My company got an advance from a sister concern. Can it be taxed as deemed dividend in our hands?
No. The payment answered the description of deemed dividend under s.2(22)(e), but it cannot be assessed on the recipient concern because that concern is not a shareholder of the paying company. The fiction enlarges the meaning of dividend; it does not enlarge who counts as a shareholder.
Decided by the High Court (Delhi High Court — A.K. Sikri J and M.L. Mehta J) on 2011-05-11, reported as [2012] 340 ITR 14 (Del); [2011] 199 Taxman 341 (Del); [2011] 242 CTR 129 (Del); IT Appeal No. 462 of 2009 and 22 connected appeals. It bears on section 2(22)(e) of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
This is the standard answer where the AO has taxed the borrowing company simply because common shareholders hold 10% or more in the payer and a substantial interest in the borrower. It does not make the money tax-free: the Court itself pointed the Revenue to assessment in the shareholder's hands, so expect protective proceedings there. Its force is weakened by the fact that the reasoning has been doubted at the Supreme Court level.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Ankitech Pvt Ltd received advances aggregating about Rs. 6.32 crores, by book entry, from Jacksons Generators Pvt Ltd, a closely held company. The shareholders who held a substantial interest in Ankitech also held not less than 10% of the voting power in Jacksons Generators. Ankitech itself was not a registered or beneficial shareholder of the paying company. The Assessing Officer assessed the advance as deemed dividend under s.2(22)(e) in Ankitech's hands, and the Revenue appealed against its deletion.
The Revenue's appeals were dismissed and the questions answered in favour of the assessee (para 32). Every other condition in s.2(22)(e) was satisfied, so the advance answered the description of a deemed dividend; but it could not be assessed in the hands of the recipient concern, which was neither a shareholder nor a member of the paying company. The Court added expressly that it remains open to the Revenue to take corrective measures by treating the same sum as dividend income in the hands of the shareholders and taxing them accordingly, as otherwise that income would escape assessment (para 30), and said the same of connected appeals it had dismissed only because the tax effect was below Rs 10 lakhs (para 31). In two of the connected appeals the Court decided a second, independent ground: where the money passing between the companies was a business transaction benefiting both, or a refund of margin money, it was not a loan or advance simpliciter and s.2(22)(e) could not be invoked at all (paras 35-36, 37-41).
A loan or advance would not ordinarily be a dividend; s.2(22)(e) makes it one by a legal fiction, and that fiction enlarges the definition of 'dividend' alone. It does not extend to 'shareholder'. The fiction stops at that point and is not to be carried further so as to broaden the concept of a shareholder (para 25). A company distributes profits as dividend to its shareholders or members, and dividend cannot be given to a non-member; the second category in the clause, a concern in which the shareholder has a substantial interest, is admittedly not a shareholder or member of the payer company, so it can under no circumstances be treated as a member receiving dividend (para 25). The Court agreed with the Special Bench in Bhaumik Colour that the words 'shareholder, being a person who is the beneficial owner of shares' require the payee to be a registered shareholder as well as the beneficial owner, following the Supreme Court's construction of the corresponding words of the 1922 Act in C.P. Sarathy Mudaliar (paras 44-45). A CBDT circular could not enlarge the provision once the legal position was found to be otherwise (para 28), and the Revenue's plea that the fiction be carried to its logical conclusion was rejected because that would require a second fiction the legislature had not created (para 29).
The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction.
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Handle my notice → Ask a CA on WhatsAppNo. The payment answered the description of deemed dividend under s.2(22)(e), but it cannot be assessed on the recipient concern because that concern is not a shareholder of the paying company. The fiction enlarges the meaning of dividend; it does not enlarge who counts as a shareholder. This was decided by the High Court (Delhi High Court — A.K. Sikri J and M.L. Mehta J) and bears on section 2(22)(e) of the Income Tax Act 1961. It is reported as [2012] 340 ITR 14 (Del); [2011] 199 Taxman 341 (Del); [2011] 242 CTR 129 (Del); IT Appeal No. 462 of 2009 and 22 connected appeals. This is the standard answer where the AO has taxed the borrowing company simply because common shareholders hold 10% or more in the payer and a substantial interest in the borrower. It does not make the money tax-free: the Court itself pointed the Revenue to assessment in the shareholder's hands, so expect protective proceedings there. Its force is weakened by the fact that the reasoning has been doubted at the Supreme Court level. If it applies to you, the first step is this: Put on record that the recipient company is neither the registered nor the beneficial shareholder of the payer, with the share register extract to prove it.
