2011 (2) TMI 1482 - AT - Income Tax

Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961.
2. Classification of the received amount as a trade advance or security deposit.
3. Determination of the entity in whose hands the deemed dividend should be taxed.
4. Interpretation of the term "shareholder" under Section 2(22)(e).

Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961:
The primary issue revolves around whether the sum of Rs. 80,00,000 received by the assessee from M/s Atul Generators (P) Ltd. should be treated as a deemed dividend under Section 2(22)(e). The AO contended that the amount was a loan or advance, thus invoking Section 2(22)(e). However, the assessee argued that the amount was a floating security deposit made in the ordinary course of business due to heavy capital costs incurred by the assessee. The CIT(A) and the Tribunal found the transaction to be a genuine commercial transaction, not a loan or advance for the individual benefit of shareholders, and thus not taxable under Section 2(22)(e).

2. Classification of the Received Amount as a Trade Advance or Security Deposit:
The assessee maintained that the Rs. 80,00,000 was a refundable, interest-free security deposit provided by M/s Atul Generators (P) Ltd. for business expediency, not a loan or advance. The Tribunal noted that the amount was paid under a commercial agreement for the supply of electricity generated by gas-based generators installed by the assessee. The Tribunal emphasized that the transaction was beneficial to both parties and was conducted in the ordinary course of business. Therefore, it did not fall within the ambit of Section 2(22)(e).

3. Determination of the Entity in Whose Hands the Deemed Dividend Should Be Taxed:
The Tribunal addressed whether the deemed dividend should be taxed in the hands of the concern (the assessee firm) or the shareholder. It referred to the Special Bench decision in Asstt. CIT vs. Bhaumik Colour (P) Ltd., which held that deemed dividends should be taxed in the hands of the shareholder, not the concern. The Tribunal also cited the Bombay High Court decision in CIT vs. Universal Medicare (P) Ltd., which supported this view. Consequently, the Tribunal ruled that no addition on account of deemed dividend could be made in the hands of the assessee firm.

4. Interpretation of the Term "Shareholder" Under Section 2(22)(e):
The Tribunal examined the requirement that the shareholder must be both a registered and beneficial shareholder to attract Section 2(22)(e). Citing Supreme Court decisions in CIT vs. C.P. Sarathy Mudaliar and Rameshwarlal Sanwarmal vs. CIT, the Tribunal concluded that the term "shareholder" refers to a registered shareholder. Since the assessee firm was not a registered shareholder of M/s Atul Generators (P) Ltd., the provisions of Section 2(22)(e) were not applicable.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the Rs. 80,00,000 received by the assessee was a security deposit made in the ordinary course of business and not a loan or advance. Therefore, it did not qualify as a deemed dividend under Section 2(22)(e). The Tribunal also ruled that deemed dividends should be taxed in the hands of the shareholder, not the concern, and since the assessee was not a registered shareholder, the addition made by the AO was deleted. The appeal filed by the Revenue was dismissed, and the cross-objection filed by the assessee was allowed.

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