By TIOL News Service

PANAJI, NOV 25, 2013: THE question before the Bench is - Whether the provisions of deemed dividend extend to related parties also. And the answer is NO.

Facts of the case

Assessee, a company, had filed ROI declaring a total income of Rs.9,88,598/-. During the search at the office of M/s. Goa Golf Club Pvt. Ltd., from the ledger extract, it was found that M/s. Goa Golf Club Pvt. Ltd., advanced loan to M/s. Brito Amusement Pvt.Ltd. It was further noted that Dr. William Britto and Mrs. Muriel Britto, were the share holders of M/s. Goa Golf Club Pvt. Ltd.,, holding 75% and 25% shareholding therein. It was further found that the said sharehoders were also holding shares in the assessee company in the ratio of 26:26:48 thus Dr. William Britto and his wife were having more than 10% voting rights in M/s. Goa Golf Club Pvt. Ltd. It was further found that they had substantial interest in assessee company, where the said M/s. Goa Golf Club Pvt. Ltd., was running a casino. Assessee received operating fees from M/s. Goa Golf Club Pvt. Ltd., and AO was of the view that in addition to the operating fees, assessee received loans or advances which, constituted deemed dividend u/s 2(22)(e). AO also computed accumulated profit of M/s. Goa Golf Club Pvt. Ltd., which were in excess of Rs.33,55,076/-. As such, AO by applying the provisions of Section 2(22)(e), treated the amount of Rs.33,55,076/- to be deemed dividend u/s 2(22)(e). On appeal, CIT(A) had confirmed the addition by holding that the assessee had confirmed in its submission before the DDIT(Inv) Panaji, that it had borrowed funds from M/s. Goa Golf Club Pvt. Ltd., and that the assessee failed to provide any explanation substantiating the claim that the money was received as a normal business transaction. On further appeal, Tribunal allowed the Appeal of assessee by concluding that in the Order passed u/s 253 for the AY 2003-2004 in the case of M/s. Goa Golf Club Pvt. Ltd., the amount paid to the assessee company of Rs.2,23,94,763/-, was treated as revenue expenditure. However, the ledger account in respect of payment received from M/s. Goa Golf Club Pvt. Ltd., it was clear that the payments made to the assessee company includes the payment against expenditure and also the loan and advances which had been admitted in the audited balance sheet.

Before the HC, Revenue's counsel had pointed out that dividends include any payments by a Company not being a Company in which the public are substantially interested of any sum by way of advance or loan to a shareholder being a person who has a substantial interest in the company. It was pointed out that as there were accumulated profits in the said Company and as Mr. William Britto was a beneficial shareholder with more than 10% voting rights in M/s. Goa Golf Club Pvt. Ltd., and had a substantial interest therein, the amount of advance was to be construed to be deemed dividend in his hands. It was further pointed out that as the material on record establishes that Dr. Britto had a substantial interest in the said Company the advance was to be continued to be deemed dividend. On the other hand, assessee's counsel had pointed out that the assessee does not hold any shares in M/s. Goa Golf Club Pvt. Ltd., and that Mr. William Britto and his wife Mrs. Muriel Britto, were the shareholders of M/s. Goa Golf Club Pvt. Ltd., having 75% and 25% share holding while Dr. William Britto and M/s. Goa Golf Club Pvt. Ltd., were the shareholders of the assessee company having 26%, 26% and 48% shareholding respectively. It was further pointed out that in such circumstances, advances can be considered deemed dividends only in the hands of the shareholders of the Company. The Counsel further pointed out that these advances can be at the most considered as deemed dividends in the hands of Mr. and Mrs. William Britto and not in the hands of non-shareholders. It was further pointed out that the deemed dividends cannot be assessed in the hands of the assessee as it was not a shareholder of M/s. Goa Golf Club Pvt. Ltd.

Held that,

++ upon comparing the provisions of the said Act as they stood prior to the amendment, the Tribunal noted that in the 1961 Act, an additional condition was introduced that the payment should be to a shareholder being a person who is the beneficial holder of shares and who has a substantial interest in the Company i.e. a shareholding which carries not less than 20% of the voting power. By the 1987 amendment, the power of the voting rights were reduced to 10%. The Tribunal further noted that in the present case, the shareholder who is a registered and beneficial holder of shares, 10% voting powers are Mr. William Britto and Mrs. Muriel Britto as each of them is holding more than 20% share holding in the assessee capital. It is further noted that the assessee is neither a registered nor a beneficial holder of the shares. The Tribunal has also taken note of the Judgment of this Court and noted that the provisions of Section 2(22)(e), cannot be applied in the case of the assessee. The Tribunal also considered the Judgment of the Special Bench and found that it had taken the same view that deemed dividend cannot be assessed in the hands of a person who is not a shareholder of the Company. The Tribunal, as such, set aside the Order of the Commissioner of Income Tax and deleted the additions made by the Assessing Officer as deemed dividend in the hands of the assessee who is not the shareholder of M/s. Goa Golf Club Pvt. Ltd;

++ the findings arrived at by the Tribunal that the assessee is not assessee of M/s. Goa Golf Club Pvt. Ltd., has not been disputed by the Apellants. In this context, it would be appropriate to note the observations of the Division Bench of this Court in the case of CIT vs. Universal Medical Pvt. Ltd (2010-TIOL-215-HC-MUM-IT), wherein it has been observed that the finding that there was no advance or loan is a pure finding of fact which does not give rise to any substantial question of law. However, even on the second aspect which has weighed with the Tribunal, we are of the view that the construction which has been placed on the provisions of Section 2(22)(e) is correct. Section 2(22)(e) defines the ambit of the expression 'dividend'. All payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely the shareholder. The effect of Section 2(22) is to provide an inclusive definition of the expression dividend. Clause (e) expands the nature of payments which can be classified as a dividend. Clause (e) of Section 2(22) includes a payment made by the company in which the public is not substantially interested by way of an advance or loan to a shareholder or to any concern to which such shareholder is a member or partner, subject to the fulfillment of the requirements which are spelt out in the provision. Similarly, a payment made by a company on behalf, of for the individual benefit, of any such shareholder is treated by Clause (e) to be included in the expression 'dividend'. Consequently, the effect of Clause (e) of Section 2(22) is to broaden the ambit of the expression 'dividend' by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder. The definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. Consequently in the present case the payment, even assuming that it was a dividend, would have to be taxed not in the hands of the assessee but in the hands of the shareholder. The Tribunal was, in the circumstances, justified in coming to the conclusion that, in any event, the payment could not be taxed in the hands of the assessee. We may in concluding note that the basis on which the assessee is sought to be taxed in the present case in respect of the amount of Rs. 32,00,000/- is that there was a dividend under Section 2(22)(e) and no other basis has been suggested in the order of the Assessing Officer. Hence, considering the above observation, the Tribunal has rightly found that the Respondent is not a shareholder of a Company known as M/s. Goa Golf Club Pvt. Ltd., and as such the question of including the disputed amount as deemed dividend in terms of Section 2(22)(e) of the Income Tax Act, does not arise at all. Considering the said Judgment of this Court and in view of the undisputed facts of the case referred to in the impugned Judgment of the Income Tax Appellate Tribunal, we find that no substantial question of law arises in the present Appeal.

(See 2013-TIOL-928-HC-MUM-IT)