2013 (9) TMI 1051 - AT - Income Tax

Deemed dividend addition u/s 2(22) - Held that - Admittedly the assessee company was not holding any shares in the lender company at all. Therefore, in our opinionthe loan received by the assessee-company from M/s Pugazh Chemical Plant & Equipments (P) Ltd. could not be considered as deemed dividend in the hands of the assesseecompany deposit it being not a trading advance. - Decided in favour of assessee

Summary

Issues:
Assessment under Section 2(22)(e) of Income-tax Act, 1961.

Detailed Analysis:

1. Facts and Assessment: The appellant, engaged in manufacturing, contested an addition of &8377; 25,51,652/- under Section 2(22)(e) of the Income-tax Act, 1961. The Assessing Officer noted a loan from M/s Pugazh Chemical Plant & Equipments (P) Ltd., with common shareholders in both companies exceeding 10%. The loan was deemed dividend due to accumulated reserves, leading to the addition in assessment.

2. Appeal Before CIT(A): The appellant argued that deemed dividend should apply only to registered shareholders, claiming the loan was for commercial purposes related to expanding the business. However, the CIT(A) upheld the addition, citing lack of evidence for the commercial nature of the transactions.

3. Arguments Before ITAT: The appellant, represented by Adv. Shri S. Sridhar, contended that deemed dividend should apply only to shareholders, referencing precedents like the Bhaumik Colour Pvt. Ltd. case. They emphasized the commercial nature of the transactions for business expansion, disputing the addition.

4. Revenue's Position: The Revenue, represented by Shri Guru Bashyam, supported the lower authorities' decisions, citing legal precedents like Sadana Textiles Mills case. They argued that Section 2(22)(e) could apply to loans even to corporate entities if certain conditions were met.

5. ITAT Decision: The ITAT analyzed the case, noting the absence of concrete evidence supporting the appellant's claims of commercial transactions. Referring to the Bhaumik Colour Pvt. Ltd. case, the ITAT held that deemed dividend should be taxed only in the hands of shareholders, not borrowing concerns. The decision overruled the Nikko Technologies case and deleted the addition in favor of the appellant.

6. Conclusion: The ITAT allowed the appeal, emphasizing the legal principle that deemed dividend under Section 2(22)(e) should be assessed only in the hands of shareholders, not borrowing entities. The decision was pronounced in Chennai on September 6, 2013.