Section 2(22)(e) Of The Income-tax Act, 1961 – Last Word Yet To Be Said

FCA Prakash Agarwal has analyzed all the recent judgements on the controversial issue as to what is a “shareholder” so as to attract the provisions of section 2(22)(e) of the Income-tax Act relating to taxation of “deemed dividends”. He points out that there is yet no clarity as to whether the expression means a “registered” shareholder or a “beneficial” shareholder. The author has provided his own opinion on the subject as well

Two recent judgements of the Apex Court have kept the pot boiling with regard to the meaning of word ‘shareholder’ appearing in section 2(22)(e). Though, everyone had assumed that the controversy and litigation in the matter had ended with the disposal of a large number of appeals from various High Courts decided by the Apex Court on 05.10.2017 upholding the decisions of the High Courts, a few well known ones were by the name of Madhur Housing, Ankitech, Caparo etc.

The Apex Court has pronounced two more judgements on the subject in the case of Gopal and Sons (HUF) and National Travel Services and the case of National Travel Services and Ankitech have been referred to Hon’ble Chief Justice of India for constituting a 3 judge bench for reconsideration of the cases.

(i) Gopal and Sons (HUF) vs. CIT, Kolkata XI, Civil Appeal No : 12274 of 2016

(ii) National Travel Services vs. CIT, Delhi VIII, Civil Appeal No : 2068 – 2071 of 2012

Gist of Gopal and Sons (HUF)

Assessee a HUF received a loan from G.S. Fertilizers (P) Ltd. in which the Karta of HUF on behalf of the H.U.F. held 37.12% of the total share capital. The ruling of the Apex Court is based on the Explanation 3(a) of section 2(22)(e) wherein H.U.F. has been covered under the definition of ‘concern’. The Apex Court has stated

“In the instant case, the payment in question is made to the assessee which is a HUF. Shares are held by Shri Gopal Kumar Sanei, who is Karta of this HUF. The said Karta is, undoubtedly, the member of HUF. He also has substantial interest in the assessee / HUF, being its Karta. It was not disputed that he was entitled to not less than 20% of the income of HUF. In view of the aforesaid position, provisions of Section 2(22)(e) of the Act get attracted and it is not even necessary to determine as to whether HUF can, in law, be beneficial shareholder or registered shareholder in a Company.”

The Apex Court is of the opinion that in view of the Explanation 3(a), the person receiving the loan need not be a registered shareholder. It is enough if the person is a beneficial shareholder. Explanation 3(a) was inserted at the time of amendment to section 2(22)(e) by the Finance Act, 1987.

Gist of National Travel Services

The case has not been finally disposed off by the Apex Court but has been referred to the Hon’ble Chief Justice of India for constitution of an appropriate Bench of 3 judges in order to have a relook at the entire question of taxability of deemed dividend. It has also referred the case of Ankitech for reconsideration since applying the ratio of Ankitech, the case of National Travel Services gets relief from the rigours of section 2(22)(e). The Apex Court is of the opinion that after the amendment by Finance Act, 1987, the condition of shareholder being a registered shareholder has been removed and the amendment was carried out with the intention of getting over the earlier judgements of the Apex Court namely, C.P. Sarathy Mudaliar and Rameshwar Lal Sanwar Mal.

