2010 (3) TMI 1096 - AT - Income Tax

Summary

Issues involved:
The judgment involves the addition of deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961 in the case of an assessee who had taken a loan from a company where it was not a shareholder. The key issue was whether the deemed dividend could be assessed in the hands of a person who is not a shareholder of the lending company.

Summary:

Issue 1: Addition of Deemed Dividend
The assessee appealed against the addition of Rs. 50,000 as deemed dividend u/s 2(22)(e) made by the Assessing Officer. The assessee argued that since it was not a shareholder of the lending company, the deemed dividend should not be assessed in its hands. The assessee relied on the decision of the Special Bench of the ITAT in the case of Bhaumik Colours P. Ltd. The Departmental Representative contended that the provisions of Section 2(22)(e) were clear and the deemed dividend should be taxed in the hands of the person who received the loan. The ITAT, after considering the arguments, held that the deemed dividend could only be assessed in the hands of the person who is a shareholder of the lending company. Since the assessee was not a shareholder of the lending company, the addition of Rs. 50,000 as deemed dividend was deleted.

Case Laws and Decisions:
The ITAT referred to the decision of the Special Bench in Bhaumik Colours P. Ltd. and held that the deemed dividend could only be assessed in the hands of a shareholder of the lending company. The ITAT disagreed with the Departmental Representative's contention that this decision was contrary to Section 2(22)(e) and held that the decision was binding. The ITAT also distinguished the decisions of the Bombay High Court and the Calcutta High Court cited by the Departmental Representative, stating that they were on different facts and did not support the contention that deemed dividend could be assessed in the hands of a person other than the shareholder.

Outcome:
The ITAT allowed the appeal of the assessee and deleted the addition of Rs. 50,000 as deemed dividend, as the assessee was not a shareholder of the lending company.

Conclusion:
The ITAT's decision in this case clarified that deemed dividend u/s 2(22)(e) can only be assessed in the hands of a person who is a shareholder of the lending company, and not in the hands of a person who is not a shareholder, as per the provisions of the Income Tax Act, 1961.