ALL TO THE CASE OF THE ASSESSEE. THE ANSWER TO THE SECOND QUESTION REFERRED TO THE S PECIAL BENCH IS THAT THE EXPRESSION ' SHAREHOLDER' REFER RED TO IN SECTION 2(22)(E) REFERS TO BOTH A REGISTERED SHARE HOLDER AND BENEFICIAL SHAREHOLDER. IF A PERSON IS A 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 SHARE- HOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO T HE PROVISIONS OF SECTION 2(22)(E) WILL NOT APPLY. I.T.A.NO.316/12 :- 13 -: IN VIEW OF THE FACT THAT THE ASSESSEE WAS NOT HOLD ING BENEFICIAL INTEREST IN THE SHARES OF BPCL AND UPPL, THERE IS NO REQUIREMENT OF ANSWERING THE FIRST QUESTION THAT A RISES FOR CONSIDERATION IN THE CASE OF THE ASSESSEE, VIZ., A S TO WHETHER DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE INCOM E-TAX ACT, 1961, CAN BE ASSESSED IN THE HANDS OF A PERSON OTHE R THAN A SHARE- HOLDER OF THE LENDER ? HOWEVER, IN THE CASE OF THE INTERVENER, VIZ., ASST. CIT, PANIPAT CIRCLE, PANIP AT V. M/S. WEAVELAND, I. T. A. NO.5036/DEL/2008, THIS QUESTIO N NEEDS TO BE ANSWERED. THE FACTS IN THE CASE OF THE INTERVENER HAVE ALREADY BEEN NARRATED EARLIER AND ARE NOT BEING REPEATED HE RE. AT THE OUTSET, IT HAS TO BE MENTIONED THAT THE PRO VISIONS OF SECTION 2(22)(E) WHICH BROUGHT IN A NEW CATEGORY O F PAYMENT WHICH WAS TO BE CONSIDERED AS DIVIDEND AS INTRODUCE D BY THE FINANCE ACT, 1987, WITH EFFECT FROM APRIL 1, 1988, VIZ., PAYMENT BY A COMPANY ' TO ANY CONCERN IN WHICH SUCH SHAREH OLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTI AL 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 ' SHARE- HOLDER' . WE HAVE ALREADY SEEN THE DIVERGENT VIEWS ON THIS ISSUE WHICH HAVE BEEN REFERRED TO IN THE EARLIER PART OF THIS ORDER. THE ABOVE PROVISIONS WERE SUBJECT MATTER OF CONSIDE RATION BEFORE THE HON` BLE RAJASTHAN HIGH COURT IN THE CA SE OF CIT V. HOTEL HILLTOP [2009] 313 ITR 116. THE FACTS OF THE CASE BEFORE THE HON` BLE COURT WERE AS FOLLOWS. THE ASSESSEE W AS ONE M/S. HOTEL HILLTOP A PARTNERSHIP FIRM. THIS FIRM RECEIV ED AN ADVANCE OF RS. 10 LAKHS FROM A COMPANY M/S. HILLTOP PALACE HO TELS (P.) LTD. THE SHAREHOLDING PATTERN OF M/S. HILLTOP PALACE HOT ELS (P.) LTD., WAS AS FOLLOWS : 1. SHRI ROOP KUMAR KHURANA : 23.33% 2. SMT. SAROJ KHURANA : 4.67% 3. VIKAS KHURANA : 22% 4. DESHBANDHU KHURANA : 25% 5. SHRI RAJIV KHURANA : 25% THE CONSTITUTION OF THE FIRM HOTEL HILL TOP WAS A S FOLLOWS : 1. SHRI ROOP KUMAR KHURANA: 45% 2. SHRI DESHBANDHU KHURANA: 55% THE ASSESSING OFFICER ASSESSED THE SUM OF RS. 10 LA KHS AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT IN THE HANDS OF THE FIRM BECAUSE THE TWO PARTNERS OF M/S. HOTEL HILLTOP WERE HOLDING SHARES BY WHICH THEY HAD 10% VOTING POWER IN M/S. I.T.A.NO.316/12 :- 14 -: HILLTOP PALACE HOTELS (P.) LTD. THEY WERE ALSO ENT ITLED TO 20% OF THE INCOME OF THE FIRM M/S. HOTEL HILLTOP. THERE- F ORE, THE LOAN BY M/S. HILLTOP PALACE HOTELS (P) LTD. TO THE FIRM M/S . HOTEL HILLTOP WAS TREATED AS DEEMED DIVIDEND IN THE HANDS OF M/S. HOTEL HILLTOP, THE FIRM UNDER THE SECOND LIMB OF SECTION 2(22)(E) OF THE ACT. THE COM- MISSIONER OF INCOME-TAX (APPEALS) HEL D THAT SINCE THE FIRM WAS NOT THE SHAREHOLDER OF THE COMPANY TH E ASSESSMENT AS DEEMED DIVIDEND IN THE HANDS OF THE FIRM WAS NOT CORRECT. THE ORDER OF THE COMMISSIONER OF INCO ME-TAX (APPEALS) WAS CONFIRMED BY THE TRIBUNAL. ON THE REV ENUE` S APPEAL BEFORE THE HON` BLE HIGH COURT, THE FOLLOWIN G QUESTION OF LAW WAS FRAMED FOR CONSIDERATION (PAGE 117 OF 313 ITR) : ' WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TRIBUNAL