The Apex Court has stated

“This being the case, we are of the view that the whole object of the amended provision would be stultified if the Division Bench judgement were to be followed. Ankitech’s case, in stating that no change was made by introducing the deeming fiction insofar as the expression “shareholder” is concerned is, accordingly to us, wrongly decided. The whole object of the provision is clear from the Explanatory memorandum and the literal language of the newly inserted definition clause which is to get over the two judgements of this Court referred to hereinabove. This is why “shareholder” now, post amendment, has only to be a person who is the beneficial owner of shares. One cannot be a registered owner and beneficial owner in the sense of a beneficiary of a trust or otherwise at the same time. It is clear therefore that the moment there is a shareholder, who need not necessarily be a member of the Company on its register, who is the beneficial owner of shares, the Section gets attracted without more. To state, therefore, that two conditions have to be satisfied, namely, that the shareholder must first be a registered shareholder and thereafter, also be a beneficial owner is not only mutually contradictory but is plainly incorrect. Also, what is important is the addition, by way of amendment, of such beneficial owner holding not less than 10% of voting power. This is another indicator that the amendment speaks only of a beneficial shareholder who can compel the registered owner to vote in a particular way, as has been held in a catena of decisions starting from Mathalone vs. Bombay Life Assurance Co. Ltd. [1954] SCR 117.”  

In view of the above legal position, as on date, with the two abovementioned judgements, the whole issue of deemed dividend and the meaning of shareholder is still wide open.   

EFFECT OF AMENDMENT BY FINANCE ACT, 1987

Now, let us examine what changes were brought about by the Finance Act, 1987 since both the above cited judgements are based only on the amendment carried out.   

Section 2(22)(e) prior to 1.4.1988.

“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) by way of advance or loan to a shareholder being a person who has a substantial interest in the company 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”. 
        
The phrase “being a person who has a substantial interest in the company” has been further defined by section 2(32) which is reproduced below :

Section 2(32)

“person who has a substantial interest in the company, in relation to a company, means 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, carrying not less than twenty per cent of the voting power”. 

Thus, in effect we should read section 2(22)(e) prior to 1.4.1988 as under (alongwith section 2(32) :

“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) 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, carrying not less than twenty per cent of the voting power 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”. 

Now, after the amendment by Finance Act, 1987, section 2(22)(e) reads as under :

“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”.

The same for better comprehension is being put in tabular form for comparison.

Applicable portion of section 2(22)(e) prior to amendment by Finance Act, 1987	The same read together with section 2(32) i.e., definition of person who has a substantial interest in the company	Applicable portion of section 2(22)(e) after amendment by Finance Act, 1987
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) by way of advance or loan to a shareholder being a person who has a substantial interest in the company.	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) 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, carrying not less than twenty per cent of the voting power.	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.

It can be seen that the amendment brought about in section 2(22)(e) by the Finance Act, 1987 has merely reduced the threshold limit of voting power from 20% to 10% and there is no other change at all. Since the threshold limit was being brought down from 20% to 10% the word ‘substantial interest’ was to be removed and instead the definition as given in section 2(32) was reproduced in section 2(22)(e) itself. No change was proposed in section 2(32) since the definition has been used elsewhere in the Act wherein the 20% threshold of substantial interest was not intended to be changed.

Thus, the wordings of section 2(22)(e) apart from change in the threshold limit, have been kept identical except the word carrying and holding which in any case does not change the meaning.

Thus, the amendment has not brought about any change in the word shareholder, the qualification of shareholder was existing prior to amendment in section 2(32) which has been placed in the section 2(22)(e) itself after amendment. The wording “beneficial owner of shares ………………………….. was existing prior to amendment also.

As regards Explanation 3(a) is concerned it has to be read in conjunction with section 2(22)(e) and cannot be read in isolation. It only defines the meaning of “concern” introduced in the section for the first time by the amendment in 1987 in order to bring H.U.F’s, Partnership firms, AOP’s, BOI’s within the ambit of section 2(22)(e) and it cannot be the case of any one that if both the conditions of beneficial owner and registered shareholder are to be fulfilled, “concerns” would never be covered by the mischief of section 2(22)(e). The amendment was brought about precisely for covering “concerns” within the ambit of section 2(22)(e).