Ankitech Pvt Ltd received advances aggregating about Rs. 6.32 crores, by book entry, from Jacksons Generators Pvt Ltd, a closely held company. The shareholders who held a substantial interest in Ankitech also held not less than 10% of the voting power in Jacksons Generators. Ankitech itself was not a registered or beneficial shareholder of the paying company. The Assessing Officer assessed the advance as deemed dividend under s.2(22)(e) in Ankitech's hands, and the Revenue appealed against its deletion. The matter was decided on 2011-05-11 by the High Court (Delhi High Court — A.K. Sikri J and M.L. Mehta J). On those facts the High Court held as follows. The Revenue's appeals were dismissed and the questions answered in favour of the assessee (para 32). Every other condition in s.2(22)(e) was satisfied, so the advance answered the description of a deemed dividend; but it could not be assessed in the hands of the recipient concern, which was neither a shareholder nor a member of the paying company. The Court added expressly that it remains open to the Revenue to take corrective measures by treating the same sum as dividend income in the hands of the shareholders and taxing them accordingly, as otherwise that income would escape assessment (para 30), and said the same of connected appeals it had dismissed only because the tax effect was below Rs 10 lakhs (para 31). In two of the connected appeals the Court decided a second, independent ground: where the money passing between the companies was a business transaction benefiting both, or a refund of margin money, it was not a loan or advance simpliciter and s.2(22)(e) could not be invoked at all (paras 35-36, 37-41).
A loan or advance would not ordinarily be a dividend; s.2(22)(e) makes it one by a legal fiction, and that fiction enlarges the definition of 'dividend' alone. It does not extend to 'shareholder'. The fiction stops at that point and is not to be carried further so as to broaden the concept of a shareholder (para 25). A company distributes profits as dividend to its shareholders or members, and dividend cannot be given to a non-member; the second category in the clause, a concern in which the shareholder has a substantial interest, is admittedly not a shareholder or member of the payer company, so it can under no circumstances be treated as a member receiving dividend (para 25). The Court agreed with the Special Bench in Bhaumik Colour that the words 'shareholder, being a person who is the beneficial owner of shares' require the payee to be a registered shareholder as well as the beneficial owner, following the Supreme Court's construction of the corresponding words of the 1922 Act in C.P. Sarathy Mudaliar (paras 44-45). A CBDT circular could not enlarge the provision once the legal position was found to be otherwise (para 28), and the Revenue's plea that the fiction be carried to its logical conclusion was rejected because that would require a second fiction the legislature had not created (para 29). In the words reproduced by the source cited on this page: "The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction." The decision followed or applied Asstt. CIT v. Bhaumik Colour (P.) Ltd. [2009] 118 ITD 1 (Mum.)(SB) — agreed with (para 28); CIT v. C.P. Sarathy Mudaliar [1972] 83 ITR 170 (SC) — followed (para 45).