WAS JUSTIFIED IN UPHO LDING THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) DELETING THE ADDITION OF RS. 10 LAKHS AS DEEMED DIVIDEND UN DER SECTION 2(22)(E) OF THE INCOME-TAX ACT ?' THE HON`BLE COURT HELD AS FOLLOWS (PAGE 119 OF 313 ITR) : ' THE MORE IMPORTANT ASPECT, BEING THE REQUIREMENT OF SECTION 2(22)(E) IS THAT ` THE PAYMENT MAY BE MADE TO ANY C ONCERN, IN WHICH SUCH SHAREHOLDER IS A MEMBER OR PARTNER AND IN WHICH HE HAS SUB- STANTIAL INTEREST OR ANY PAYMENT BY ANY SU CH COMPANY ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUC H SHAREHOLDER . . .` THUS, THE SUB- STANCE OF THE REQUIREMENT IS THA T THE PAYMENT SHOULD BE MADE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER, OBVIOUSLY, THE PROVISION IS INTE NDED TO ATTRACT THE LIABILITY OF TAX ON THE PERSON, ON WHOSE BEHAL F OR FOR WHOSE INDIVIDUAL BENEFIT THE AMOUNT IS PAID BY THE COMPA NY WHETHER TO THE SHAREHOLDER OR TO THE CONCERNED FIRM. IN WHICH EVENT, IT WOULD FALL WITHIN THE EXPRESSION ` DEEMED DIVIDEND` . OB VIOUSLY, INCOME FROM DIVIDEND IS TAXABLE AS INCOME FROM THE OTHER SOURCES UNDER SECTION 56 OF THE ACT, AND IN THE VE RY NATURE OF THINGS THE INCOME HAS TO BE OF THE PERSON EARNING T HE INCOME. THE ASSESSEE IN THE PRESENT CASE IS NOT SHOWN TO BE ONE OF THE PERSONS BEING SHAREHOLDER. OF COURSE, THE TWO INDIV IDUALS BEING ROOP KUMAR AND DEVENDRA KUMAR ARE THE COMMON PERSON S, HOLDING MORE THAN REQUISITE AMOUNT OF SHAREHOLDING AND HAVING REQUISITE INTEREST IN THE FIRM BUT THEN THEREBY TH E DEEMED DIVIDEND WOULD NOT BE DEEMED DIVIDEND IN THE HANDS OF THE FIRM RATHER IT WOULD OBVIOUSLY BE DEEMED DIVIDEND IN TH E HANDS OF THE INDIVIDUAL, ON WHOSE BEHALF OR ON WHOSE INDIVIDUAL BENEFIT BEING SUCH SHAREHOLDER THE AMOUNT IS PAID BY THE COMPANY TO THE CONCERN. I.T.A.NO.316/12 :- 15 -: THUS, THE SIGNIFICANT REQUIREMENT OF SECTION 2(22)( E) IS NOT SHOWN TO EXIST. THE LIABILITY OF TAX, AS DEEMED DIVIDEND COULD BE ATTRACTED IN THE HANDS OF THE INDIVIDUALS BEING TH E SHAREHOLDERS AND NOT IN THE HANDS OF THE FIRM.' THE AFORESAID DECISION OF THE HON` BLE RAJASTHAN HI GH COURT WHICH IS THE ONLY DECISION OF THE HIGH COURT, SHOU LD BE SUFFICIENT TO ANSWER QUESTION NO. 2 WHICH HAS BEEN REFERRED T O THE SPECIAL BENCH BY HOLDING THAT DEEMED DIVIDEND CAN BE ASSES SED ONLY IN THE HANDS OF THE PERSON, WHO IS A SHAREHOLDER OF T HE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THA N A SHAREHOLDER. THE ARGUMENT OF THE LEARNED DEPARTMENT AL REPRESENTATIVE THAT THE HON`BLE RAJASTHAN HIGH COUR T DID NOT DEAL WITH THE SECOND LIMB OF SECTION 2(22)(E) OF THE AC T IS NOT CORRECT. WE MAY ALSO TOUCH UPON CERTAIN OTHER ASPECTS OF THE ISSUE IN THE LIGHT OF THE SUBMISSIONS MADE BEFORE US. THE TRIBU NAL IN THE CASE OF NIKKO TECHNOLOGIES (SUPRA), WHILE HOLDING THAT THE PAYMENT MADE BY A COMPANY EVEN TO A NON-SHAREHOLDE R CAN BE BROUGHT TO TAX IN THE HANDS OF THE NON- SHAREHOLDER HAS MADE THE FOLLOWING OBSERVATIONS. ' SECTION 2(22)(E) ONLY SPECIFIES THE CIRCUMSTANCES UNDER WHICH A PAYMENT BY WAY OF LOAN/ADVANCE IS TO BE TREATED AS DEEMED DIVIDEND. ONCE IT IS DETERMINED THAT ANY PAYMENT B Y WAY OF LOAN/ADVANCE FALLS WITHIN THE AMBIT OF SECTION 2(2 2)(E), THEN, IT HAS TO BE TREATED AS DIVIDEND EVEN THOUGH SUCH PAY MENT IN THE ORDINARY CIRCUMSTANCES MAY NOT BE CONSIDERED AS DI VIDEND. AT THIS POINT OF TIME, THE ROLE OF SECTION 2(22)(E) E NDS. IT NOWHERE PROVIDES AS TO WHO IS TO BE TAXED IN INSPECT OF SU CH INCOME. IT IS TO BE BORNE IN