ACIT, NEW DELHI vs. SH. K.P. SINGH, NEW DELHI

The revenue has raised following grounds of appeal. “(i) The CIT(A) has erred in deleting the addition of Rs. 18785000/- made by the ld AO u/s 2(22)(e) on account of deemed dividend. (ii) The CIT(A) has erred in holding that the assessee is not a shareholder in M/s. Bravely Park Operation and Maintenance Services P Ltd without appreciating that the assessee was substantial shareholder through various companies.

The brief facts of the case is that assessee is an individual who filed return of income for assessment year 2006–07 on 30/10/2006 at Rs. 4.09,77,144/–. Subsequently assessment under section 143 (3) was made on 22/9/2008 at the returned income. Subsequently notice under section 148 of the act was issued on 30/3/2013 after recording reason that one company M/s Beverly Park Operation and Maintenance Services Pvt.Ltd., has given loan of Rs.1,87,85,000/– to another company which has accumulated profit of Rs.73,64,08,868/–, where assessee is holding 32.3% shares through holding companies. It was also observed that in the borrowing company, assessee holds 10200 ordinary shares of Rs. 100/-, each out of the total equity of 17,502. Ld. AO observed that, as it was held by Hon’ble Delhi High Court vide order dated 12/05/2011 in the case of Madhur Housing Development Company, that deemed dividend is required to be taxed in the hands of shareholder of the company, to tax the above amount the case of assessee was reopened.

The assessee submitted a letter dated 10/4/2013 in response to the notice under section 148 of the income tax act holding that the original return filed may be considered as return in response to the notice under section 148 of the act. Further, the assessee objected to reopening of the assessment and stated that the above sum has already been taxed in the hands of Madhur Housing and Development Co Limited, borrower company, for assessment year 2006– 07. It was submitted that provisions of section 2 (22) (e) of the Act will be applicable when assessee Page | 2 holds 10% of the voting right in the payer company and hold 20% of the beneficiary owners right in the receiving company. According to assessee, none of these conditions were satisfied. It was further stated that assessee does not hold any shares in payer company in his individual capacity for the relevant period consequently assessee did not hold any voting power in the payer company much less holding beneficially at least 10% of the voting power. Hence, in case of the assessee the above condition is not satisfied. It was also submitted that assessee do not hold requisite number of shares in either the lender company or borrower company, therefore the provision of section 2 (22) (e) of the Act does not apply. The Ld. AO rejected contentions of assessee and held that that loan given by Beverly Park operation and maintenance services Ltd to M/s Madhur Housing and development Co amounts to deemed dividend in the hands of the assessee. As the accumulated profits of the lender company is more than the amount of loan received by M/s Madhur Housing Company, entire loan is liable to be taxed as deemed dividend.

Aggrieved by the order of the Ld. AO assessee preferred appeal before the Ld. CIT (A) who dealt with the whole issue in detail in para 4 to 5.9 at pages 3- 22 of his order. For the sake of brevity the same is not reproduced herein however we refer to and relied upon the same.

The Ld. CIT (A) held that assessee is not a specified shareholder in the lending company but holding 32.3% of ordinary shares through holding companies. He further noted that in Madhur Housing Development Co, assessee is holding 3648 Preference shares of Rs. 100/-,which are entitled to fixed rate of dividend. It has been observed by Ld. CIT (A) that such shares are excluded from the definition u/s 2(22) (e) of the Act. With respect to assessee holding 10200 equity shares of the above company, Ld. CIT (A) noted that above shares as on 31/3/2006 were held by M/s Gen marketing Corporation, which is a partnership firm and that as partnership firm cannot hold shares in its name but the shares are held by its partners. Ld. CIT (A) therefore held that 10200 equity shares of M/s Madhur Housing Development Co are not beneficially held by the assessee and further assessee do not have any voting right in his individual capacity as he holds shares in fiduciary capacity. Accordingly Ld. CIT (A) held that the transaction does not satisfy the basic condition of section 2 (22) (e) of the Act to tax the amount of Rs.1,87,85,000/– of loan given by one company to another company to be taxed in the hands of assessee.

Aggrieved with the order of the Ld. CIT (A) revenue preferred appeal before us.