It was decided by the High Court on 2011-05-11 and is reported as [2012] 340 ITR 14 (Del); [2011] 199 Taxman 341 (Del); [2011] 242 CTR 129 (Del); IT Appeal No. 462 of 2009 and 22 connected appeals. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 2(22)(e), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeals were dismissed and the questions answered in favour of the assessee (para 32). Every other condition in s.2(22)(e) was satisfied, so the advance answered the description of a deemed dividend; but it could not be assessed in the hands of the recipient concern, which was neither a shareholder nor a member of the paying company. The Court added expressly that it remains open to the Revenue to take corrective measures by treating the same sum as dividend income in the hands of the shareholders and taxing them accordingly, as otherwise that income would escape assessment (para 30), and said the same of connected appeals it had dismissed only because the tax effect was below Rs 10 lakhs (para 31). In two of the connected appeals the Court decided a second, independent ground: where the money passing between the companies was a business transaction benefiting both, or a refund of margin money, it was not a loan or advance simpliciter and s.2(22)(e) could not be invoked at all (paras 35-36, 37-41). It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 2(22)(e) of the Income Tax Act 1961, and was decided by Delhi High Court — A.K. Sikri J and M.L. Mehta J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check whether the department has also opened or protectively assessed the common shareholder for the same sum, because that is the route this judgment leaves open. Cite the case with the caveat about the larger bench reference rather than as settled law, so that the AO cannot dismiss the whole submission when he raises it.
Under appeal, and the appeal has not been decided. Referred to a larger Bench and not settled. A two-Judge Bench of the Supreme Court in National Travel Services v. CIT [2018] 401 ITR 154 (SC), 18 January 2018, said it was very difficult to accept the reasoning of the Division Bench, held that in stating that the 1988 amendment made no change to the expression 'shareholder' this decision was wrongly decided, and placed the appeals before the Chief Justice to constitute a Bench of three Judges. Three months earlier the Supreme Court had affirmed this decision in CIT v. Madhur Housing & Development Co. [2018] 401 ITR 152 (SC), 5 October 2017, saying it did not wish to add anything to the Delhi judgment 'except to say that we agree therewith'. The two orders are not easy to reconcile and the reference has not been traced as answered. The status is recorded as 'under appeal' because that is the nearest value this library has: strictly nothing is under appeal - a reference to a larger Bench is pending - but the signal to a reader is the same, which is that this decision should not be relied on without checking the current position first. Until the reference is answered, do not cite Ankitech as settled on who the deemed dividend may be assessed upon. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read against the reported judgment. The bench was A.K. Sikri J and M.L. Mehta J, the date 11 May 2011, and the lead appeal ITA 462 of 2009 was heard with 22 connected appeals. The decision is not confined to the shareholder point: in ITA 1588 of 2011 and ITA 211 of 2011 the Court held that money moving as a business transaction benefiting both companies, or as a refund of margin money, is not a loan or advance at all, so s.2(22)(e) has no application — that limb is available for a commercial or current-account defence. On status, the Supreme Court affirmed this decision in CIT v Madhur Housing & Development Co [2018] 401 ITR 152 (SC) on 5 October 2017 and then, on 18 January 2018, a coordinate two-judge Bench in National Travel Services v CIT [2018] 401 ITR 154 (SC) held it wrongly decided and referred the question to a Bench of three judges; the outcome of that reference is not recorded. Say both when citing it. This page was previously labelled 'still good law' while its own validity note recorded that a Supreme Court Bench had held it wrongly decided. The label has been corrected so that the flag and the note say the same thing. The reference ordered in National Travel Services v CIT [2018] 401 ITR 154 (SC) on 18 January 2018 was still pending so far as anything traced records; the three-judge decision, if any, has not been located. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeals were dismissed and the questions answered in favour of the assessee (para 32). Every other condition in s.2(22)(e) was satisfied, so the advance answered the description of a deemed dividend; but it could not be assessed in the hands of the recipient concern, which was neither a shareholder nor a member of the paying company. The Court added expressly that it remains open to the Revenue to take corrective measures by treating the same sum as dividend income in the hands of the shareholders and taxing them accordingly, as otherwise that income would escape assessment (para 30), and said the same of connected appeals it had dismissed only because the tax effect was below Rs 10 lakhs (para 31). In two of the connected appeals the Court decided a second, independent ground: where the money passing between the companies was a business transaction benefiting both, or a refund of margin money, it was not a loan or advance simpliciter and s.2(22)(e) could not be invoked at all (paras 35-36, 37-41).
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