Bombay High Court Refuses 50% Entitlement Of Beneficial Ownership In Husband's Shareholding By Portuguese Civil Code For 'Deemed Dividend' Taxability

The Bombay High Court has refused 50% entitlement to beneficial ownership in a husband's shareholding under the Portuguese Civil Code for 'deemed dividend' taxability.

The bench of Justice Valmiki SA Menezes has observed that Section 2(6A)(e) in the Income Tax Act, 1922, which is similar to the provisions of Section 2(22) of the Income Tax Act, 1961, creates a deeming fiction, by which the dividend referred to is not a real dividend and the person deemed to have received it does not actually get any income. The only person who is deemed to have received that income can be assessed in respect of the dividend, that person alone being a shareholder.

The court noted that the effect of clause (e) of Section 2(22) is to broaden the ambit of the expression "dividend" by including certain payments that the company has made as a loan or advance for the individual benefit of a shareholder, but the definition does not alter the position that the dividend has to be taxed in the hands of the shareholder alone.

Three brothers, their spouses, and Kamat Construction Private Limited (KCPL) filed the appeals. The three brothers were married under the Portuguese Civil Code, which states that in the absence of an ante-nuptial agreement between the spouses, each of them has a 50% right to their common estate. The assessee and his two brothers held 30–33% of the shares in various private limited companies involved in construction and hospitality.

The assessee served as the managing director of KCPL (the parent company of the Kamat Group), where the three brothers were registered shareholders. As a result of the search of KCPL's offices and the homes of its directors, Section 153C notices were sent to the directors.

According to the department, the payments made through various transactions through the companies constituted payments under Section 2(22)(e) and were therefore treated as presumed dividends by the payee companies. The AO assessed the assessee and his spouse 1/6th of each amount retained as a presumed dividend in the hands of payee entities. After remand proceedings, ITAT upheld the assessment.

The court said, "Under no circumstances would the provisions of the Civil Code confer or create an ownership right in the shares of a company or give the right of voting, in proportion to the share in the capital of the company, to the other spouse".

"Provisions of the Civil Code could not create any right in a spouse who is not a registered shareholder of the company, by operation of law, in relation to other shareholders of that company, including her spouse, as the provisions of the Company Act, 1956, exclusively regulate this relationship between the company and a shareholder," the court said.

Case Title: Dattaprasad Kamat Versus Assistant Commissioner Of Income Tax

Case No.: Tax Appeal No.51/2017

Date: 18.08.2023

Counsel For Petitioner: Jitendra Jain

Counsel For Respondent: Susan Linhares

Click Here To Read The Order