The Explanatory Notes on the provisions relating to Finance Act, 1987 brought out vide Circular No.495 dated 22nd September, 1987 [168 ITR 91 (St)] issued by the Central Board of Direct Taxes (CBDT) explains the scope and effect of the amendment in the following terms :

“10.2 With the deletion of sections 104 to 109 there was a likelihood of closely held companies not distributing their profits to shareholders by way of dividends but by way of loans or advances so that these are not taxed in the hands of the shareholders.  To forestall this manipulation, sub-clause (e) of clause (22) of section 2 has been suitably amended.  Under the existing provisions, payments by way of loans or advances to shareholders having substantial interest in a company to the extent to which the company possesses accumulated profits is treated as dividend. The shareholders having substantial interest are those who have a shareholding carrying not less than 20 per cent voting power as per the provisions of clause (32) of section 2.  The amendment of the definition extends its application to payment made (i) to a shareholder holding not less than 10 per cent of the voting power, or (ii) to a concern in which the shareholder has substantial interest.  “Concern” as per the newly inserted Explanation 3(a) to section 2(22) means a HUF or a firm or an association of persons or a body of individuals or a company.  A shareholder having a substantial interest in a concern as per part (b) of Explanation 3 is deemed to be one who is beneficially entitled to not less than 20 per cent of the income of such concern

10.3 The new provision would, therefore, be applicable in a case where a shareholder has 10 per cent or more of the equity capital.  Further, deemed dividend would be taxed in the hands of a concern where all the following conditions are satisfied.

(i) where the company makes the payment by way of loans or advances to a concern;

(ii) where a member or a partner of the concern holds 10 per cent of the voting power in the company; and

(iii) where the member or partner of the concern is also beneficially entitled to 20 per cent of the income of such concern.

With a view to avoid the hardship in cases where advances or loans have already been given, the new provisions have been made applicable only in cases where loans or advances are given after 31st May, 1987.

These amendments will apply in relation to assessment year 1988-89 and subsequent years”.

The explanatory Circular has categorically specified how “concerns” would get covered, if the following conditions are fulfilled:

(i) where the company makes the payment by way of loans or advances to a concern;

(ii) where a member or a partner of the concern holds 10 per cent of the voting power in the company; and

(iii) where the member or partner of the concern is also beneficially entitled to 20 per cent of the income of such concern.

Thus, a partner in a partnership firm who has 20% share in profits, 10% shareholding (in individual capacity) in the company which has given the loan to the partnership firm will get covered u/s 2(22)(e) to the extent of the company’s accumulated profits.

It is clear that the concern is not required to be shareholder is such a situation, neither registered nor beneficial. The Legislature had known this fact that “concerns” cannot be registered shareholder’s and therefore in order to cover them the above 3 conditions were introduced by the amendment.

Further, by including company in the definition of concern, the ambit of section 2(22)(e) has been further enlarged. Apart from covering company to company loans and advances in the first limb of section 2(22)(e), the amendment now covers a loan or advance given to a company in which a shareholder (in individual capacity) holds 20% shares and the same individual holds 10% voting power in the company giving the loan.

Thus, the rigours of section 2(22)(e) have been immensely enlarged in the case of companies. It has to be kept in mind that we are dealing with deeming provisions wherein strict interpretation of the provisions should be applied and since a legal fiction has been created it should be taken to its logical conclusion. The Legislature intends to tax a “concern” for deemed dividend purposes, so be it. In this regard, in case of Ankitech the Hon’ble Delhi High Court has rightly stated:

“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 loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance”.

The expression “being a person who is a beneficial owner of shares”, qualifies the word shareholder occurring earlier and it is a further restriction on the scope of persons who would be covered.  It must be remembered that in section 2(6A)(e) the expression used was by way of advance or loan to “a shareholder” when it was first introduced by the Finance Act, 1955. 

Thus from 1955 till its re-enactment in 1961 u/s section 2(22)(e), an advance or loan to every shareholder of a company in which the public were not substantially interested would have been treated as dividend as the further condition that a shareholder must be a person who has substantial interest in the company was not a requirement in the period from 1955 to 1961.

