2017 (5) TMI 1508 - AT - Income Tax

Deemed dividend u/s.2(22)(e) - whether the assessee-company can be taxed towards the loans/advances received from the lender by virtue of deeming fiction under s.2(22)(e) where the assessee-company itself is not a shareholder of the lending company, notwithstanding the fact that both the companies (lender-company and assessee-company) had common shareholders having substantial interest in both the companies? - Held that - The dividend taken note of by this provision is a deemed dividend and not a real dividend. Loans or advances given by company to its shareholder is actually not a dividend. In fact, such a loan to a shareholder has to be returned by the shareholder to the company. It does not become income of the shareholder. Notwithstanding the same, for certain purpose, the legislature deemed such a loan/advance as of dividend and made it taxable at the hands of the said shareholder. It is therefore ostensible that such a provision which is a deeming provision and fictionally creates certain kind of receipts as dividends is to be given strict interpretation. It follows that unless all the conditions contained in the said provision are fulfilled the receipt cannot be deemed as dividend. It is an undisputed fact that the assessee-company is not a shareholder per se in the lender company of the Act. We note that the CIT(A) has decided the issue in favour of assessee on the ground that the deemed income can be taxed only in the hands of shareholder of the lending company notwithstanding the fact that both the lender-company as well as the assessee-company has common shareholder having substantial interest in both the companies. For this proposition, the CIT(A) relied upon certain judicial precedents as noted in the operative para quoted above. We find that the legal fiction in section 2(22)(e) enlarges the definition of dividend but does not extend to or broaden the concept of a shareholder . As the assessee is not a shareholder of the lendercompany, the receipt is not susceptible to tax under s.2(22)(e) in its hands in view of long line of judicial precedents including Baumik Colour Pvt.Ltd.(2008 (11) TMI 273 - ITAT BOMBAY-E). - Decided against revenue.

Summary

Issues:
- Whether loans/advances received by the assessee-company are taxable as deemed dividend under section 2(22)(e) of the Income Tax Act.
- Whether the assessee-company can be taxed for loans/advances received from a lender-company despite not being a shareholder of the lender-company.

Analysis:
1. Issue 1 - Taxability of Loans/Advances as Deemed Dividend:
The Revenue appealed against the CIT(A)'s order deleting the addition of ?12.35 crores as deemed dividend under section 2(22)(e) of the Act. The AO had added the loans/advances received by the assessee-company from Cadila Pharmaceuticals Ltd. as taxable deemed dividend due to substantial interest of IRM Trust in both companies. However, the CIT(A) reversed this decision, emphasizing that for invoking section 2(22)(e), the recipient must be a shareholder of the lending company. The CIT(A) cited judicial precedents supporting this view, stating that legal fiction under section 2(22)(e) enlarges the dividend definition but does not extend to non-shareholders. The Delhi High Court's decisions further reinforced this interpretation. The Tribunal upheld the CIT(A)'s order, highlighting that the assessee not being a shareholder of the lender precludes taxation under section 2(22)(e).

2. Issue 2 - Taxation of Loans/Advances to Non-Shareholder Assessee:
The core controversy was whether the assessee-company could be taxed for loans/advances from the lender-company despite not being a shareholder. The Tribunal referred to the Supreme Court's stance that section 2(22)(e) creates a fiction deeming certain payments as dividends. It stressed that unless all conditions of the provision are met, the receipt cannot be deemed as dividend. The Tribunal noted that the legal fiction does not broaden the concept of a shareholder. As the assessee was not a shareholder of the lender-company, the deemed income could not be taxed in its hands. Citing various judicial precedents, including decisions from the Bombay High Court, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision.

In conclusion, the Tribunal upheld the CIT(A)'s order, ruling that the loans/advances received by the assessee-company were not taxable as deemed dividend under section 2(22)(e) due to the assessee not being a shareholder of the lending company. The judgment emphasized the strict interpretation of deeming provisions and the significance of shareholder status in determining tax liability for deemed dividends.