Deemed dividend provision is a legal fiction; but does not enhance the definition of shareholder to include deemed shareholder – Del HC

CIT v Bikaner Cuisine Pvt Ltd [ITA No. 475/2013 dated 04.10.13] (Delhi HC)


Assessee – M/s Bikaner Cuisine Pvt. Ltd. was not a shareholder of BIPS Systems Ltd. The latter company i.e. BIPS Systems Ltd. had granted unsecured loan of Rs.49,25,000/- to the assessee. The Assessing Officer invoked provisions of section 2(22)(e) of the Income Tax Act, 1961 and made an addition of Rs.33,84,290/- as deemed dividend in the hands of the assessee. The reason given was that the assessee and BIPS Systems Ltd. had common shareholder, namely, Narender Goel, who held more than 10% shares in BIPS Systems Ltd. and more than 20% voting rights in Bikaner Cuisine Pvt. Ltd. However, the accepted and admitted position is that the company is not a shareholder in BIPS Systems Ltd. 


Reliance is placed on ruling of CIT Vs. Ankitech (P.) Limited, (2012) 340 ITR 14 (Delhi) wherein it was held that:

  • The intention behind enacting the provisions of section 2(22)(e) is that closely-held companies, 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 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 provisions, such payment by the company is treated as dividend
  • By a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to ‘‘shareholder’‘.
  • The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction.
  • It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to nonmembers.
  • The second category specified under section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend.
  • If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of ‘‘deeming shareholder’‘, then the Legislature would have inserted a deeming provision in respect of shareholder as well, that has not happened. 
  • It is not correct on the part of the Revenue to argue that if this position is taken, then the income ‘‘is not taxed at the hands of the recipient’‘. Simple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance.
  • Precisely, for this very reason, the courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under section 2(22)(e) of the Act.

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