The rigours of every advance or loan made to a shareholder being covered as deemed dividend were reduced by adding the requirement that the shareholder must be a “person who has substantial interest in the company”. This expression viz. “person who has a substantial interest in the company” was defined in section 2(32) as a person who was a beneficial owner of shares ….. carrying not less than 20% of voting power. 

The amendment brought out in section 2(22)(e) by the Finance Act, 1987 merely reduced the threshold of beneficial ownership from 20% to 10%.  Therefore, the expression “being a person who is the beneficial owner of shares”  controls, governs and restricts the applicability of section 2(22)(e) only to such “registered” shareholders who hold not less than 10% of voting power. 

The law enunciated by the Supreme Court in C.P. Sarathy Mudaliar and reiterated in Rameshwarlal Sanwarmal viz. that the word shareholder must necessarily mean a “registered” shareholder has not been changed by statute or whittled down otherwise.  The adding of the expression “being a person who is a beneficial owner of the shares …….” reduces the universe of registered shareholders hit by section 2(22)(e). 

It does not expand the universe of persons hit by section 2(22)(e) to persons who may own beneficial ownership of more than 10% of voting power but who are not registered shareholders.

INAPPOSITE SURPLUS

In my opinion the interpretation which emerges from the above two recent judgements of the Apex Court is that the word “shareholder” in the section has no meaning or has become redundant after the amendment and has become an inapposite surplus which need not be read and interpreted OR the wordings of the section should now be read after deleting the ‘coma’ and the word ‘being’ appearing after shareholder and adding ‘who is a’. It will reads as under :

“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 who is 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, …………………………………………………………………”

This is so, because it is being said that the word shareholder has now been defined in the section itself and the only condition to be fulfilled is that of beneficial ownership. If the word shareholder has been defined after the amendment then it will obviously be read as above.

RULES OF INTERPRETATION

The moot question which arises is whether such an interpretation is permissible under law or even desirable. On this issue, the following judgements throw light on the Rules of interpretation.

(a) As long back in 1955 the Supreme Court in New Piece Goods Bazar Co. Ltd. v. CIT [1950] 18 ITR 516 stated that "It is elementary that the primary duty of a Court is to give effect to the intention of the Legislature as expressed in the words used by it and no outside consideration can be called in aid to find that intention".

(b) In Turner Morrison & Co. Ltd. v. CIT [1953] 23 ITR 152 (SC) it was stated that "The Courts have to construe the statute according to the plain language and tenor thereof and if any untoward consequences result therefrom, it is for authority other than the Court to rectify or prevent the same".

(c) In CIT v. Shahzada Nand & Sons [1966] 60 ITR 392 (SC), it is said that "In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. To this may be added a rider: in a case of reasonable doubt, the construction most beneficial to the subject is to be adopted. The underlying principle is that the meaning and intention of a statute must be construed from the plain and unambiguous expression used therein rather than from any notions which may be entertained by the Court as to what is just or expedient".

(d) Lord Halsbury as early as 1901, in Cooke v. Charles A. Vogeler Company [1901] AC 102 (HL) stated the law in the manner following:

"a court of law, has nothing to do with the reasonableness or unreasonableness of a provision of a statute except so far as it may hold it in interpreting what the Legislature has said. If the language of a statute be plain, admitting of only one meaning, the Legislature must be taken to have meant and intended what it has plainly expressed, and whatever it has in clear terms enacted must be enforced though it should lead to absurd or mischievous results. If the language of this sub-section be not controlled by some of the other provisions of the statute. It must, since, its language is plain and. unambiguous, be enforced, and Your Lordships’ House sitting judicially is not concerned with the question whether the policy it embodies is wise or unwise, or whether it leads to consequences just or unjust, beneficial or mischievous."

The oft-quoted observations of Rowlatt, J. in the case of Cape Brandy Syndicate v. IRC [1921] 1 KB 64 ought also to be noticed at this juncture. The learned judge observed

"… in a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax.

Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used."
The observations of Rowaltt, J. as above stand accepted and approved by the House of Lords in a later decision, in the case of Canadian Eagle Oil Co. Ltd. v. The King [1946] AC 119; [1945] 2 All ER 499. Lord Thankerton also in manner similar in JJRC v. Ross And Coulter (Bladnoch Distillery Co. Ltd.) [1948] 1 All ER 616 at page 625 observed:

"If the meaning of the provision is reasonably clear, the courts have no jurisdiction to mitigate such harshness."

The decision of Supreme Court in Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 also lends concurrence to the views expressed above. This court observed:

"As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the Legislature cannot then be appealed to whittle down the statutory language which is otherwise unambiguous. If the intendment is not in the words used, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature .…..”.

(e) In the case of Vikrant Tyres Ltd. v. First ITO [2001] 247 ITR 821, the Supreme Court observed that: "Admittedly, on a literal meaning of the provisions of section 220(2) of the Act, such a demand for interest cannot be made." In this connection, the Supreme Court observed as under:-
 
"It is settled principle in law that the courts while construing ‘revenue Acts have to give a fair and reasonable construction to the language of a statute without leaning to one side or the other, meaning’ thereby that, no tax or levy can be imposed on a subject by an Act of Parliament without the words of the statute clearly showing an intention to lay the burden on the subject. In this process, the courts must adhere to the words of the statute and the so-called equitable construction of those words of the statute is not permissible. The task of the court is to construe the provisions of the taxing enactments according to the ordinary and natural meaning of the language used and then to apply that meaning to the facts of the case and in that process if the taxpayer is brought within the net he is caught, otherwise he has to go free! This principle in law is settled by this court in India Carbon Ltd. v. State of Assam [1997] 106 STC 460; [1997] 6 SCC 479 wherein this court held "Interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in this behalf". A Constitution Bench of this court speaking through one of us (S.P. Bharucha) in the case of V.V.S. Sugars v. Government of A.P. [1999] 114 STC 47; [1999] 4 SCC 192 reiterated the proposition laid down in the India Carbon Ltd’s case [1997] 106 STC 460 in the following words (headnote of [1999] 4 SCC): "The Act in question is a taxing statute and, therefore, must be interpreted as it reads, with no additions and no subtractions, on the ground of legislative intendment or otherwise."

(f) The five Judges Constitutional Bench of the Supreme Court in the case of Padmasundara Rao v. State of Tami Nadu [2002] 255 ITR 147 held, "the court cannot read anything into a statutory provision which is plain and unambiguous. A statute is the edict of the Legislature. The language employed in a statute is the determinative factor of legislative intent. The first and primary rule of construction is that the intention of the legislation must be found in the words used by the Legislature itself. The court only interprets the law and cannot legislate. If a provision of law is misused and subjected to the abuse of the process of law, it is for the Legislature to amend, modify or repeal it, if deemed necessary. Legislative casus omissus cannot be supplied by judicial interpretative process”.

(g) In Gurudevdatta VKSSS Maryadit v. State of Maharashtra AIR 2001 SC 1980, it has been held:

"It is a cardinal principle of interpretation of statute that the words of a statute must be understood in their natural, ordinary or popular sense and construed according to their grammatical meaning, unless such construction leads to some absurdity or unless there is something in the context or in the object of the statute to suggest to the contrary. The golden rule is that the words of a statute must prima facie be given their ordinary meaning. It is yet another rule of construction that when the words of the statute are clear, plain and unambiguous, then the courts are bound to give effect to that meaning, irrespective of the consequences. It is said that the words themselves best declare the intention of the law-giver. The courts have adhered to the principle that efforts should be made to give meaning to each and every word used by the Legislature and it is not a sound principle of construction to brush aside words in a statute as being inapposite surpluses, if they can have a proper application in circumstances conceivable within the contemplation of the statute."