The Ld. CIT DR relied upon the order of the Ld. AO and submitted that assessee is a beneficial shareholder of company to whom loans have been given and also holding substantial interest in shares of lending company. He submitted that even indirect shareholding also needs to be considered for deemed dividend.

The Ld. AR supported the order of the Ld. CIT (A) and submitted that assessee holds 10,000 shares out of total 30,003 shares having no voting rights in M/s Beverly Park maintenance services Ltd. He stated that assessee also hold 3648 shares out of total 4648 shares being 15% noncumulative preference shares of Rs. 100/- each paying the fixed rate of dividend. It was further stated that assessee holds on behalf of the partnership firm M/s General Marketing Corporation 10,200 equity shares out of the total 17502 equity shares which do not have any voting rights. He submitted that the essential conditions of section 2 (22) (e) provides that provisions are hit only if assessee holds 10% shares with voting rights in the payer company and 20% shares with voting rights in the recipient company. In the present case both these conditions are not fulfilled therefore deemed dividend cannot be taxed in the hands of the assessee. He further referred to the provisions of section 2 (32) to state that substantial interest in the company means beneficial owner of shares and not being shares entitled to fixed rate of dividend, carrying not less than 20% of voting power. He submitted that assessee do not have voting right on account of shares which are held by him on behalf of partnership firm in M/s Madhur Housing and Development Co who has received loan. He also submitted that assessee does not have any voting right in Beverly Park maintenance services Ltd which is the lending company. In view of the above facts he submitted that since basic conditions are not fulfilled as per the provisions of section 2 (22) (e) it cannot be applied in the present facts of case.

We have perused the submissions advanced by both the sides in the light of the records placed before us. According to provisions of section 2 (22) (e) of the Act any payment made by a company other than a public limited company by way of advance or loan to a shareholder , being a person who is the beneficial owner of shares, which are not shares entitled to a fixed rate of dividend or without a right to participate in profits, holding not less than 10% 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 to the extent of which the company possess accumulated profits. Deemed dividend is chargeable to tax in the hands of the shareholder in case there is a loan to a shareholder or any other concern. It is also triggered in case of a company making any payment on behalf of or for the individual benefit of such shareholder. The maximum cap of such deemed dividend is the accumulated profit possessed by the company making the payment or giving the loan. Therefore according to that provision to attract provisions of section 2 (22) (e) of the act in case of a loan given to shareholder following conditions must be satisfied. i. There must be a loan or advance to a shareholder of a Company other than a company-covered u/s 18 of the act. ii. Shareholder must be the beneficial owner of the shares. iii. Such shares should not be entitled to a fixed rate of dividend. iv. The voting power of such shareholding shall not be less than 10 % of the total voting power. In case the loan is given by the company to other concern than to tax it u/s 2 (22) (e) of the act in the hands of a shareholder following conditions must be satisfied. i. The company should give loan to a HUF, Firm, AOP or BOI or to another company. ii. It would be taxed in the hands of a shareholder of the lender company who :- a. must be the beneficial owner of the shares. b. Such shares should not be entitled to a fixed rate of dividend. Page | 6 c. The voting power of such shareholding shall not be less than 10 % of the total voting power. iii. Such shareholder should be a member, a partner, or a person having substantial interest in that concern. iv. Substantial interest in AOP, BOI, Firm or HUF means, assessee must be beneficially entitled to not less than 20 % of its income. Substantial interest in case of a company is defined u/s 2(32) of the act. According to that person must be beneficial owner of shares. v. Such shares in the borrowing company should not be entitled to a fixed rate of dividend and must carry minimum 20 % of the voting power.

Therefore to tax the loan from lender company to the borrowing company in the hands of the assessee following conditions must be satisfied. a. Assessee must be the beneficial owner of the shares of the lender company. b. Such shares should not be entitled to a fixed rate of dividend. c. The voting power of such shareholding shall not be less than 10 % of the total voting power. d. Assessee must also be the beneficial shareholder of the borrowing company holding shares which are not entitled to a fixed rate of dividend and should have minimum 20 % voting right in the borrowing company.

In the lender company M/s Beverly Park Maintenance Services Ltd., assessee holds shares without any voting rights. Therefore the condition of 10% of holding in the lender company fails.