My client holds only 1.7 per cent in the lending company but its subsidiary holds another 11 per cent. The Assessing Officer has added them together to cross 10 per cent. Is that right?
No. The Tribunal held that for the first limb of s.2(22)(e) what has to be considered is only the voting power held by the assessee itself as registered and beneficial shareholder, and the shareholding of the assessee's own subsidiary is irrelevant and cannot be added to it. With 1.7 per cent, the section was not attracted and the addition of Rs 10.20 crores went.
Decided by the ITAT (N.V. Vasudevan, Judicial Member and Waseem Ahmed, Accountant Member (Kolkata 'B' Bench)) on 2017-06-02, reported as I.T.A. No. 423/Kol/2014, assessment year 2009-10. It bears on section 2(22)(e), section 143(3) of the Income Tax Act 1961, in Assessment & Scrutiny matters.
The 10 per cent threshold is the first jurisdictional fact in a s.2(22)(e) addition and this is the case that stops it being manufactured by aggregation. Two things make the order useful. First, it distinguishes Gopal & Sons (HUF), which the Departmental Representative pressed: there the karta's shares were treated as held on behalf of the HUF because the karta is a member of the HUF, and that reasoning cannot be extended to equate a company's shareholding with its subsidiary's. Second, it separates the three limbs of s.2(22)(e) — payment to a shareholder holding at least 10 per cent, payment to a concern in which such a shareholder has a substantial interest, and payment on behalf or for the individual benefit of such a shareholder — and holds that where the Assessing Officer has applied the first limb, the controversy about the second limb, including the question then pending before the Supreme Court in Namdhari Seeds, is irrelevant. It also carries forward the Special Bench in Bhaumik Colour, whose holding that 'such shareholder' means a person who is both the registered and the beneficial shareholder is the foundation of the rule that the deemed dividend is taxable in the registered shareholder's hands and not in the hands of the concern that received the money.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee, a company manufacturing and selling jute goods, took loans of Rs 10,20,00,000 during the previous year from M/s Mega Resources Ltd. It held 2,21,500 equity shares out of the payer's total paid-up equity of 1,20,00,000 shares, conferring 1.7 per cent of the voting power. A subsidiary of the assessee, M/s Hooghly Mills Projects Ltd, separately held 13,90,100 equity shares of the payer. The Assessing Officer added the two holdings together, concluded that the assessee held more than 10 per cent of the voting power in Mega Resources Ltd, and treated the loans as deemed dividend under s.2(22)(e) in the assessee's hands. The CIT(A) deleted the addition, holding that the Assessing Officer had given no reason for aggregating the subsidiary's holding, that the section applies only to a person who is the beneficial holder of shares carrying not less than 10 per cent of the voting power, and that a fiction enlarging the definition of dividend must be strictly construed. The Revenue appealed, relying on Gopal & Sons (HUF) v. CIT and on the Supreme Court having admitted the Revenue's special leave petition in CIT v. Namdhari Seeds.
Ground 1 of the Revenue's appeal was dismissed and the order of the CIT(A) upheld. The assessee was a registered and beneficial shareholder of shares conferring voting rights of only 1.7 per cent, and it is only that shareholding which has to be considered for applying the first limb of s.2(22)(e); the shareholding of the assessee's subsidiary should not be considered and is irrelevant.
The Tribunal analysed s.2(22)(e) as having three limbs and found from the assessment order that the Assessing Officer had applied the first. Gopal & Sons (HUF) was held inapplicable because the question there was whether shares held by the karta of a Hindu undivided family are to be treated as held on behalf of the family, the karta being a member of the family; the shareholding of a company and of its subsidiary cannot be equated with that. The pendency of a special leave petition in Namdhari Seeds was held to have no bearing, because the question framed there concerned the second limb, that is payments to a concern in which the shareholder is a member or partner, which was not the basis of this assessment. The Tribunal then set out the Special Bench decision in ACIT v. Bhaumik Colour, which held on the authority of C.P. Sarathy Mudaliar and Rameshwarlal Sanwarlal that the payee under the first limb must be a registered holder of shares, and that the words 'being a person who is the beneficial owner of shares' qualify the word 'shareholder' as an additional condition rather than substituting beneficial ownership for registration. Applying that, the relevant holding was the assessee's own 1.7 per cent.
It is only this share holding that has to be considered for applying the first limb of Section 2(22)(e) of the Act and the shareholding of the Assessee's subsidiary M/S.Hooghly Mills Projects Ltd., should not be considered and it is irrelevant.
