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2011 (10) TMI 252 - AT - Income TaxDeemed Dividend - Assessee co. entered into lease agreement with Dalmiya Co. It advance Rs 3.20 crores to be adjusted against rent. - This agreement got annulled and a fresh agreement required security deposit of Rs. 3.80 crores to the assessee company. A shareholder of had 60% interest in Dalmiya Co. and 40% in assessee co. however assessee-company neither holds any share in M.L. Dalmiya & Co. Ltd. nor has any beneficial interest in the said company. AO treats Security deposits as deemed dividemd under 2(22)(e. Held - The facts are not in disputes and the AO had no objection with contention of assessee that donot halod any shares and beneficial interest. As per Asstt. Commissioner of Income Tax v. Bhaumik Colour (P.) Ltd. (2008 -TMI - 59371 - ITAT BOMBAY-E), Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. Thus decided in favour of assessee.
Issues Involved:
1. Treatment of advance against rent as security deposit. 2. Applicability of Section 2(22)(e) of the Income Tax Act, 1962, regarding deemed dividend. Issue-wise Detailed Analysis: 1. Treatment of Advance Against Rent as Security Deposit: The department contended that the amount of Rs. 3.8 crore received by the assessee from M/s. M.L. Dalmiya & Co. Ltd. was an advance against rent and should be treated as such. However, the assessee argued that this amount was a security deposit under a new agreement dated 31/3/2003, which superseded the earlier agreement dated 10/8/1998. The CIT(A) examined the nature of the transaction and found that the security deposit was distinct from the advance rent. The CIT(A) noted that the security deposit was to be refunded at the end of the lease period, unlike the advance rent, which was adjusted annually. The CIT(A) concluded that the security deposit was not an advance or loan and, therefore, should not be treated as such. 2. Applicability of Section 2(22)(e) of the Income Tax Act, 1962: The A.O. added Rs. 3,66,31,403/- as deemed dividend under Section 2(22)(e), arguing that the security deposit was an advance and that the beneficial shareholders of the lessee-company were also substantially interested in the assessee-company. The assessee contended that the security deposit did not fall under the ambit of deemed dividend as it was neither an advance nor a loan. The CIT(A) agreed with the assessee, stating that deemed dividend could only be assessed in the hands of a shareholder of the lender company. The CIT(A) cited the Special Bench decision in Asstt. CIT v. Bhaumik Colour (P.) Ltd. and the Rajasthan High Court decision in CIT v. Hotel Hilltop, which supported the view that deemed dividend could not be taxed in the hands of a non-shareholder. Tribunal's Findings: The Tribunal upheld the CIT(A)'s decision, stating that the provisions of Section 2(22)(e) did not apply to the assessee as it was not a shareholder of M.L. Dalmiya & Co. Ltd. The Tribunal emphasized that the intention behind Section 2(22)(e) was to tax dividend in the hands of the shareholder, not a non-shareholder. The Tribunal also noted that the security deposit was a commercial transaction and not an advance or loan. Therefore, the Tribunal dismissed the department's appeal and confirmed the CIT(A)'s order to exclude the amount of Rs. 3,66,31,403/- from the total income of the assessee as deemed dividend.
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