Deemed Dividend- Shares held by Subsidiary Co. is irrelevant

Assessee was a registered and beneficial shareholder of shares of M/S.Mega Resources Ltd., that conferred voting rights of only 1.7%. 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.

In the case of Bhaumik Colour (P) Ltd 313 ITR (AT) 146, the Hon’ble Special Bench has held that section 2(22)(e) has created a fiction whereby the definition of “dividend” has been enlarged to include even loans and advances; and so, the legal provision has to be given a strict interpretation. Secondly, the definition of “dividend” as given in section 2(22)(e) is an .inclusive definition and the AO was not competent to enlarge the same by importing things which do not form part of such legal fiction. In view of the above, the AO was not justified in including the share-holding of the subsidiary company also for the purposes of invoking section 2(22)(e). The AO has not disputed the fact that the assessee company was having 1.7% share-holding in the lending company. As the assessee company was holding less than 10% of the voting power in the lending company, the provisions of section 2(22)(e) was not attracted in its case.

Full Text of the ITAT Order is as follows:-