2011 (8) TMI 1236 - AT - Income Tax

Summary

Issues Involved:
1. Deletion by the ld. CIT(A) u/s 2(22)(e) of the Income-tax Act, 1961.
2. Assessment of deemed dividend and applicability of section 2(22)(e).

Summary:

Issue 1: Deletion by the ld. CIT(A) u/s 2(22)(e) of the Income-tax Act, 1961

The Revenue's appeal and the assessee's cross-objection pertain to the deletion of an addition made by the AO u/s 2(22)(e) of the Income-tax Act, 1961. The AO had added Rs. 1,12,44,952/- to the assessee's income, alleging tax evasion through a colorable device, citing precedents like Mcdowell Co Ltd (1985) 154 ITR 148. The AO noted that the shareholding patterns of M/s Arora Fabrics Pvt Ltd and M/s Arora Knit Fab Pvt Ltd indicated substantial interest by common shareholders, thus treating the loan from M/s Arora Fabrics Pvt Ltd to the assessee as deemed dividend.

Issue 2: Assessment of deemed dividend and applicability of section 2(22)(e)

The ld. CIT(A) deleted the addition, reasoning that only shareholders can be assessed for deemed dividend u/s 2(22)(e), not the company. The CIT(A) cited judgments such as CIT v. Universal Medicare P. Ltd (2010 190 Taxman 144 (Bom)) and the SB decision in M/s Bhaumik Colours Pvt Ltd (2009) 313 ITR (AT) 146 (Mum) (SB), which support that deemed dividend can only be taxed in the hands of the shareholder, not the recipient company. The CIT(A) also rejected the AO's clubbing of different shareholders' interests to meet the conditions of section 2(22)(e), noting that none of the shareholders individually held the requisite shareholding in both companies.

The Tribunal upheld the CIT(A)'s findings, agreeing that the conditions for deemed dividend u/s 2(22)(e) were not met since the assessee company was not a shareholder in M/s Arora Fabrics Pvt Ltd, and the individual shareholders did not hold substantial interest in both companies. The Tribunal dismissed the Revenue's appeal and the assessee's cross-objection as infructuous.

Conclusion:

The Tribunal concluded that the addition of Rs. 1,12,44,952/- as deemed dividend u/s 2(22)(e) was not justified and upheld the CIT(A)'s order, dismissing both the Revenue's appeal and the assessee's cross-objection.