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Improvement in the Premises of Shareholder – Deemed Dividend u/s 2(22)(e)?
Whether the improvement made by the company on the assets of shareholders is to be considered as deemed dividend u/s 2(22)(e) even if the asset is given to the company on hire basis?
One may say that yes it is deemed dividend because the ultimate benefit of improvement on the asset made by the company is given to the shareholder.
What does the law say?
Let’s understand what is Deemed Dividend. The clause of deemed dividend reads as under:
“(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 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, 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;”
On analyzing the clause we can say that
Dividend includes any payment by a company, not being a company in which public are substantially interested of any sum by way of loan or advance
- to a shareholder, being a person who is the beneficial owner of the shares ,holding not less than 10% of the voting rights, or
- to any concern in which such shareholder is a member or a partner and in which he has a substantial interest, or
- on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.
Also it is clear that the company must make the payment by way of loan/ advance. In the instant case, although the improvement was made on the assets of Shareholder, there was no concept of loan. Therefore the transaction is not an instance covered by 2(22)(e). The same was held in the case of COMMISSIONER OF INCOME TAX vs. VIR VIKRAM VAID. The case law is reproduced hereunder for reference.
COMMISSIONER OF INCOME TAX vs. VIR VIKRAM VAID
HIGH COURT OF BOMBAY
- The Appellant is aggrieved by the impugned order dated 9th September, 2011 passed by the Income Tax Tribunal whereby the tribunal negated the Appellant’s claim that the Respondent was beneficiary of certain amounts by way of deemed dividend under section 2(22)(e) by virtue of certain expenses incurred on construction/renovation of the premises owned by the Respondent and let out by the Respondent to a limited Company of which the Respondent was a majority share holder.
- The question of law raised by the Respondent is whether the tribunal had erred in directing/concluding that the provisions of section 2(22)(e) were not attracted in the case of the Respondent in view of the Appellant’s contention that the expenditure made by the private limited Company of the Respondent in which the Respondent – assessee is a majority share holder and that the expenditure in fact was made for benefit of the Respondent – assessee himself.
- A few facts may be adverted to : The Respondent – assessee holds 76.26% of equity shares of Offshore Hookup and Construction Services Pvt. Ltd. (“the Company”). He is also an Executive Director of the Company. In his personal capacity he is the owner of certain premises and was carrying on business as proprietor of Offshore International Services. It seems that over a period of time the Respondent ceased carrying on business of the propriety concern and he let out the premises to the Company. The Company incurred expenses towards construction and improvement of the factory premises which it continued to use. The Appellant contended that such improvement in the factory premises was for benefit of the Respondent and therefore applied provisions of section 2(22)(e) for total expenditure of Rs.2.51 crores. Vide the assessment order dated 2.2.2009 the Appellant treated the sum of Rs.2.51 crores as deemed divided in the name of assessee, under the provisions of section 2(22)(e).
- The Respondent filed an appeal before the Commissioner the Income Tax (Appeals), who vide order dated 10.11.2009 dismissed the appeal of the Respondent. The Respondent, aggrieved by the dismissal of appeal, filed an appeal before the Income Tax Appellate Tribunal, which vide the impugned order dated 9.9.2011 allowed the appeal.
- Before proceeding further it would be useful to reproduce section 2(22)(e). Section 2(22) (e) reads thus :
(22) “dividend” includes—
(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 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, 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 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 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).
- To effectively adjudicate upon the issue before us it will be convenient to refer the assessment order dated 2.2.2009 itself prior to dealing with the impugned order. The Assessing Officer holds that the amount of Rs.2.51 crores was paid on behalf of the assessee and relied upon inter alia on a decision of the Calcutta High Court in the case of Mr.M.D. Jindal Vs. CIT 164 ITR 28. It states that any payment referred to in section 2(22)(e) also covers value of goods and services provided by the Company to its share holders. Alternatively, the Assessing Officer held that the amount of Rs.2.51 crores be treated as a perquisite which includes value of any benefit by Company to the employee who is the Director thereof and/or by Company, who has substantial interest in it. Thus, the case against the Respondent was two fold, one that amount of Rs.2.51 crores was deemed dividend and secondly, that the amount constituted a perquisite.
- In appeal, the Commissioner of Income Tax in his order 10.11.2009 also noted a submission of the Respondent that he had leased out the premises to the Company on rent which was lower than the prevailing market rate with a clear understanding that all expenditure for its upkeep and improvement, if any, would be fully spent by the Company since the Appellant had stopped his own business activities. According to the CIT (Appeals) the Respondent failed to substantiate the said claim and held that all conditions provided under section 2(22)(e) for deemed dividend was satisfied. In appeal, the tribunal concluded that the payment was not deemed dividend. The tribunal also held that the amount was also not perquisite and accordingly the Appellant’s case under section 17(2) is also not sustainable.
- In the present appeal, the challenge is restricted to the tribunal’s findings that the Respondent’s case is not covered under section 2(22)(e). There is no challenge to the findings qua disallowance of the Appellant’s case that the amount was a perquisite. Analysis of section 2(22)(e) would reveal that in order attract the provisions of sub-section (22) the payment made by the Company must be by way of advance or loan to the share holder who is entitled to the shares which do not carry a fixed rate of dividend with or without a right to participate or a payment to him for his individual benefit. The payment should be for the individual benefit of such share holder and it would be restricted to accumulated profits of the Company.
- In the present case, no money has been paid to the Respondent by way of advance or loan nor was any payment made for his individual benefit. The fact that the Company has spent money has not been called into question. Thus, it is deemed that the Company did spent Rs.2.51 crores towards repair and renovation on the premises owned by the Respondent. There is no dispute about the fact that the Company had taken rent on the aforesaid premises. Thus, it is case where the asset of the Respondent may have enhanced in value by virtue of repairs and renovation in respect of which it cannot be brought within definition of the advance or loan to the Respondent. Nor can it be treated as payment by the Company on behalf of the Respondent share holder or for the individual benefit of such share holder.
- To hold so would be merely presumption which is not warranted in the facts of the present case. Accordingly, the order of the tribunal cannot be faulted.
- The challenge being restricted to the issue of dividend alone it is not necessary to consider the contention pertaining that the amount as perquisite. Moreover, in the case of Income Tax Appeal No.114 of 2012 and other group of appeals this court has vide the judgment dated July 4, 2014 to which one of us (S.C. Dharmadhikari, J.) was a party has already held that where the recipient is not the share holder of the lender Company such case of a deemed dividend does not arise and such appeals are to stand dismissed since they do not raise any substantial question of law. We have, however, considered the facts of the present case in detail being slightly different nature in the facts of the case in Income Tax Appeal No.114 of 2012. In the circumstances the impugned order is not vitiated by error of law apparent on the face on record. The appeal is therefore dismissed. No order as to costs.
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