MIND THAT THE TAX CAN ONLY BE ASSES SED IN THE HANDS OF RIGHT PERSON AS HELD BY THE APEX COURT IN THE CASE OF ITO V. CH. ATCHAIAH [1996] 218 ITR 239, AT PAGES 24 3-244. IN ORDER TO FIND OUT THE RIGHT PERSON, ONE HAS TO EXAM INE THE CHARG- ING PROVISIONS OF THE ACT. SECTIONS 4 AND 5 OF THE ACT ARE THE CHARGING PROVISIONS. . . . ' THEREAFTER, THE TRIBUNAL HAS REFERRED TO THE PROVI SIONS OF SECTION 5(1) OF THE ACT AND HAS CONCLUDED THAT INCOME ACCR UES TO THE PERSON WHO IS THE RECIPIENT OF THE PAYMENT FROM TH E COMPANY. THE TRIBUNAL HAS THEREAFTER REFERRED TO CIRCULAR N O. 495, DATED SEPTEMBER 22, 1987, OF THE CENTRAL BOARD OF DIRECT TAXES WHEREIN IT HAS BEEN OPINED THAT DEEMED DIVIDEND WO ULD BE TAXED IN THE HANDS OF A CONCERN (NON-SHAREHOLDER) A LSO IF THE CONDITIONS MENTIONED IN THE SECTION ARE SATISFIED. I.T.A.NO.316/12 :- 16 -: WE ARE OF THE VIEW THAT THE PROVISIONS OF SECTION 2 (22)(E) DO NOT SPELL OUT AS TO WHETHER THE INCOME HAS TO BE TAXED IN THE HANDS OF THE SHARE- HOLDER OR THE CONCERN (NON-SHAREHOLDE R). THE PROVISIONS ARE AMBIGUOUS. IT IS THEREFORE NECESSAR Y TO EXAMINE THE INTENTION BEHIND ENACTING THE PRO- VISIONS OF S ECTION 2(22)(E) OF THE ACT. THE INTENTION BEHIND ENACTING THE PROVISIONS OF SEC TION 2(22)(E) IS THAT CLOSELY HELD COMPANIES (I.E., COMPANIES IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED), WHICH ARE CONTRO LLED BY A GROUP OF MEMBERS, EVEN THOUGH THE COMPANY HAS ACCUMULATE D PROFITS WOULD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEND BECAU SE IF SO DISTRIBUTED THE DIVIDEND INCOME WOULD BECOME TAX- A BLE IN THE HANDS OF THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS L OAN OR ADVANCES TO SHAREHOLDER OR TO CONCERN IN WHICH SUC H SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SH AREHOLDER. IN SUCH AN EVENT, BY THE DEEMING PROVISIONS SUCH PAYME NT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIN D THE PRO- VISIONS OF SECTION 2(22)(E) IS TO TAX DIVIDEND IN T HE HANDS OF SHAREHOLDER. THE DEEMING PROVISIONS AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHI CH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOAN OR ADVANCES WOULD ULTIMAT ELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. THE INTENTION OF THE LEGISLATURE IS THEREF ORE TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE CONCERN. THE BASIS OF BRINGING IN THE AMENDMENT TO SECTION 2(22)(E) OF THE ACT BY THE FINANCE ACT, 1987, WITH EFFECT FROM APRIL 1, 1988, IS TO ENSURE THAT PER- SONS WHO CONTROL THE AFFAIRS OF A COMPANY AS WELL AS THAT OF A FIRM CAN HAVE THE PAYMENT MAD E TO A CONCERN FROM THE COMPANY AND THE PERSON WHO CAN CO NTROL THE AFFAIRS OF THE CONCERN CAN DRAW THE SAME FROM THE C ONCERN INSTEAD OF THE COMPANY DIRECTLY MAKING PAYMENT TO T HE SHAREHOLDER AS DIVIDEND. THE SOURCE OF POWER TO CO NTROL THE AFFAIRS OF THE COMPANY AND THE CONCERN IS THE BASI S 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 O F A NON- SHAREHOLDER VIZ., CONCERN. A LOAN OR ADVANCE RECEI VED BY A CONCERN IS NOT IN THE NATURE OF INCOME. IN OTHER W ORDS THERE IS A DEEMED ACCRUAL OF INCOME EVEN UNDER SECTION 5(1)(B ) IN THE HANDS OF THE SHAREHOLDER ONLY AND NOT IN THE HANDS OF THE PAYEE, VIZ., NON-SHAREHOLDER (CONCERN). SECTION 5(1)(A) CO NTEMPLATES THAT THE RECEIPT OR DEEMED RECEIPT SHOULD BE IN THE NATURE OF I.T.A.NO.316/12 :- 17 -: INCOME. THEREFORE, THE DEEMING FICTION CAN BE APPL IED ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT THE NON-SHARE HOLDER, VIZ., THE CONCERN. THE