Recently Hon’ble Bombay High Court has held in the case of CIT vs. Impact Containers Pvt. Ltd. that Section 2(22)(e) of the Income Tax Act, 1961 does not apply to a non-shareholder. Court follows the laid down in Universal Medicare 324 ITR 263 (Bom) which approves Bhaumik Colour 313 ITR 146 (SB)).
It is then urged that the Division Bench judgment in Universal Medicare does not take into consideration the amendments that have been made to the statute from time to time. It is urged that the amendment specifically refers to a person who is a beneficial owner of the shares. It is submitted that there are several words which have been substituted by the amendment. The words “ being a person who is a beneficial owner of share”, therefore, cannot be given the same meaning as is assigned to it in the judgment delivered by the Hon’ble Supreme Court in the case of Rameshwarlal Samwarmal Vs. CIT (Assam) reported in (1979) 122 ITR page 1. In other words, any interpretation of the provision prior to its amendment cannot serve as a guide even if the same fall for interpretation again. The Court will have to bear in mind that the legislature steppedin to amend the subclause with some definite intent and purpose. The purpose was not to allow circumvention or bye passing a statute like the I. T. Act 1961. Therefore, any reference to the position of the shareholders/members of a company as is to be found in the Indian Company Act, 1956 is wholly unwarranted and uncalled for. The words “shareholder being a person who is the beneficial owner of the assessee”, therefore, must receive an interpretation in consonance with the legislative intent. That being not to restrict it to a shareholder registered as such, that we will have to take a second look at the view taken by this Court in Universal (supra). This argument is opposed by the counsel of the assessee by pointing out not only the judgment in the Universal Medicare takes care of all these aspects but interpretation placed on the provision in that judgment has found favour with several High Courts and the leading judgment of the Delhi High Court which follows the view taken in Universal Medicare is relied upon.
We have perused the provision carefully and equally the judgment in the case of Universal Medicare and the view following the same rendered by several High Courts. We are of the opinion that there is no merit in the contentions of the Revenue that Universal Medicare was either erroneously decided or that the view taken in Universal Medicare requires reconsideration. In that regard, we must not brush aside the binding precedent or the judgment of a coordinate bench simply because some of the arguments canvassed before us were either not canvassed or if canvassed were not considered. The binding precedent can be ignored only if it is perincuriam. Such is not the stand before us. All that is urged is several facets and which emerge from a reading of section namely Section 2(22) together with its subclauses have not been noticed by the Division Bench while deciding Universal’s case.
We are unable to agree with the Revenue in this behalf. What we have noted is that the legislature has incorporated and inserted the definition of the term “dividend”. It is made inclusive of distribution of profits, any distribution to the shareholders by a company of debentures, debenturestock, or deposit certificate in any form, or distribution made to the shareholders upon liquidation of a company. Equally, amount distributed on reduction of capital is termed as dividend. What is also then included is a payment made by a company to its shareholder. That is by way of advance or loan to him. This is included so as to visit the shareholder with a liability to pay tax. It is eventually, the shareholder who will pay tax on the same. The shareholder cannot escape that liability merely because the loan or advance has been made over to any concern in which such shareholder is a member or a partner and in which he has substantial interest. Earlier, legislature noted that the shareholder would receive the sum from a company and which is not strictly falling within the concept of “dividend”. Firstly, because that was received by way of advance or loan, secondly, an attempt was made to show that the advance or loan is not to the shareholder who is registered as such but to a concern in which he is a member or a partner and in which he may have a substantial interest but that cannot be termed as advance or loan to the shareholder. With a view to take care of such stand of the shareholders and not allow them to escape the liability to pay tax that the definition came to be broadly worded by indicating therein the reference to any concern. Equally, any payment made by such company on behalf of the shareholder or for individual benefit of any shareholder to the extent to which the company in other case possesses accumulated profits has also been brought in. Thus, in addition to distribution of accumulated profit, debenture stock or deposit certificate etc, a payment of the aforesaid nature has been termed as “dividend” and included in the definition. At the same time, the legislature has taken care not to include any advance or loan made to a shareholder or the said concern in which such shareholder is a member or a partner and in which he has substantial interest in the ordinary course of the business of the company and where lending of money is substantial part of the business of the company. Equally, any dividend paid by the company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of subclause (e), to the extent to which it is so set off, is also excluded advisedly.
