2011 (11) TMI 318 - HC - Income Tax

Deemed dividend- assessee is a private limited company- received loans from two Pvt Ltd companies- assessee-company did not hold any shares in the said companies.Held that - Legal provision relates to dividend thereby loan or advance given under the conditions specified under Section 2(22)(e) of the Act would be treated as dividend. By a deeming provision it is the definition of dividend which is enlarged and is not to be extended further for broadening the concept of shareholder. Therefore an assessee who is not a shareholder of the company from which it received a loan or an advance cannot be treated as being covered by the definition of the word dividend as provided in Sec.2(22)(e) of the Act. Decided in favor of the assessee.

Issues:
1. Whether deemed dividend under Section 2(22)(e) can be assessed in the hands of a registered shareholder as well as beneficiary shareholder and not in the hands of the assessee company?
2. Whether the decision in ACIT vs Bhaumik Colours Pvt. Ltd. needs reconsideration as it has wrongly interpreted section 2(22)(e)?
3. Whether the correct interpretation is found in Skyline India vs ITO and Ex Tempor Securities vs DCIT?

Analysis:
1. The case involved an appeal by the Revenue against the Tribunal's order regarding the assessment year 2006-07. The AO had made additions of deemed dividends under Section 2(22)(e) of the Income Tax Act, received by the assessee-company as loans/advances from other companies. The CIT(A) deleted the additions, following a Special Bench decision, stating that the addition can only be made when a shareholder of the company receives the loan or advance. The Tribunal upheld this decision, noting that the assessee-company did not hold the required percentage of shares in the lending companies.

2. The Revenue appealed, questioning the Tribunal's decision. The High Court referred to a division bench judgment in another case, which clarified that an assessee not being a shareholder of the lending company cannot be treated as covered by the definition of dividend under Section 2(22)(e). The court explained the intention behind the provision was to tax dividend in the hands of shareholders, and legal fiction does not extend to non-shareholders. The court emphasized that the provision applies to loans or advances made to shareholders or concerns in which shareholders have substantial interest, not to non-shareholders like the assessee-company.

3. Since the assessee-company did not hold the required shares in the lending companies, the High Court held that the judgment from the division bench applied to the present case. The court dismissed the appeal, stating that no substantial question of law arose from the Tribunal's order. The decision was based on the interpretation of Section 2(22)(e) and the specific circumstances of the case, where the assessee was not a shareholder in the lending companies. The court concluded that the legal fiction of deeming provisions did not extend to non-shareholders, and therefore, the additions of deemed dividends were not applicable to the assessee-company.

4. The judgment clarified the scope and application of Section 2(22)(e) in cases involving deemed dividends and highlighted the importance of shareholder status in determining tax liability under the provision. The decision provided a comprehensive analysis of the legislative intent behind the provision and emphasized the distinction between shareholders and non-shareholders in the context of deemed dividends.

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