DEFINITION OF DIVIDEND UNDER SECTION 2(22)(E) O F THE ACT IS AN INCLUSIVE DEFINITION. SUCH INCLUSIVE DEFINITION ENL ARGES THE MEANING OF THE TERM ' DIVIDEND' ACCORDING TO ITS ORDINARY AND NATURAL MEANING TO INCLUDE EVEN A LOAN OR ADVANCE. ANY LOAN OR ADVANCE CANNOT BE DIVIDEND ACCORDING TO ITS ORDINA RY AND NATURAL MEANING. THE ORDINARY AND NATURAL MEANING O F THE TERM DIVIDEND WOULD BE A SHARE IN PROFITS TO AN INVESTOR IN THE SHARE CAPITAL OF A LIMITED COMPANY. TO THE EXTENT THE MEA NING OF THE WORD ' DIVIDEND' IS EXTENDED TO LOANS AND ADVANCE S TO A SHAREHOLDER OR TO A CONCERN IN WHICH A SHAREHOLDER IS SUBSTANTIALLY INTERESTED DEEMING THEM AS DIVIDEND IN THE HANDS OF A SHAREHOLDER THE ORDINARY AND NATURAL MEANING OF THE 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-SHAREHOL DER THE ORDINARY AND NATURAL MEANING OF THE WORD DIVIDEND IS TAKEN AWAY. IN THE LIGHT OF THE INTENTION BEHIND THE PRO VISIONS 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 L OAN OR ADVANCE TO A NON-SHAREHOLDER ALSO, WE ARE OF THE VIEW THAT 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 AS HELD BY THE APEX COURT IN THE CASE OF KANTILAL MANILAL V. CIT [1961] 41 ITR 275 IS A SHARE OF PROFITS OF THE COM- PANY GIVEN TO ITS SHAREHOLDE RS. FURTHER, SECTION 206 OF THE COMPANIES ACT, 1956, PROHIBITS PAYMENT OF DIVIDEND TO ANY PERSON OTHER THAN THE REGISTERED S HAREHOLDER. IF ONE WERE TO BREAK UP THE NATURAL MEANING THE FOLLOW ING COMPONENTS EMERGE (A) DIVIDEND IS A SHARE OF PROFIT S OF THE COMPANY (B) PAID TO ITS SHAREHOLDERS. SECTION 2(22 ) OF THE ACT ARTIFICIALLY EXTENDS THE SCOPE OF DIVIDEND FROM BE ING MORE THAN ONLY A DISTRIBUTION OF PROFITS TO COVER CERTAIN OT HER TYPES DISBURSEMENTS SUCH AS LOANS PAID, ETC. (THE FIRST INGREDIENT MENTIONED ABOVE). IT DOES NOT HOWEVER ALTER THE SEC OND COM- PONENT OF ITS NATURAL MEANING, VIZ., PAID TO ITS SH AREHOLDER. IN OTHER WORDS ALL THAT SECTION 2(22) SEEKS TO DO IS TO EXPAND THE VARIOUS TYPES PAYMENTS THAT MAY BE REGARDED AS DIV IDEND. THE APEX COURT WHILE CONSIDERING WHAT CAN COME WITHIN THE ARTIFICIAL DEFINITION OF DIVIDEND UNDER SECTION 2(22) IN THE CASE OF CIT V. NALIN BEHARI LALL SINGHA [1969] 74 ITR 849 (SC) DE SCRIBED THE SCOPE OF THE DEFINITION OF DIVIDEND THUS (PAGE 851 OF 74 ITR) : I.T.A.NO.316/12 :- 18 -: ' THE DEFINITION IS, IT IS TRUE, AN INCLUSIVE DEFIN ITION AND A RECEIPT BY A SHAREHOLDER WHICH DOES NOT FALL WITHIN THE DE FINITION MAY POSSIBLY BE REGARDED AS DIVIDEND WITHIN THE MEANIN G OF THE ACT UNLESS THE CONTEXT NEGATIVES THAT VIEW.' THE CONTENTION OF THE DEPARTMENTAL REPRESENTATIVE THAT THE PROVISIONS OF SECTION 8(A) OF THE ACT CREATES A FI CTION BY WHICH EVEN PAYMENTS TO NON- SHAREHOLDERS CAN BE CONSTRUED AS DIVIDEND CANNOT BE ACCEPTED. THOSE PRO- VISIONS MER ELY FIX THE YEAR IN WHICH DIVIDEND HAS TO BE TAXED. IT IS THERE FORE CLEAR THAT THE SHAREHOLDER ALONE CAN, IF AT ALL, BE SUBJECTED TO TAX FOR HAVING EARNED DIVIDEND. IN THE DECISION OF THE TRIBUNAL IN THE CASE OF NIKK O TECHNOLOGIES LTD. (SUPRA) RELIANCE HAS BEEN PLACED ON CIRCULAR NO. 495, DATED SEPTEMBER 22, 1987 ([1987] 168 ITR (ST.) 87), WHIC H STATES AS FOLLOWS (PAGE 91) : 'FURTHER, DEEMED DIVIDEND WOULD BE TAXED IN THE HAN DS OF A CONCERN WHERE ALL THE FOLLOWING CONDITIONS ARE SATI SFIED. . . .' WE ARE OF THE VIEW THAT CIRCULAR OF THE CENTRAL BOA RD OF DIRECT TAXES TO THE EXTENT THAT THEY DO NOT TONE DOWN THE RIGOR OF THE PROVISIONS OF THE ACT IN THE SENSE TO THE EXTENT T HEY ARE NOT BENEVOLENT ARE