ITA No.462 of 2009 & Ors. Page 1 of 50 REPORTABLE * IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA No.462 of 2009 with ITA Nos. 2087/2010, 901/2010, 902/2010, 903/2010, 960/2010, 1327/2010, 1436/2010, 1502/2010, 1865/2010, 461/2010, 998/2009, 1421/2009, 1618/2010, 1758/2010, 1978/2010, 622/2011, 623/2011, 270/20111588/2010, 211/2010, 352/2010 & 2014/2010. Reserved On: April 27, 2011. % Pronounced On: May 11, 2011. 1) ITA No.462 of 2009 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS ANKITECH PVT LTD. . . .RESPONDENT 2) ITA No.2087 of 2010 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS ANKITECH PVT LTD. . . .RESPONDENT 3) ITA No.901 of 2010 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS M/s MUKUL INTERNATIONAL LTD. . . .RESPONDENT 4) ITA No.902 of 2010 ITA No.462 of 2009 & Ors. Page 2 of 50 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS M/s MUKUL INTERNATIONAL LTD. . . .RESPONDENT 5) ITA No.903 of 2010 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS M/s MUKUL INTERNATIONAL LTD. . . .RESPONDENT 6) ITA No.960 of 2010 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS M/s R.C. ENERGY METERING PVT. LTD. . . .RESPONDENT 7) ITA No.1327 of 2010 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS ACTIVE SECURITIES PVT. LTD. . . .RESPONDENT 8) ITA No.1436 of 2010 COMMISSIONER OF INCOME TAX . . . APPELLANT ITA No.462 of 2009 & Ors. Page 3 of 50 VERSUS P AND A ESTATES PVT. LTD. . . .RESPONDENT 9) ITA No.1502 of 2010 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS MEHRA STORE . . .RESPONDENT 10) ITA No.1865 of 2010 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS MOKUL INTERNATIONAL LTD. . . .RESPONDENT 11) ITA No.461 of 2011 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS COSMOTECH COMMUNICATIONS PRODUCTS PVT. LTD. . . .RESPONDENT 12) ITA No.998 of 2009 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS MAGIC INTERNATIONAL PVT. LTD., New Delhi ITA No.462 of 2009 & Ors. Page 4 of 50 . . .RESPONDENT 13) ITA No.1421 of 2009 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS R.C. ENERGY MATERING PVT. LTD. . . .RESPONDENT 14) ITA No.1618 of 2010 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS KAISER EXPORT PVT LTD . . .RESPONDENT 15) ITA No.1758 of 2010 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS PEARL INDIA PUBLISHING HOUSE PVT. LTD. . . .RESPONDENT 16) ITA No.1978 of 2010 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS STELCO INDIA P. LTD. . . .RESPONDENT 17) ITA No.622 of 2011 ITA No.462 of 2009 & Ors. Page 5 of 50 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS CAPARO INDIA DEVELOPMENT PVT. LTD. . . .RESPONDENT 18) ITA No.623 of 2011 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS CAPARO INDIA PVT. LTD. . . .RESPONDENT 19) ITA No.270 of 2011 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS SHIVA COMMODITIES AND DERIVATIVES . . .RESPONDENT Reserved On: April 29, 2011 Pronounced On: May 11, 2011 20) ITA No.1588 of 2010 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS TIMELESS FASHIONS PVT. LTD. . . .RESPONDENT 21) ITA No.211 of 2010 ITA No.462 of 2009 & Ors. Page 6 of 50 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS NANDLALA SECURITIES PVT. LTD. . . .RESPONDENT 22) ITA No.352 of 2011 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS INDIAN TECHNOCRAFT LTD. . . .RESPONDENT Reserved On: May 02, 2011 Pronounced On: May 11, 2011 23) ITA No.2014 of 2010 COMMISSIONER OF INCOME TAX . . . APPELLANT VERSUS ROXY INVESTMENT . . .RESPONDENT Counsels for the Revenue: Ms. Prem Lata Bansal, Sr. Advocate with Mr. Deepak Anand. Mr. Sanjeev Sabharwal, Sr. Standing Counsel. Mr. N.P. Sahni, Sr. Standing Counsel. Mr. Kamal Sawhney, Sr. Standing Counsel. Ms. Rashmi Chopra, Sr. Standing Counsel. ITA No.462 of 2009 & Ors. Page 7 of 50 Counsels for the Assessee: Mr. Ajay Vohra with Ms. Kavita Jha, Advocates. Mr. Salil Kapoor, Advocate. Dr. Rakesh Kapoor with Ms. Poonam Ahuja, Advocates. Mr. Satyen Sethi with Mr. A.T. Panda, Advocates. Mr. Rajat Navet, Advocate. Mr. Sandeep Sapra, Advocate. CORAM :- HON’BLE MR. JUSTICE A.K. SIKRI HON’BLE MR. JUSTICE M.L. MEHTA 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest? A.K. SIKRI, J. 1. In all these appeals, same questions of law touching the interpretation that is to be accorded to the provisions of Section 2(22)(e) of the amount received by the Income Tax Act (hereinafter referred to as ‗the Act‘), arise for consideration. Our purpose would be served by taking note of the questions of law framed in ITA No.462 of 2009, as concededly answer thereto shall cover the outcome of all these appeals. The ITA No.462 of 2009 & Ors. Page 8 of 50 substantial questions of law on which this appeal