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Handle my notice → Ask a CA on WhatsAppNo. The Tribunal held that for the first limb of s.2(22)(e) what has to be considered is only the voting power held by the assessee itself as registered and beneficial shareholder, and the shareholding of the assessee's own subsidiary is irrelevant and cannot be added to it. With 1.7 per cent, the section was not attracted and the addition of Rs 10.20 crores went. This was decided by the ITAT (N.V. Vasudevan, Judicial Member and Waseem Ahmed, Accountant Member (Kolkata 'B' Bench)) and bears on section 2(22)(e), section 143(3) of the Income Tax Act 1961. It is reported as I.T.A. No. 423/Kol/2014, assessment year 2009-10. The 10 per cent threshold is the first jurisdictional fact in a s.2(22)(e) addition and this is the case that stops it being manufactured by aggregation. Two things make the order useful. First, it distinguishes Gopal & Sons (HUF), which the Departmental Representative pressed: there the karta's shares were treated as held on behalf of the HUF because the karta is a member of the HUF, and that reasoning cannot be extended to equate a company's shareholding with its subsidiary's. Second, it separates the three limbs of s.2(22)(e) — payment to a shareholder holding at least 10 per cent, payment to a concern in which such a shareholder has a substantial interest, and payment on behalf or for the individual benefit of such a shareholder — and holds that where the Assessing Officer has applied the first limb, the controversy about the second limb, including the question then pending before the Supreme Court in Namdhari Seeds, is irrelevant. It also carries forward the Special Bench in Bhaumik Colour, whose holding that 'such shareholder' means a person who is both the registered and the beneficial shareholder is the foundation of the rule that the deemed dividend is taxable in the registered shareholder's hands and not in the hands of the concern that received the money. If it applies to you, the first step is this: Identify from the assessment order which limb of s.2(22)(e) the Assessing Officer has actually applied, and confine your reply to that limb.
The assessee, a company manufacturing and selling jute goods, took loans of Rs 10,20,00,000 during the previous year from M/s Mega Resources Ltd. It held 2,21,500 equity shares out of the payer's total paid-up equity of 1,20,00,000 shares, conferring 1.7 per cent of the voting power. A subsidiary of the assessee, M/s Hooghly Mills Projects Ltd, separately held 13,90,100 equity shares of the payer. The Assessing Officer added the two holdings together, concluded that the assessee held more than 10 per cent of the voting power in Mega Resources Ltd, and treated the loans as deemed dividend under s.2(22)(e) in the assessee's hands. The CIT(A) deleted the addition, holding that the Assessing Officer had given no reason for aggregating the subsidiary's holding, that the section applies only to a person who is the beneficial holder of shares carrying not less than 10 per cent of the voting power, and that a fiction enlarging the definition of dividend must be strictly construed. The Revenue appealed, relying on Gopal & Sons (HUF) v. CIT and on the Supreme Court having admitted the Revenue's special leave petition in CIT v. Namdhari Seeds. The matter was decided on 2017-06-02 by the ITAT (N.V. Vasudevan, Judicial Member and Waseem Ahmed, Accountant Member (Kolkata 'B' Bench)). On those facts the ITAT held as follows. Ground 1 of the Revenue's appeal was dismissed and the order of the CIT(A) upheld. The assessee was a registered and beneficial shareholder of shares conferring voting rights of only 1.7 per cent, and it is only that shareholding which has to be considered for applying the first limb of s.2(22)(e); the shareholding of the assessee's subsidiary should not be considered and is irrelevant.
The Tribunal analysed s.2(22)(e) as having three limbs and found from the assessment order that the Assessing Officer had applied the first. Gopal & Sons (HUF) was held inapplicable because the question there was whether shares held by the karta of a Hindu undivided family are to be treated as held on behalf of the family, the karta being a member of the family; the shareholding of a company and of its subsidiary cannot be equated with that. The pendency of a special leave petition in Namdhari Seeds was held to have no bearing, because the question framed there concerned the second limb, that is payments to a concern in which the shareholder is a member or partner, which was not the basis of this assessment. The Tribunal then set out the Special Bench decision in ACIT v. Bhaumik Colour, which held on the authority of C.P. Sarathy Mudaliar and Rameshwarlal Sanwarlal that the payee under the first limb must be a registered holder of shares, and that the words 'being a person who is the beneficial owner of shares' qualify the word 'shareholder' as an additional condition rather than substituting beneficial ownership for registration. Applying that, the relevant holding was the assessee's own 1.7 per cent. In the words reproduced by the source cited on this page: "It is only this share holding that has to be considered for applying the first limb of Section 2(22)(e) of the Act and the shareholding of the Assessee's subsidiary M/S.Hooghly Mills Projects Ltd., should not be considered and it is irrelevant." The decision followed or applied ACIT v. Bhaumik Colour Pvt. Ltd. 118 ITD 1 (SB) (Mumbai) — followed; CIT v. C.P. Sarathy Mudaliar [1972] 83 ITR 170 — relied on through Bhaumik Colour; Gopal & Sons (HUF) v. CIT 391 ITR 1 (SC) — distinguished; CIT v. Namdhari Seeds — pendency of SLP held to have no bearing on a first-limb case.