NOT BINDING. APART FROM THE ABOVE, IT IS ALSO NOTICED THAT SECTION 2(22)(E)(III) PROVIDES RELIEF TO A SHAREHOLDER AS FOLLOWS : ' DIVIDEND DOES NOT INCLUDE,-. . . (III) ANY DIVIDEND PAID BY A COMPANY WHICH IS SET O FF BY THE COM- PANY AGAINST THE WHOLE OR ANY PART OF ANY SUM PREVI OUSLY PAID BY IT AND TREATED AS A DIVIDEND WITHIN THE MEANING OF SUB-CLAUSE (E) TO THE EXTENT TO WHICH IT IS SO SET OFF.' IN THE EVENT OF THE PAYMENT OF LOAN OR ADVANCE BY A COMPANY TO A CONCERN BEING TREATED AS DIVIDEND AND TAXED IN TH E HANDS OF THE CONCERN THEN, THE BENEFIT OF SET OFF CANNOT BE ALLOWED TO THE CONCERN, BECAUSE THE CONCERN CAN NEVER RECEIVE DIV IDEND 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 I N THE HANDS OF A SHAREHOLDER ONLY. FOR THE REASONS STATED ABOVE , WE ARE OF THE VIEW THAT THE LAW LAID DOWN IN THE CASE OF NIK KO TECHNOLOGIES LTD. (SUPRA) IS NOT CORRECT. WE, THER EFORE, HOLD THAT DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE INCO ME-TAX ACT, 1961, CAN BE ASSESSED ONLY IN THE HANDS OF A SHAREH OLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF ANY OTHER PE RSON. I.T.A.NO.316/12 :- 19 -: IN THE LIGHT OF THE ABOVE DISCUSSION, THE QUESTION S REFERRED TO THE SPECIAL BENCH ARE ANSWERED AS FOLLOWS : ON THE FIRST QUESTION : DEEMED DIVIDEND CAN BE ASSE SSED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THA N A SHAREHOLDER. ON THE SECOND QUESTION : THE EXPRESSION SHAREHOLDER REFERRED TO IN SECTION 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BENEFICIAL SHAREHOLDER. IF A PERSON IS A REGISTERE D SHAREHOLDER BUT NOT THE BENEFICIAL SHAREHOLDER THEN THE PROVIS IONS OF SECTION 2(22)(E) WILL NOT APPLY. SIMILARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE PROVISIONS OF SECTION 2(22)(E) WILL NOT APPLY. IN VIEW OF THE ABOVE DISCUSSION, THERE IS NO MERIT IN THIS APPEAL BY THE REVENUE AND THE SAME IS, THEREFORE, DISMISS ED. THE ORDER PRONOUNCED ON THIS NOVEMBER 19, 2008. 10. FURTHER, THE HON'BLE RAJASTHAN HIGH COURT IN THE CA SE OF CIT VS HOTEL HILL TOP [2009] 313 ITR 116 (RAJ) HAS HELD AS UNDER: LONG DRAWN ARGUMENTS WERE MADE ON EITHER SIDE. HOW EVER, BEFORE PRO- CEEDING FURTHER, WE MAY GAINFULLY QUOTE THE PROVISIONS OF SECTION 2(22)(E), WHICH READ AS UNDE R : 2.(22)(E) ANY PAYMENT BY A COMPANY, NOT BEING A CO MPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF A NY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF T HE COMPANY OR OTHERWISE) MADE AFTER THE 31ST DAY OF MAY, 1987, B Y WAY OF ADVANCE OR LOAN TO A SHARE HOLDER, BEING A PERSON W HO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTIT LED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITH OUT A RIGHT T O PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT. OF TH E VOTING POWER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMB ER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HERE- AFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL B ENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPA NY IN EITHER CASE POSSESSES ACCUMULATED PROFITS ; I.T.A.NO.316/12 :- 20 -: FROM A READING OF THE ABOVE PROVISION, IT IS CLEAR THAT IT COMPREHENDS MANIFOLD REQUIREMENTS, THE FIRST BEING THE PAYMENT SHOULD BE MADE BY WAY OF LOAN OR ADVANCE TO THE CO NCERN. OF COURSE ON THIS ASPECT, THE CONCLUSION HAS BEEN REC ORDED BY THE TRIBUNAL AGAINST THE REVENUE BUT THEN ON A BARE RE ADING OF THE AGREEMENT AND CONSIDERING THE TOTALITY OF CIRCUMSTA NCES INCLUDING THE VERY NATURE OF THE TERM SECURITY AN D THE FACT