No addition can be made u/s 2(22)(e) when assessee is not a shareholder

Issue before tribunal:

• Whether addition deemed dividend u/s 2(22)(e) as the Appellant company is neither a registered shareholder nor a beneficial shareholder in M/s. Wire & Wireless Satellite Network Pvt. Ltd., the lending company.
• Whether provisions of Section 2 (22) (e) do not apply to the Appellant company.

Brief facts of the case:

• The assessee company is engaged in the business of cable TV services. The AO noticed that the assessee has taken a loan of Rs.1,08,71,574/- from M/s Wire & Wireless Satellite Network Pvt. Ltd.
• The AO found that the shareholdings of assessee and M/s. Wire & Wireless Satellite Network Pvt. Ltd., is with common shareholdings.
• The AO was of the view that the shareholders are dummy in nature and these companies are holding shares of each other and thus loan taken by the assessee from M/s. Wire & Wireless Satellite Network Pvt. Ltd., attract the provisions of section 2(22)(e) of the Act.
• The assessee challenged the action of the AO before the ld. CIT(A) but could not succeed.

Contention of the revenue:

• When the 99% shareholding in M/s. Wire & Wireless Satellite Network Pvt. Ltd., is with a common shareholders which are also holding 55% shares in assessee company then the AO is justified in invoking the provisions of section 2(22)(e) of the Act.

Contention of the assessee:

• The assessee is not a shareholder of M/s. Wire & Wireless Satellite Network Pvt. Ltd., therefore, the addition u/s 2(22)(e) cannot be made in the hand of none shareholder.
• In support this contention, he relied upon the decision of the Hon’ble Jurisdictional High Court in the case of CIT V/s UNIVERSAL MEDICARE PRIVATE LIMITED [2010] 324 ITR 263 (Bom) as well as the decision in the case of CIT V/s IMPACT CONTAINERS P. LTD. [2014] 367 ITR 346 and submitted that the Hon’ble High Court has confirmed the view taken by the Special Bench in the case of ACIT V/s BHAUMIK COLOUR P. LTD.( 2009) 313 ITR (A.T.) 146 (ITAT Mum).

Held by the tribunal:

• The assessee company is not a shareholder of M/s. Wire & Wireless Satellite Network Pvt. Ltd. merely because, the shareholdings of both the companies are with common shareholders would not make the assessee company the shareholder of the M/s. Wire & Wireless Satellite Network Pvt. Ltd.
• The provisions of section 2(22)(e) is a deeming provision and expand the ambit of expression “dividend” if the shareholder of the company has availed the benefit of loan and the company was having the sufficient funds of received and surplus then the shareholder who is having more than 25% equal capital of the company and availed the loan would be treated as reserve the deemed dividend.
• The dividend can be received or deemed to have been received only by shareholder of the company, therefore, the provisions of section 2(22)(e) enlarging the scope of dividend under the express deemed “dividend” cannot be invoked in case of a person who is not a shareholder of the company who has advance the loan.

Conclusion:

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 are not substantially interested by way of an advance or loan to a shareholder or to any concern of which such shareholder is a member or partner, subject to the fulfilment of the requirements which are spelt out in the provision.