was admitted are as under: ―a) Whether ITAT was correct in law in deleting the addition of `6,32,72,265/- made by the Assessing Officer in the hands of assessee company under Section 2(22)(e) of the Act? b) Whether ITAT was correct in law in holding that the addition could not have been made by the Assessing Officer in the assessee company as it was not the shareholder of M/s Jackson? c) Whether ITAT has correctly interpreted the provisions of Section 2(22)(e) of the Act? d) Whether order passed by ITAT is perverse in law and on facts when it deleted the addition holding that though the amount received by the assessee by way of book entry falls within the ambit of Section 2(22)(e) of the Act but the same cannot be assessed in the hands of Assessee?” 2. Though as many as four questions are framed, it is with singular focus, viz., whether the assessee who was not the shareholders of M/s. Jackson Generators (P) Ltd. (JGPL) could be treated as covered by the definition of ‗dividend‘ as contained in Section 2(22)(e) of the Income Tax Act (hereinafter referred to as ‗the Act‘). This issue has arisen under the following circumstances. 3. The assessee filed the return declaring income at ‗Nil‘ under normal provisions but at `1.45 Crores under Section 115JB of the Act. During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee company had received ITA No.462 of 2009 & Ors. Page 9 of 50 advances of `6,32,72,265/- by way of book entry from JGPL and the shareholders having substantial interest in the assessee company were also having 10% of the voting power in JGPL. The AO specifically took note of the share-holding pattern in the assessee company as well as in JGPL, which was as following: ―The share holding pattern of the assessee company (hereinafter referred as APL) as on 31.03.2003 is as follows: Percentage holding 1. Mahesh Kumar Gupta 45.1% 2. Rukmani Gupta 45.1% 3. Manmohan Gupta 9.8% The share holding pattern of a company M/s Jakson Generators P. Ltd. (hereinafter referred as JGPL) is as under:- Percentage holding 1. Mahesh Kumar Gupta 43.19% 2. Rukmani Gupta 26.46% Others 30.35%‖ 4. The AO was of the view that as the two Guptas were the members holding substantial interests in JGPL which had provided loans and advances to the assessee company and these very Guptas had substantial interest even in the assessee company, for the purpose of Section 2(22)(e) of the Act the amount received by the assessee from JGPL which constituted ‗advances and loans‘ would be treated as deemed dividend within the meaning of Section 2(22)(e) of the Act and added the aforesaid amount to the income of the assessee. ITA No.462 of 2009 & Ors. Page 10 of 50 The assessee had specifically pleaded that the provisions of Section 2(22)(e) of the Act would not be attracted as the assessee was not a shareholder in JGPL. According to the assessee, for the purposes of application of Section 2(22)(e) of the Act, one of the essential conditions was that the concern receiving the said money has to be that income is to be assessed at the hands of shareholder. The AO rejected this contention. 5. CIT (A) affirmed the aforesaid view taken by the AO. 6. However, in further appeal before the Tribunal, the appeal of the assessee has been allotted vide impugned order dated 06.06.2008 thereby deleting the addition made by the AO on account of deemed dividend under Section 2(22)(e) of the Act. The Income Tax Appellate Tribunal (for brevity ‗the Tribunal‘) held that though the amount received by the assessee by way of book entry is a deemed dividend within the meaning of Section 2(22)(e) of the Act, the same cannot be assessed in the hands of assessee company, as it was not the shareholder in the company JGPL. A dividend cannot be paid to a non- shareholder. It would have to be taxed, if at all, in the hands of the shareholders who have a substantial interest in the assessee concern and also holding not less than 10% of the voting power in JGPL. ITA No.462 of 2009 & Ors. Page 11 of 50 7. We may point out at this stage that the Tribunal has relied upon the decision of the Special Bench, Mumbai in the case of ACIT Vs. Bhaumik Colour (P) Ltd. 118 ITD 1 (Mum.) (SB). The said decision of the Special Bench has been affirmed by the Bombay High Court in the case of Commissioner of Income Tax Vs. Universal Medicare (P) Ltd. 190 Taxman 144 (Bom.) 8. Before we discuss the aforesaid decision, it would be prudent to take note of the provision of Section 2(22)(e) of the Act. It reads as under: ―(a) xxx xxx xxx (b) xxx xxx xxx (c) xxx xxx xxx (d) xxx xxx xxx (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent 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 (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but ―dividend‖ does not include— (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not ITA No.462 of 2009 & Ors. Page 12 of 50 entitled in the event of liquidation to participate in the surplus assets ; [(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, [and before the 1st day of April, 1965] ;] (ii) any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; (iii) any dividend paid by a 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 sub-clause (e), to the extent to which it is so set off; [(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).]