THAT SUBSTANTIAL PORTION OF THIS RS. 10 LAKHS OF AMOUNT, SAY MORE THAN RS. 9 LAKHS, HAVE BEEN ADVANCED ONLY DURING JANUAR Y 7, 1991, TO MARCH 22, 1991, IT IS DIFFICULT TO ACCEPT IT AS A SECURITY IN THE SENSE OF THE TERM AS COMPREHENDED IN THE AGREEMENT RATHER IT CLEARLY APPEARS TO BE SIMPLY A NOMENCLATURE USED TO BORROW THE WORDS OF THE ASSESSING OFFICER TRANSPARENT COVER. BE THAT AS IT MAY. THE MORE IMPORTANT ASPECT, BEING THE REQUIREMENT OF SECTION 2(22)(E) IS THAT THE PAYMENT MAY BE MADE TO ANY C ONCERN, IN WHICH SUCH SHAREHOLDER IS A MEMBER OR PARTNER AND IN WHICH HE HAS SUBSTANTIAL INTEREST OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH S HAREHOLDER . . . THUS, THE SUBSTANCE OF THE REQUIREMENT IS THAT THE PAYMENT SHOULD BE MADE ON BEHALF OF OR FOR THE INDIVIDUAL B ENEFIT OF ANY SUCH SHAREHOLDER, OBVIOUSLY, THE PROVISION IS INTEN DED TO ATTRACT THE LIABILITY OF TAX ON THE PERSON, ON WHOSE BEHAL F OR FOR WHOSE INDIVIDUAL BENEFIT THE AMOUNT IS PAID BY THE COMPA NY WHETHER TO THE SHAREHOLDER OR TO THE CONCERNED FIRM. IN WHICH EVENT, IT WOULD FALL WITHIN THE EXPRESSION DEEMED DIVIDEND. OBVI OUSLY, INCOME FROM DIVIDEND IS TAXABLE AS INCOME FROM OTHER SOUR CE UNDER SECTION 56 OF THE ACT AND IN THE VERY NATURE OF THI NGS THE INCOME HAS TO BE OF THE PERSON EARNING THE INCOME. THE ASS ESSEE IN THE PRESENT CASE IS NOT SHOWN TO BE ONE OF THE PERSONS BEING SHAREHOLDER. OF COURSE, THE TWO INDIVIDUALS BEING ROOP KUMAR AND DEVENDRA KUMAR ARE THE COMMON PERSONS HOLDING MORE THAN REQUISITE AMOUNT OF SHAREHOLDING AND HAVING R EQUISITE INTEREST IN THE FIRM BUT THEN THEREBY THE DEEMED D IVIDEND WOULD NOT BE DEEMED DIVIDEND IN THE HANDS OF THE FIRM RAT HER IT WOULD OBVIOUSLY BE DEEMED DIVIDEND IN THE HANDS OF THE IN DIVIDUALS ON WHOSE BEHALF OR ON WHOSE INDIVIDUAL BENEFIT BEING S UCH SHAREHOLDER THE AMOUNT IS PAID BY THE COMPANY TO T HE CONCERN. THUS, THE SIGNIFICANT REQUIREMENT OF SECTION 2(22)( E) IS NOT SHOWN TO EXIST. THE LIABILITY OF TAX AS DEEMED DIV IDEND COULD BE ATTRACTED IN THE HANDS OF THE INDIVIDUALS BEING TH E SHAREHOLDERS AND NOT IN THE HANDS OF THE FIRM. I.T.A.NO.316/12 :- 21 -: 11. STILL FURTHER, THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS ANKITECH (P) LTD & ORS [2012] 340 ITR 14(DEL) HA S HELD AS UNDER: WE HAVE SERIOUSLY DELIBERATED ON THE AFORESAID ARG UMENTS ADVANCED BY THE COUNSEL FOR THE REVENUE. IN SO FAR AS THE PROVISIONS OF SECTION 2(22)(E) ARE CONCERNED, WE HAVE ALREADY EXTRACTED THIS PROVISION AND TAKEN N OTE OF THE CONDITIONS/REQUISITES WHICH ARE TO BE ESTABLISHED FOR MAKING THE PROVISION APPLICABLE. IN CIT V. C. P. SARATHY MUD ALIAR [1972] 83 ITR 170 (SC), THE SUPREME COURT HAD TRACED OUT TH E ASSESSEE OF THIS PROVISION IN THE FOLLOWING MANNER : 'ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN W HICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WH ETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF A DVANCE OR LOAN. FIRST LIMB (A) TO A SHAREHOLDER, BEING A PERSON WHO IS THE BEN EFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RAT E OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PERCENT. OF THE VOTING POWER, SECOND LIMB (B) OR TO MY 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) THIRD LIMB (C) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, O R FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS.' IT IS RIGHTLY POINTED OUT BY THE BOMBAY HIGH COURT IN UNIVERSAL MEDICARE (P) LTD. [2010] 324 ITR 263 (BOM) THAT SEC TION 2(22)(E) OF THE