For s. 2(22)(e), firm is “shareholder” though shares held in names of partners

CIT vs. M/s National Travel Services (Delhi High Court)

The assessee was a partnership firm consisting of three partners being Naresh Goyal, Surinder Goyal and Jet Enterprises Pvt. Ltd. The assessee was the “beneficial owner” of 48.18% of the share capital of Jetair Pvt. Ltd which were held in the name of its partners Naresh Goyal and Surinder Goyal. The assessee took a loan of Rs. 28.52 crores from Jetair Pvt. Ltd. The AO held that the said loan was assessable as “deemed dividend” u/s 2(22)(e) in the hands of the assessee which was reversed by the Tribunal. Before the High Court, the assessee argued, relying on Ankitech Pvt. Ltd, Universal Medicare 324 ITR 363 (Bom) and Bhaumik Colour 118 ITD 1 (Mum) (SB), that s. 2(22) could only apply in the hands of the “shareholder” and as the assessee was not a “shareholder” (its partners were), s. 2(22)(e) could not apply. HELD rejecting the assessee’s plea:

The first limb of s. 2(22)(e) is attracted if the payment is made by a company by way of advance or loan “to a shareholder, being a person who is the beneficial owner of shares”. While it is correct that the person to whom the payment is made should not only be a registered shareholder but a beneficial share holder, the argument that a firm cannot be treated as a “shareholder” only because the shares are held in the names of its partners is not acceptable. If this contention is accepted, in no case a partnership firm can come within the mischief of s. 2 (22)(e) because the shares would always be held in the names of the partners and never in the name of the firm. This would frustrate the object of s. 2(22)(e) and lead to absurd results. Accordingly, for s. 2(22)(e), a firm has to be treated as the “shareholder” even though it is not the “registered shareholder”.