By TIOL News Service

AHEMDABAD, AUG 11, 2017: THE ISSUE BEFORE THIS COURT IS - Whether payment by a company in form of a loan/advances to any concern whose share holder is a member or a partner having substantial interest, would be construed as 'deemed dividend'. YES is the verdict.

Facts of the case:

The Assessee company had filed its return for A.Y 2008-09 declaring total loss of Rs.68.28 lakhs. The return carried the audited accounts of the company, which contained a declaration that the company had taken a loan from another company namely J.P. Infrastructure Pvt. Ltd. to the tune of Rs.215.16 lakhs during the financial year under consideration. The return of assessee was therefore taken in scrutiny, wherein it was noticed that no information regarding share holding pattern had been declared and disclosed by assessee company. However, it was seen that assessee company's issued and subscribed share capital stood at Rs. 1,00,000/- which as per the assessment record of A.Y. 2007-08 was held at 50% each by Jatin M Gupta and Jayesh Kotak. It was seen that these two individuals were also holding beneficial interest – by way of equity share holding exceeding 10% in J P Infrastructure Pvt. Ltd. for the year under consideration. It is also seen that as per balance sheet of J P Infrastructure Pvt. Ltd. for A.Y. 2008-09 the distributable reserves stood at Rs.7,38,54,215/- in additon to general reserve of Rs.3,91,64,000/-. In view of the above, the provisions of section 2(22)(e) were applicable and the amount of Rs.2,17,24,223/- was liable to be taxed in the hands of assessee company u/s 2(22)(e) of the Actre, the AO had reason to believe that income chargeable to tax had escaped assessment on account of allowance of excess deduction as well as income chargeable to tax escaping assessment and this was a fit case for reassessement by invoking the provisions of section 147.

On appeal, the HC held that,

++ as per Section 2(22)(e), any payment by a company by way of advance or loan to its share holders under certain circumstances is a deemed dividend. This definition of a deemed dividend was extended to include any such payment by a company in form of a loan or advance to any concern in which such share holder is a member or a partner and in which he has substantial interest. 'A person who has substantial interest in the company' is defined u/s 2(22)(e) to mean a person who is beneficial owner of shares, not being shares entitled to a fixed rate of dividend carrying not less than 20% of the voting power. Clause (b) of Explanation 3 below Section 2(22)(e) provides that a person shall be deemed to have substantial interest in a concern, other than a company, if he is at any time during the previous year beneficially entitled to not less than twenty per cent of the income of such concern. It is on the basis of such statutory provisions that the Revenue contends that Shri Gupta and Shri Kotak are beneficial owners of shares of J.P. Infrastructure carrying more than the prescribed per cent of voting power. These two gentlemen also have substantial interest in the assessee company since they hold 50% shares each of the said company. The assessee company when received a loan from J.P. Infrastructure, all requirements of Section 2(22) (e) of the Act stood satisfied.

(See 2017-TIOL-1534-HC-AHM-IT)