We are also of the opinion that any reference to Explanation 3 and particularly the definition of term “concern” will not advance or carry the Revenue’s case any further. Eventually, it is the shareholder who is registered as such who is entitled to receive the dividend. Merely because the payment is made to him by way of advance or loan was not termed as such earlier that the legislature has inserted such a payment in the definition of the term “dividend” and made the definition wide and broad so also inclusive.
We do not see how with this legal position and the status of the shareholder recognized in law can be ignored while interpreting Section 2 (22) (e) of the I. T. Act. Precisely, this is what has been done by this Court in the judgment rendered in the case of Universal Medicare. It is not necessary for us to make a detailed reference to the order of the Special Bench of the Tribunal in the case of Bhaumik Colour Pvt Ltd. Suffice it to hold that the view taken by this Court in the case of M/s. Universal Medicare does not require any reconsideration. We are not in agreement with Shri Gupta that the definition does not contemplate or does not stipulate any requirement of assessee being a shareholder of the assessee like the one in the present case. The view taken in the present case that the recipient/assessee was not a shareholder, thus is in consonance with the legal position noted by us hereinabove.
We are of the further view that this Court merely restated this principle and which remains unaltered throughout from the case of Rameshwarlal Sanwarmal v/s Commissioner of Income Tax reported in 1980 (122) I. T. R. page 1 (SC). The Hon’ble Supreme Court held that it is only where a loan is advanced by the company to the registered shareholder and other conditions set out in Section 2 (6A) (e) of the then prevailing I.T. Act 1922 are satisfied that the amount of the loan would be liable to be regarded as deemed dividend within the meaning of that provision. The loan granted to the beneficial owner of the share, who is not registered shareholder would not fall within the meaning of Section 2 (6A) (e) of the I. T. Act. What the section is designed to strike at is advance or loan to a shareholder and the word shareholder can mean only the registered shareholder. The Hon’ble Supreme Court following the judgment in the case of Commissioner of Income Tax v/s C. P. Sarathy reported in 1972 (83) ITR 170(SC) held that the beneficial owner of shares whose name does not appear in the register of the shareholders of the company cannot be said to be a shareholder though he may be beneficially entitled to the shares but he is not a shareholder. Mr. Gupta, appearing before us for the Revenue would submit that much water has flown after the decision in the case of Rameshwarlal and C. P. Sarathy(supra) because the provision has been amended since then. The fiction therefore must be carried to its logical end and its purpose should not be defeated by narrow construction as was placed on the provision prior to its amendment. In other words, the amendment was brought in only because of such view having taken earlier, is his submission.
We are unable to accept it because of the consistent view taken and that even if the words as noted by us hereinabove have been inserted in the definition so as to make reference to the beneficial owner of the shares, still the definition essentially covers the payment to the shareholder and the position of the shareholder as noted in the Supreme Court’s decision, cannot undergo any change. That legal position and status of the shareholder being the same, we do not see how the view prevailing from Commissioner of Income Tax v/s C. P. Sarathy(supra) is in any way said to be changed. That is how all the judgments subsequent thereto have been rendered. The reliance placed by Ms. Vissanjee on the judgment of the Division Bench of this Court in the case of Commissioner of Income Tax, Patiala v/s Shahzada Nand and Sons and Ors, reported in (1966) 177 ITR 393, is therefore, apposite. Equally, her reliance on the judgment of the Division Bench of Delhi High Court is well placed. We have noted that the Delhi High Court and even after exhaustive amendment to Section 2(22)(e) held that the payment made to any concern would not come within the purview of this subclause so long as it contemplated shareholders. The Division Bench of Delhi High Court has made detailed reference to all the decisions in the field. It has also referred to the order passed by the Special Bench of the Tribunal in arriving at the same conclusion. In the Commissioner of Income Tax v/s Ankitech Pvt Ltd reported in 2012 (340) ITR page 14, the Hon’ble Delhi High Court referred to both Sarathy Mudaliar and Rameshwarlal Sanwarmal (supra), extensively. It also referred to the arguments of the Revenue which are somewhat similar to those raised before us. It is in dealing with these arguments that the Division Bench concluded that all the three limbs of the section analyzed in Universal Medicare denote the intention that closely held companies namely companies in which public are not substantially interested which are controlled by a group of members, even though having accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provision, such payment by the company is treated as dividend. The purpose is to tax dividend in the hands of the shareholder.
We do not see how such a view taken by the Delhi High Court and which reaffirms that of this Court in Universal Medicare can be said to be contrary to the legal fiction or the intent and purpose of the legislature in enacting it. The view taken by the Delhi High Court in the Commissioner of Income Tax v/s Ankitech Pvt Ltd (supra) has thus our respectful concurrence.