ACT IS NOT ARTISTICALLY WORDED. BE AS IT M AY, WE MAY REITERATE THAT AS PER THIS PROVISION, THE FOLLOWING CONDITIONS ARE TO BE SATISFIED : (1) THE PAYER COMPANY MUST BE A CLOSELY HELD COMPAN Y. (2) IT APPLIES TO ANY SUM PAID BY WAY OF LOAN OR AD VANCE DURING THE YEAR TO THE FOLLOWING PERSONS : (A) A SHAREHOLDER HOLDING AT LEAST 10 OF VOTING POW ER IN THE PAYER COMPANY. I.T.A.NO.316/12 :- 22 -: (B) A COMPANY IN WHICH SUCH SHAREHOLDER HAS AT LEAS T 20 PER CENT. OF THE VOTING POWER. (C) A CONCERN (OTHER THAN A COMPANY) IN WHICH SUCH SHAREHOLDER HAS AT LEAST 20 PER CENT. INTEREST. (3) THE PAYER COMPANY HAS ACCUMULATED PROFITS ON TH E DATE OF ANY SUCH PAYMENT AND THE PAYMENT IS OUT OF ACCUMU LATED PROFITS. (4) THE PAYMENT OF LOAN OR ADVANCE IS NOT IN COURSE OF ORDINARY BUSINESS ACTIVITIES. THE INTENTION BEHIND ENACTING THE PROVISIONS OF SEC TION 2(22)(E) IS THAT CLOSELY-HELD COMPANIES (I.E., COMPANIES I N WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED), WHICH ARE CONTRO LLED BY A GROUP OF MEMBERS, EVEN THOUGH THE COMPANY HAS ACCUMULAT ED PROFITS WOULD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEND BECA USE IF SO DISTRIBUTED THE DIVIDEND INCOME WOULD BECOME TAXABL E IN THE HANDS OF THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS L OAN OR ADVANCES TO SHAREHOLDERS OR TO CONCERN IN WHICH S UCH SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE AN Y PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH S HAREHOLDER. IN SUCH AN EVENT, BY THE DEEMING PROVISIONS, SUCH PAYM ENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIN D THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDERS. THE DEEMING PROVISIONS AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A C ONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOANS OR ADVANCES WOULD ULTI MATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. FURTHER, IT IS AN ADMITTED CASE THAT UNDER THE NORM AL CIRCUMSTANCES, SUCH A LOAN OR ADVANCE GIVEN TO TH E SHAREHOLDERS OR TO A CONCERN, WOULD NOT QUALIFY A S DIVIDEND. IT HAS BEEN MADE SO BY A LEGAL FICTION CREATED UNDER SECTION 2(22)(E) OF THE ACT. WE HAVE TO KEEP IN MIND THAT T HIS 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 WE KEEP IN MIND THI S ASPECT, THE CONCLUSION WOULD BE OBVIOUS, VIZ., LOAN OR ADVANC E GIVEN UNDER THE CONDITIONS SPECIFIED UNDER SECTION 2(22)(E) O F THE ACT WOULD ALSO BE TREATED AS DIVIDEND. THE FICTION HAS TO S TOP HERE AND IS NOT TO BE EXTENDED FURTHER FOR BROADENING THE CON CEPT OF SHAREHOLDERS BY WAY OF LEGAL FICTION. IT IS A COMMO N CASE THAT ANY COMPANY IS SUPPOSED TO DISTRIBUTE THE PROFITS I N THE FORM OF DIVIDEND TO ITS SHAREHOLDERS/MEMBERS AND SUCH DIV IDEND CANNOT BE GIVEN TO NONMEMBERS. THE SECOND CATEGORY SPECIFI ED UNDER SECTION 2(22)(E) OF THE ACT, VIZ., A CONCERN (LIK E THE ASSESSEE I.T.A.NO.316/12 :- 23 -: HEREIN), WHICH IS GIVEN THE LOAN OR ADVANCE IS AD MITTEDLY NOT A SHAREHOLDER/MEMBER OF THE PAYER COMPANY. THEREFOR E, UNDER NO CIRCUMSTANCE, IT COULD BE TREATED AS SHAREHOLDER /MEMBER RECEIVING DIVIDEND. IF THE INTENTION OF THE LEGISLA TURE WAS TO TAX SUCH LOAN OR ADVANCE AS DEEMED DIVIDEND AT THE HA NDS OF 'DEEMING SHAREHOLDER', THEN THE LEGISLATURE WOULD H AVE INSERTED A DEEMING PROVISION IN RESPECT OF SHAREHOLDER AS WELL, THAT HAS NOT HAPPENED. MOST OF THE ARGUMENTS OF THE LEARNED COUNSEL FOR THE REVENUE WOULD STAND ANSWERED, ONCE WE LOOK IN TO THE MATTER FROM THIS PERSPECTIVE. IN A CASE LIKE THIS, THE RECIPIENT WOULD BE A SHARE