CONDITIONS TO BE FULFILLED

It is clear that after the amendment in 1987, section 2(22)(e) has 3 limbs. The controversy is regarding the first two limbs since the third limb is rarely invoked. In order to understand the first two limbs, let’s examine the conditions required to be fulfilled in order to invoke this deeming provision.

First limb
 
(i) where the company makes the payment by way of loans or advances to a “shareholder”.

(ii) where the shareholder is also the beneficial owner of shares holding not less than 10% voting power.

Thus, the first limb covers loans or advances to “shareholders”.

Second limb

(i) where the company makes the payment by way of loans or advances to a concern;

(ii) where a member or a partner of the concern holds 10 per cent of the voting power in the company; and

(iii) where the member or partner of the concern is also beneficially entitled to 20 per cent of the income of such concern.[As defined in Explanation 3(b) to section 2(22)(e)]

The second limb covers loans or advances to a “concern” not to a “shareholder”. The word “such shareholder” in the second limb refers to a member / partner in the concern satisfying the abovementioned condition i.e. (ii) above. Thus, the primary distinction apart from other conditions is that the second limb covers instances of loans or advances to “concerns” wherein shareholding of member / partner is to be seen. It does not cover loans or advances directly to shareholders.

CONTROVERSY

I hope the controversy will be set to rest whenever the 3 judge bench is constituted by the Hon’ble CJI and the case of National Travel Services and Ankitech are put before it particularly in view of the varying and contradictory opinions one can read in the following judgements. It seems that the first two limbs are getting intertwined leading to varying opinions / judgements.

(a) In Ankitech case, the Hon’ble Delhi High Court has said

“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:”

“It is thus clear from the aforesaid pronouncement of the Hon’ble Supreme Court that to attract the first limb of the provisions of Section 2(22)(e) the payment must be to a person who is a registered holder of shares. As already mentioned the condition under the 1922 Act and the 1961 Act regarding the payee being a shareholder remains the same and it is the condition that such shareholder should be beneficial owner of the shares and the percentage of voting power that such shareholder should hold that has been prescribed as an additional condition under the 1961 Act. The word "shareholder" alone existed in the definition of dividend in the 1922 Act. The expression "shareholder" has been interpreted under the 1922 Act to mean a registered shareholder. This expression "shareholder" found in the 1961 Act has to be therefore construed as applying only to registered shareholder. It is a principle of interpretation of statutes that where once certain words in an Act have received a judicial construction in one of the superior Courts, and the legislature has repeated them in a subsequent statute, the legislature must be taken to have used them according to the meaning which a Court of competent jurisdiction has given them.”

“In the 1961 Act, the word "shareholder" is followed by the following words "being a person who is the beneficial owner of shares". This expression used in Section 2(22)(e), both in the 1961 Act and in the amended provisions w.e.f. 1st April, 1988 only qualifies the word "shareholder" and does not in any way alter the position that the shareholder has to be a registered shareholder. These provisions also do not substitute the aforesaid requirement to a requirement of merely holding a beneficial interest in the shares without being a registered holder of shares. The expression "being" is a present participle. A participle is a word which is partly a verb and partly an adjective. In Section 2(22)(e), the present participle "being" is used to described the noun ‘shareholder’ like an adjective. The expression "being a person who is the beneficial owner of shares" is therefore a further requirement before a shareholder can be said to fall within the parameters of Section 2(22)(e) of the Act. In the 1961 Act, Section 2(22)(e) imposes a further condition that the shareholder has also to be 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. It is not possible to accept the contention of the learned Departmental Representative that under the 1961 Act there is no requirement of a shareholder being a registered holder and that even a beneficial ownership of shares would be sufficient.”

“The expression "shareholder being a person who is the beneficial owner of shares" referred to in the first limb of Section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial then the provision of Section 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the first limb of provisions of Section 2(22)(e) will not apply.”

“Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under Section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to ‘dividend’. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to ‘shareholder’. When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under Section 2(22)(e) of the Act would also be treated as dividend. 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 non-members. 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 deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspective.

“No doubt, the legal fiction/deemed provision created by the Legislature has to be taken to ‘logical conclusion’ as held in Andaleeb Sehgal (supra). The Revenue wants the deeming provision to be extended which is illogical and attempt is to create a real legal fiction, which is not created by the Legislature. We say at the cost of repetition that the definition of shareholder is not enlarged by any fiction.”
  
(b) In National Travel Services, the same Hon’ble Delhi High Court has stated as under :

“This brings us to the more important issue viz. whether the assessee firm can be treated as a shareholder having purchased shares through its partners in the company which has paid the loans or is it necessary that a shareholder has to be a ‘registered shareholder’. If the contention of the assessee is accepted, in no case a partnership firm can come within the mischief of Section 2 (22) (e) of the Act because of the reason that shares would be purchased by the firm in the name of its partners as the firm is not having any separate entity of its own. With the name of the partner entering into the register of members of the company as shareholder, the said partner shall be the ‘shareholder’ in the records of the company but not the beneficial owner as ‘beneficial owner’ is the partnership firm. This would mean that the loan or advance given by the company would never be treated as deemed dividend either in the hands of the partners or in the hands of partnership firm. In this way the very purpose for which this provision was enacted would get defeated. The object behind this provision is succinctly stated in the Circular No. 495 of 22nd September, 1987 particularly in the Explanatory Notes to Finance Act, 1987 when this provision was amended”.

“If the contention of the assessee is accepted than the very object for which Section 2 (22) (e) of the Act was amended would get frustrated qua the partnership firm leading to absurd results. It is a very well established principle of construction that where the plain literal interpretation of a statutory provisions produces manifestly absurd and unjust results which could never have been intended by the Legislature, the Court must modify the language used by the Legislature or even “do some violence” to it, so as to achieve obvious intention of the Legislature. Reference is made to the decision of the Supreme Court in the Case of K.P. Varghese Vs. ITO 131 ITR 597 (SC)”.
  
(c) And then the recent Apex Court decisions cited above.

CONCLUSION
  
In Ankitech, the Hon’ble Delhi High Court has defined the word shareholder saying it has to be a registered as well as a beneficial owner of shares. It has also stated that the meaning of shareholder cannot be enlarged and deemed dividend can only taxed in the hands of shareholder and not a concern inspite of the clear provision and intent to tax “concerns” in the second limb.

In National Travel Services, the Hon’ble Delhi High Court says if the definition of shareholder as laid down in Ankitech is applied, “concerns” will go scot free and they need to do violence with the language of the section to achieve the ends of justice and there by enlarged the meaning of shareholder inspite of specific provision for taxing concern being on the Statute w.e.f. 1-4-1988.

In Gopal and Sons HUF, the Apex Court says that it is not even necessary to determine as to whether HUF can, in, law be beneficial shareholder or registered shareholder in the company by applying Explanation 3(a) to section 2(22)(e) inspite of the HUF i.e. concern not required to be a shareholder under the second limb.

In National Travel Services, the Apex Court says the amendment has now changed the definition of shareholder since beneficial owner has been put in the section itself and therefore there is no more a requirement for a shareholder to be a registered shareholder despite there being no change in the section either in language or in intent to change the meaning of shareholder.

Thus, a comprehensive judgement covering all the above varying opinions can only put the controversy to rest and hope it answers the following questions of law :

(1) Whether ‘shareholder’ has to be a registered as well as beneficial owner of shares for the purposes of section 2(22)(e) ?
 
(2) Whether the amendment of 1987 has defined the meaning of  shareholder ?
 
(3) Can deemed dividend be taxed in the hands of “concerns” who are not shareholders and / or cannot be registered as well as beneficial owners of shares but fulfill the conditions laid out in the second limb ?
 
The author can be reached at pagarwal0286@gmail.com.

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