‖ 9. It was not in dispute before us that all other conditions stipulated in this provision stands satisfied in the present case. There is a payment by a company (i.e. JGPL) of a sum which is in the nature of ‗advance or loans‘ and the payment is within the limits of accumulated profits possessed by JPGL. The payment is not made to the Guptas directly, who are the shareholders, but to the assessee which is admittedly a concern in which such shareholders, i.e., Guptas are also members/shareholders and they have substantial interest in the assessee as is clear from the share pattern disclosed above ITA No.462 of 2009 & Ors. Page 13 of 50 as per Section 2(32) of the Act, in order to have substantial interest in the company such shareholders i.e. (Guptas) in the present case who carry no less than 20% of the voting power. In the instant case, the share holding of Guptas is much more than prescribed 20%. It is for this reason whether all the conditions stipulated in Clause (e) of Section 2(22) of the Act stand satisfied. As a fortiori, the payment of ‗advance or loans‘ made by JGPL to the concern, i.e., the assessee would be treated as dividend within the meaning of Section 2(22)(e) of the Act. The dispute which has arisen, in the scenario is to whether this is to be treated as dividend income in the form of dividend advance of the shareholders or advance of the said concern (i.e. the assessees herein). Whereas the Department has taken it as income at the hands of the assessee, as per the assessee it cannot be treated as dividend income to their account. The Tribunal has accepted this plea of the assessee holding that such dividend income is to be taxed at the hands of shareholders. 10. In Bhaumik Colour (P) Ltd. (supra), the Special Bench, Mumbai took note of the historical background of Section 2(22)(e) of the Act. There cannot be any dispute that the historical background narrated by the Special Bench is flawless and therefore, we can reproduce the same: ITA No.462 of 2009 & Ors. Page 14 of 50 (a) Section 2(6A)(e) of the IT Act, 1922, as introduced by the Finance Act, 1955 corresponding to Section 2(22)(e) of the IT Act, 1961 was as follows: Any payment by a company, not being a company in which the public are substantially interested within the meaning of Section 23A, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, or any payment by any such company on behalf, or for the individual benefit, of a shareholder to the extent to which the company in either case possesses accumulated profits. (b) Section 2(22) of the IT Act, 1961, defines dividend. Section 2(22)(e) of the Act, which is equivalent to Section 2(6A)(e) of the 1922 Act, as it existed originally in the IT Act, 1961, read as follows: Section 2(22) 'Dividend' includes- (a) to (d) ... (e) Any payment made by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, of any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. (c) The aforesaid Clause (e) of the Act has been amended w.e.f. 1st April, 1988; the amended Clause (e) of the Act reads as follows: (e) Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting ITA No.462 of 2009 & Ors. Page 15 of 50 power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. Explanation 3 to Section 2(22)(e) is as follows: Explanation 3 : For the purpose of this clause— (a) "concern" means an HUF, or a firm or an AOP or a BOI or a company; (b) A person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern. 11. It is clear from the above that Under the 1922 Act, two categories of payments were considered as dividend viz., (a) any payment by way of advance or loan to a shareholder was considered as dividend paid to shareholder; or (b) any payment by any such company on behalf of or for the individual benefit of a shareholder was considered as dividend. In the 1961 Act, the very same two categories of payments were considered as dividend but an additional condition that payment should be to a shareholder being a person who is the beneficial owner of shares and who has a substantial interest in the company viz., shareholding which carries not less than twenty per cent of the voting power, was introduced. By the ITA No.462 of 2009 & Ors. Page 16 of 50 1987 amendment w.e.f. 1st April, 1988, the condition that payment should be to a shareholder who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power was substituted. Thus, the percentage of voting power was reduced from twenty per cent to ten per cent. By the very same amendment, a new category of payment was also considered as dividend viz., payment to any concern in which such shareholder is a member or a partner and in which he has a substantial interest. Substantial interest has been defined to mean holding of shares carrying 20 per cent of voting power. 