SHARES HELD BY RELATIVES CAN’T BE CONSIDERED TO DETERMINE SUBSTANTIAL INTEREST OF SHAREHOLDER UNDER SEC. 2(22)(E):-
SHARES HELD BY RELATIVES CAN’T BE CONSIDERED TO DETERMINE SUBSTANTIAL INTEREST OF SHAREHOLDER UNDER SEC. 2(22)(E)
Section 2(22), read with section 2(32), of the Income-tax Act, 1961 – Deemed dividend -Loans or advances to shareholder/substantial interest
In order to determine substantial interest of a shareholder for invoking provisions of section 2(22)(e), it is ownership of shareholder alone in company to which loan/advance has been made by assessee-company, and not his or her relative or family members, which is determinative factor[2015] 11- ITAT DELHI –ACIT v.Maharishi Ayurveda Products(P.) Ltd.
Facts
The assessee-company was engaged in the business of manufacturing and exporting in all kinds of ayurvedic and herbal preparations. It filed return declaring certain taxable income.
In course of assessment, the Assessing Officer made addition to the assessee’s income under section 2(22)(e) on ground that 90 per cent beneficial and registered shareholding in companies to whom loan had been given by assessee-company was with family members of ‘A’, who was a substantial shareholder of the assessee-company as well.
The Commissioner (Appeals) took a view that there was nothing in section 2(22)(e) or section 2(32) so as to suggest that the holding or ownership of voting rights of the shares held by the family could be taken into consideration for the purposes of determining substantial shareholding of a person/shareholder.
The Commissioner (Appeals) opined that it was the ownership of the shareholder alone in the company to which the loan/advance was made by assessee-company, and not his or her relative or family members, which was the determinative factor. Accordingly, inclusion/clubbing of beneficial ownership of family members with that of ‘A’ was not mandated by the provision of the Act.
The Commissioner (Appeals) thus deleted the impugned addition made by the Assessing Officer.
On Revenue’s Appeal it was held by Tribunal:-
The intention behind enacting the provisions of section 2(22)(e) is that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has 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 shareholder 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 provisions such payment by the company is treated as dividend
The intention behind the provisions of section 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance.
Keeping in view of the facts and circumstances of case, as explained above, it is held that First Appellate Authority has deleted the addition in dispute by following the judgment of the Supreme Court in the case of CIT v. Nalin Behari Lall Singha [1969] 74 ITR 849 and decision of the ITAT, Mumbai, Special Bench in the case of Asstt. CIT v. BhaumikColour (P.) Ltd. [2009] 27 SOT 270, which does need any interference, hence, the impugned order is upheld.
In the result, the Appeal filed by the Revenue stands dismissed.
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