ITA No. 223 of 2010. Case: Commissioner of Income Tax Vs National Travel Services, (Alongwith ITA Nos. 219, 1204, 309 of 2010). High Court of Delhi (India)
| Case Number | ITA No. 223 of 2010 |
| Counsel | For Appellant: Prem Lata Bansal, Sr. Adv., Ruchir Bhatia, Kiran Babu, Advs. and Kamal Sawhney, Sr. Standing Counsel and For Respondents: M.S. Syali, Sr. Adv., U.A. Rana, Mrinal Mazumdar and Husnal Syali, Advs. |
| Judges | A.K. Sikri and M.L. Mehta, JJ. |
| Issue | Income Tax Act - Sections 2A, 2(6), 2(22), 4, 5, 8, 14, 16(2), 18(5) and 56; Companies Act, 1956 - Sections 41, 41(3), 47, 77A, 147, 150, 153, 187, 187C, 187(2) and 187(7); Companies (Amendment) Act, 1974; Companies (Amendment) Act, 2000 - Section 187B; Companies Act, 1913; Partnership Act - Sections 14, 15, 16 and 18; Income Tax Act, 1922 - ... |
| Judgement Date | July 11, 2011 |
| Court | High Court of Delhi (India) |
Judgment:
A.K. Sikri, J.
1. In a very recent judgment pronounced on 11th May, 2011 in a batch of appeals with lead case entitled Commissioner of Income Tax v. Ankitech Pvt. Ltd. (ITA 462/2009), this very Bench has discussed in detail the extent and scope of the provisions of Section 2(22) (e) of the Income-Tax Act (hereinafter referred to as "the Act?). This provision reads as under:
dividend includes
| (a) | xxx | xxx | xxx |
| (b) | xxx | xxx | xxx |
| (c) | xxx | xxx | xxx |
| (d) | xxx | xxx | xxx |
(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 31st day of May, 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, or to any 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)) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but 'dividend' does not include-
(i) a distribution made in accordance with Sub-clause (c) or Sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets;
(ia) a distribution made in accordance with Sub-clause (c) or Sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, (and before the 1st day of April, 1965);
(ii) any advance or loan made to a shareholder (or the said concern) by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;
(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously 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;
(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of Section 77A of the Companies Act, 1956 (1 of 1956);
(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).
2. This provision creates a fiction providing certain circumstances under which certain kinds of payments made to the persons specified therein are to be treated as deemed dividend income. As per this provision, the following conditions are to be satisfied:
(1) The payer company must be a closely held company.
(2) It applies to any sum paid by way of loan or advance during the year to the following persons:
(a) A shareholder holding at least 10 of voting power in the payer company.
(b) A company in which such shareholder has at least 20% of the voting power.
(c) A concern (other than company) in which such shareholder has at least 20% interest.
(3) The payer company has accumulated profits on the date of any such payment and the payment is out of accumulated profits.
(4) The payment of loan or advance is not in course of ordinary business activities.
3. In Commissioner of Income Tax v. C.P. Sarathy Mudaliar (1972) 83 ITR 170, the Supreme Court analysed the provision and pointed out that in so far as payment by a company by way of advance or loan is concerned, it can be made to any of the three persons mentioned therein i.e. it had three limbs and explained the same as under:
Any payment by a company, not being a company in which the public are substantially interest, of any sum (whether as representing a part of the assets of the company or otherwise) made after 31.05.19987 by way of advance or loan.
First limb
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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 percent of the voting power,
Second limb
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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
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or any payment by any such company on behalf, or for the individual benefit, or any such shareholder, to the extent to which the company in either case possesses accumulated profits.
4. In Ankitech (supra), this Court was concerned with the second limb and the question that arose was: when the payment is made to "a concern" in which such share holder is a member or partner and he has a substantial interest, whether deemed dividend income would be treated as income in the hands of such concern or in the hands of such share holder? It was answered by holding that the provision of Section 2(22)(e) of the Act are not applicable to such a concern which has received the payment but is not a share holder as it is the share holder who is a member or a partner in such a company which has made the payment and that member or partner shall have substantial interest be treated as receiptment of deemed dividend income. The operative portion of that judgment reads as under:
25. Further, it is an admitted case that 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) of the Act. We have 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 we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under Section 2(22)(e) of the Act 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) of the Act, 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. Most of the arguments of the Learned Counsels for the Revenue would stand answered, once we look into the matter from this perspective.
26. 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 Learned Counsels for...
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