2013 (6) TMI 793 - HC - Income Tax

Does advance or loan can be regarded as deemed dividend u/s 2(22)(e) - Held that - the Respondent Assessee Company is not a shareholder of M/s Rajrani Exports Private Limited - inspite of having common shareholders with none of them held 20% shares - The conditions precedent for attracting Section 2(22)(e)are not satisfied which are - the company making the payment should be a closely held company - the payment should have been made out of profits - and the payment of the loan or advance is not in the ordinary course of business activities of the company - Thus there is no question of law involved in this appeal - Appeal dismissed

Issues Involved:
1. Whether the amount of Rs. 1,50,000/- received by the Respondent Assessee Company from M/s Rajrani Exports Private Limited constitutes dividend income under Section 2(22)(e) of the Income Tax Act, 1961.
2. The applicability of Section 2(22)(e) in cases involving common shareholders between the payer and recipient companies.
3. The conditions under which a loan or advance can be deemed as dividend under Section 2(22)(e).
4. The interpretation of "shareholder" within the context of Section 2(22)(e).

Detailed Analysis:

1. Whether the amount of Rs. 1,50,000/- received by the Respondent Assessee Company from M/s Rajrani Exports Private Limited constitutes dividend income under Section 2(22)(e) of the Income Tax Act, 1961:

The core issue is to determine if the sum of Rs. 1,50,000/- received by the Respondent Assessee Company from M/s Rajrani Exports Private Limited qualifies as dividend income under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer initially assessed this sum as deemed dividend, arguing that it was a loan/advance from a company with accumulated profits, thus falling under the purview of Section 2(22)(e).

2. The applicability of Section 2(22)(e) in cases involving common shareholders between the payer and recipient companies:

The Respondent Assessee Company argued that the amount was received as margin money for share transactions, which the Assessing Officer rejected. The key point here is whether the common shareholders holding shares in both companies influence the application of Section 2(22)(e). The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal both ruled in favor of the Respondent Assessee Company, stating that the company receiving the advance was not a shareholder of the payer company, thus not falling within the ambit of Section 2(22)(e).

3. The conditions under which a loan or advance can be deemed as dividend under Section 2(22)(e):

For Section 2(22)(e) to apply, several conditions must be met:
- The payer company must be a closely held company.
- The company must have accumulated profits at the time of the loan/advance.
- The loan/advance must be made to a shareholder holding at least 10% voting power or to a concern where such a shareholder has at least 20% interest.
- The payment must not be in the ordinary course of business activities.

In this case, while M/s Rajrani Exports Private Limited had accumulated profits and made the payment, the Respondent Assessee Company was not a shareholder of M/s Rajrani Exports Private Limited.

4. The interpretation of "shareholder" within the context of Section 2(22)(e):

The legal interpretation of "shareholder" under Section 2(22)(e) was crucial. The courts referenced judgments from the Bombay High Court and Delhi High Court, which clarified that the deemed dividend should be taxed in the hands of the shareholder receiving the benefit, not the company receiving the advance. The fiction created by Section 2(22)(e) does not extend to broadening the definition of "shareholder" to include entities that are not direct shareholders of the payer company.

Conclusion:

The High Court upheld the decisions of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, agreeing that the Respondent Assessee Company, not being a shareholder of M/s Rajrani Exports Private Limited, could not be taxed for the deemed dividend under Section 2(22)(e). The appeal was dismissed, reinforcing that the legal fiction of deemed dividend does not extend to non-shareholders.

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