It was decided by the ITAT on 2017-06-02 and is reported as I.T.A. No. 423/Kol/2014, assessment year 2009-10. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 2(22)(e), section 143(3), 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. Ground 1 of the Revenue's appeal was dismissed and the order of the CIT(A) upheld. The assessee was a registered and beneficial shareholder of shares conferring voting rights of only 1.7 per cent, and it is only that shareholding which has to be considered for applying the first limb of s.2(22)(e); the shareholding of the assessee's subsidiary should not be considered and is irrelevant. It arises in Assessment & Scrutiny matters, on section 2(22)(e), section 143(3) of the Income Tax Act 1961, and was decided by N.V. Vasudevan, Judicial Member and Waseem Ahmed, Accountant Member (Kolkata 'B' Bench). 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. Where the first limb is applied, produce the register of members of the payer company showing the assessee's own registered holding and the percentage of voting power it confers, and take the threshold point first. Resist aggregation with any group company, subsidiary or associate; the deeming fiction is to be strictly construed and the Assessing Officer cannot enlarge an inclusive definition by importing what is not in it. If Gopal & Sons is cited against you, distinguish it on the ground that it turned on the karta being a member of the HUF, not on group shareholding. Do not concede on the strength of a pending SLP on a different limb — the Tribunal held the pendency of Namdhari Seeds on the second limb had no bearing on a first-limb case.
Searched for later treatment; none was found. That is not the same as a source affirming it. No later decision adopting the reasoning of this order has been found, and nothing doubting or overruling it has been found either. A caution about searching for it. Decisions carrying a similar name concern a DIFFERENT assessee — Hooghly Mills Projects Ltd, not The Hooghly Mills Co. Ltd — and they should not be taken as later treatment of this order. The Calcutta High Court judgment of 10 May 2022 in CIT v Hooghly Mills Projects Ltd has been read: it is an appeal from a Kolkata Bench order in ITA No. 1729/Kol/2011 dated 1 August 2014 for AY 2005-06, it dismissed the Revenue's appeal on the strength of an earlier binding judgment, and it gave no independent ruling on whether a subsidiary's shareholding may be counted in testing the ten per cent voting power. It is neither an appeal from this order nor an application of it. So the order stands as a single Bench decision on the threshold point, untested above. That is worth saying plainly to a client, because the proposition it rests on — that the first limb of s.2(22)(e) looks only to the assessee's own registered and beneficial holding — is not controversial, but the specific refusal to aggregate a subsidiary's holding has not been endorsed by any High Court. What would displace it: a decision holding that shares held by a wholly owned subsidiary are held beneficially by the parent for the purposes of the sub-clause, or an amendment bringing group holdings into the ten per cent computation. Neither has been located. 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.
The order sets out s.2(22)(e) twice, first in its pre-1988 form and then in its post-1988 form. In the first of those the opening words are given as 'Any payment made by a company'; the section reads 'any payment by a company'. Nothing turns on it, but a reader taking the statutory text from this order rather than from the Act will carry the slip forward. This entry covers ground 1 of the Revenue's appeal and nothing else. The order disposes of other grounds, which have not been read and are not described here; a proposition attributed to this order outside the s.2(22)(e) threshold point does not come from this entry. The Special Bench decision the Tribunal relies on is cited in the order under two spellings and two citations — 'Bhaumik Colour (P) Ltd' at 313 ITR (AT) 146, in the CIT(A)'s extract reproduced by the Tribunal, and 'Bhaumik Color Labs Pvt. Ltd.' at 118 ITD 1, in the Tribunal's own paragraph 9. The same Special Bench decision is meant in both places. That decision has not itself been read for this entry, so what is said here about it — that the payee under the first limb must be the registered holder of the shares, and that the words 'being a person who is the beneficial owner of shares' impose an additional condition rather than substituting beneficial ownership for registration — is taken from the way this order states it, and should be checked against Bhaumik Colour itself before it is relied on as a statement of that Bench's reasoning. Two things this order does not decide, and which should not be read into it. It does not decide whether a subsidiary's shareholding could ever be relevant under the second or third limb of s.2(22)(e); the Assessing Officer here had applied the first limb, and the reasoning is confined to it. And it does not decide anything about Namdhari Seeds, which was then pending in the Supreme Court on a second-limb question; the holding is only that the pendency had no bearing on this assessment. Two figures fix the case. The assessee held 2,21,500 shares out of the payer's paid-up equity of 1,20,00,000 shares, which is 1.7 per cent; its subsidiary separately held 13,90,100 shares. The loans in question were Rs 10,20,00,000. So the whole of the addition depended on the aggregation, and the threshold point disposed of it without any enquiry into accumulated profits. 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.
Ground 1 of the Revenue's appeal was dismissed and the order of the CIT(A) upheld. The assessee was a registered and beneficial shareholder of shares conferring voting rights of only 1.7 per cent, and it is only that shareholding which has to be considered for applying the first limb of s.2(22)(e); the shareholding of the assessee's subsidiary should not be considered and is irrelevant.
TaxSphere, “DCIT v The Hooghly Mills Co. Ltd.”, https://taxnotice.vittsphere.com/caselaw/case/dcit-v-hooghly-mills-ten-per-cent-voting-power-own-shareholding/ (validity last checked 2026-09-08)
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