12. The controversy in the present case relates to this new category introduced by way of Amendment, viz., payment to any concern in which such shareholder is a member or a partner or in which he has a substantial interest. The Special Bench analyzed the language implied in creating this new category and spelt out the conditions which are required to be satisfied for attracting this category in Para 26 of its order, which reads as under: ―19. The provisions of Section 2(22)(e) create a fiction bringing in amounts paid otherwise than as dividend into the net of dividends. Therefore, this clause must be given a strict interpretation as held by the Hon'ble Supreme Court ITA No.462 of 2009 & Ors. Page 17 of 50 in the case of CIT v. C.P. Sarathy Mudaliar. In the case of the assessee as well as the intervener there is no dispute that the companies which gave the loan or advance were one in which public are not substantially interested. Nor is there any dispute that these companies possess accumulated profits to the extent of the loan or advance. The three limbs of Section 2(22)(e) are as follows: Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st May, 1987, by way of advance or loan. First limb (a) to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power. Second limb (b) or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) Third limb (c) or any payment by any such company on behalf, or for the individual benefit of any such shareholder, to the extent to which the company in either case possesses accumulated profits. 20. In the case of CIT v. C.P. Sarathy Mudaliar (supra), provisions of Section 2(6A)(e) of the Act, 1922, which was synonymous to Section 2(22)(e) of the IT Act, 1961 came up for consideration. In the said case, members of HUF acquired shares in a company with the fund of the family. Loans were granted to HUF and the question was whether the loans could be treated as dividend income of the family falling within Section 2(6A)(e) of the Act, 1922. The apex Court held that only loans advanced to shareholders could be deemed to be dividends under Section 2(6A)(e) of the Act; the HUF could not be considered to be a 'shareholder' under Section 2(6A)(e) of the Act and hence, loans given to ITA No.462 of 2009 & Ors. Page 18 of 50 the HUF will not be considered as loans advanced to "shareholder" of the company and could not, therefore, be deemed to be its income. The apex Court further held that when the Act speaks of shareholder it refers to the registered shareholder. 21. The aforesaid decision of the apex Court in the case of C.P. Sarathy Mudaliar (supra) has been followed by the apex Court in the case of Rameshwarlal Sanwarmal v. CIT (supra). In this case, the company advanced the loans to the assessee HUF who was the beneficial owners of the shares in the company, but the shares were registered in the name of the individual Karta, who held the shares for and on behalf of the HUF. On the above facts, the question before the Supreme Court was whether the loans advanced to the HUF-beneficial owner of the shares-would be taxed as deemed dividend in the hands of the HUF. The Supreme Court held that the HUF being only the beneficial shareholder and not a registered shareholder would not fall within the purview of Section 2(6A)(e) of the 1922 Act. The apex Court observed as follows: ...What Section 2(6A)(e) is designed to strike at is advance or loan to a 'shareholder' and the word 'shareholder' can mean only a registered shareholder. It is difficult to see how a beneficial owner of shares whose name does not appear in the register of shareholders of the company can be said to be a 'shareholder'. He may be beneficially entitled to the share but he is certainly not a 'shareholder'. It is only the person whose name is entered in the register of the shareholders of the company as the holder of the shares who can be said to be a shareholder qua the company and not the person beneficially entitled to the shares. It is the former who is a 'shareholder' within the matrix and scheme of the