HOLDER 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 IN COME 'IS NOT TAXED AT THE HANDS OF THE RECIPIENT'. SUCH AN ARGUMENT BASED ON THE SCHEME OF THE ACT AS PROJECTED BY THE LEARNED COU NSEL FOR 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 ARGUMEN T 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 RECIPIE NT TO THE COMPANY, WHICH HAS GIVEN THE LOAN OR ADVANCE. PRECISELY, FOR THIS VERY REASON, THE COURTS HAVE HE LD THAT IF THE AMOUNTS ADVANCED ARE FOR BUSINESS TRANSACTIONS BE TWEEN THE PARTIES, SUCH PAYMENT WOULD NOT FALL WITHIN THE D EEMING DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. IN SO FAR AS RELIANCE UPON CIRCULAR NO. 495, DATED SEPTEMBER 22, 1987, ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES IS CONCERNED, WE ARE INCLINED TO AGREE WITH THE OBSE RVATIONS OF THE MUMBAI BENCH DECISION IN BHAUMIK COLOUR (P) LTD. [2009] 313 ITR (AT) 146 (MUMBAI) [SB] THAT SUCH OBSERVATIONS A RE NOT BINDING ON THE COURTS. ONCE IT IS FOUND THAT SUCH L OAN OR ADVANCE CANNOT BE TREATED AS DEEMED DIVIDEND AT THE HANDS OF SUCH A CONCERN WHICH IS NOT A SHAREHOLDER, AND THAT , ACCORDING TO US, IS THE CORRECT LEGAL POSITION, SUCH A CIRCULA R WOULD BE OF NO AVAIL. NO DOUBT, THE LEGAL FICTION/DEEMED PROVISION CREATE D BY THE LEGISLATURE HAS TO BE TAKEN TO 'LOGICAL CONCLUSIO N' AS HELD IN ANDALEEB SEHGAL [2010] 173 DLT 296 (DELHI) [FB]. THE REVENUE WANTS THE DEEMING PROVISION TO BE EXTENDE D WHICH IS ILLOGICAL AND THE ATTEMPT IS TO CREATE A REAL LEGAL FICTION, WHICH IS NOT CREATED BY THE LEGISLATURE. WE SAY AT THE COST OF REPETITION THAT THE DEFINITION OF SHAREHOLDER IS NOT ENLARGE D BY ANY FICTION. I.T.A.NO.316/12 :- 24 -: 12. THUS, FROM THE READING OF THE ABOVE DECISIONS WHICH WERE RENDERED AFTER TAKING INTO CONSIDERATION THE CBDT C IRCULAR NO.495 DATED 23.09.1987, IT IS CLEAR THAT DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO IS A REGISTERED SHAREHOLDER AS WELL AS BENEFICIAL SHAREHOLDER OF MO RE THAN SPECIFIED PERCENTAGE AND IN THE SPECIFIED CIRCUMSTANCES. THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, BEING A DEEMING PROV ISION, REQUIRES TO BE CONSTRUED STRICTLY WITHIN THE PARAMETERS SPECIFIED BY THE LEGISLATION. THUS, IN OUR CONSIDERED VIEW, THE ASSESSEE-FIRM, NO T BEING A SHAREHOLDER, REGISTERED OR BENEFICIAL, OF M/S SHREE LAXMI JEWELLERY PVT. LTD., THE LOAN AMOUNT OF ` 2.50 CRORES CANNOT BE ASSESSED AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE-FIRM. 13. THE CIT/DR RELIED UPON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS BHARTI OVERSEAS TR ADING CO. (SUPRA) WHICH IS FOUND TO BE DISTINGUISHABLE ON FACTS AND N OT APPLICABLE ON THE FACTS OF THE INSTANT CASE. IN THAT CASE, BEFORE THE HON'BLE DELHI HIGH COURT IT WAS FOUND THAT THE ASSESSEE-FIRM WAS BENE FICIAL SHAREHOLDER OF THE COMPANY FROM WHICH IT RECEIVED LOANS OR ADVA NCES BUT IN THE INSTANT CASE IT IS OBSERVED THAT THE ASSESSEE-FIRM IS NOT BENEFICIAL SHAREHOLDER OF THE SHARES OF M/S SHREE LAXMI JEWELL ERY PVT. LTD AND THEREFORE, THE SAID DECISION IS NOT APPLICABLE IN T HE INSTANT CASE. I.T.A.NO.316/12 :- 25 -: 14. WE, THEREFORE, DELETE THE ADDITION OF ` 2.50 CRORES AND ALLOW THE GROUNDS OF APPEAL OF THE ASSESSEE. 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLO WED. ORDER PRONOUNCED ON , THE DAY OF SEPTEMBER, 2012, AT CHENNAI. SD/- SD/- (SATBEER SINGH GODARA) JUDICIAL MEMBER (N.S.SAINI) ACCOUNTANT MEMBER DATED: 13 TH SEPTEMBER, 2012 RD COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR