Income Tax Act | Trustee's Shareholding Doesn't Make Public Trust A 'Concern' Under Deemed Dividend Provision: Gujarat High Court

The Gujarat High Court has recently held that a public trust cannot be treated as a "concern" under the deemed dividend provisions of the Income Tax Act (Section 2(22)(e)) merely because its trustee holds substantial shares in the lending company.

Holding that the legal fiction created by the provision cannot be stretched to cover such trusts, the court observed, "The word "concern" used under the Act in such Explanation, which encompasses a Hindu Undivided Family (HUF), or a firm, or an association of persons or a body of individuals or a company cannot be extended to public Trust and they cannot be classified as a "concern" for the purpose of specific tax fiction. Thus, even if a loan is extended to a public Trust by a Private Limited Company, that usually cannot be treated as a deemed dividend under Section 2(22)(e) of the Act."

The court accordingly quashed reassessment orders passed under Section 148A(d) and the notices issued under Section 148.

A division bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati was hearing a petition filed by the Institute of Fire Safety Disaster Management Studies, a public trust. The trust had challenged the order passed under Section 148A(d) and the notices issued under Section 148 for Assessment Year 2013-14.

The trust had filed its return declaring nil income. The Income Tax Department later reopened the assessment after alleging that the trust had received loans and advances worth ₹8.85 crore from Checkmate Services Private Limited. The amount was reflected in the trust's books as trade payables.

According to the department, the amount was taxable as deemed dividend under Section 2(22)(e) since the trust's Managing Trustee, Vikram Mahurkar, was also a director of Checkmate Services Private Limited and held a 50% stake in the company.

The trust, however, argued that Section 2(22)(e) had no application because it was not a shareholder of the company. It also said Mahurkar was not a beneficiary of the trust.

Relying on the Gujarat High Court's decision in GSEC Ltd. and the Delhi High Court's ruling in Ankitech Pvt. Ltd., later affirmed by the Supreme Court in Madhur Housing and Development Company, the trust contended that deemed dividend can be taxed only in the hands of a shareholder.

The Revenue argued that Section 2(22)(e) applied because Mahurkar was the trust's Managing Trustee and held a 50% shareholding in the lending company. It also relied on the Supreme Court's decision in Gopal and Sons (HUF).

Examining the statutory framework and the earlier decisions, the high court said the deeming fiction under Section 2(22)(e) enlarges only the definition of "dividend." It does not expand the meaning of "shareholder."

The bench also held that the expression "concern" in Explanation 3 to Section 2(22)(e) is confined to the entities specifically listed in the provision. It cannot be expanded to include a public trust.

Distinguishing Gopal and Sons (HUF), the court noted that a Hindu Undivided Family is expressly covered by Explanation 3, whereas a public trust is not.

The court also observed that there could be exceptional situations where Section 2(22)(e) may apply to a public trust.

One such situation would be where the trust itself is a shareholder holding at least 10% voting power in a closely held company. Another would be where the trust acts as a conduit and a loan obtained by its trustee is used for the trust's individual benefit.

The bench found that neither situation arose in the present case. It ultimately held, "The action of the respondents in roping in petitioner public Trust in the provision of Section 2(22)(e) of the Act, only because its Trustee is having a 50% shareholding in the Company – Checkmate Services Pvt. Ltd., is required to be quashed and set aside."

The court accordingly quashed the order passed under Section 148A(d) and the notices issued under Section 148, allowing the trust's petition.

For Petitioner: Advocate Hardik V. Vora

For Revenue: Advocates Rutvij R. Patel