2012 (8) TMI 767 - AT - Income Tax

Deemed dividend amount advanced to assessee who holds 10% of voting rights in company company having accumulated profits as on the date of granting of the loan, which was more than the amount lent assessee contended inapplicability of S 2(22)(e) on ground that amount has not been provided out of accumulated profits and it is out of amount withdrawn from CC A/c - Held that - All the requirements of sec 2(22)(e) have been satisfied in the present case. The Assessee holds more than 10% of equity shares in M/s HFP (P) Ltd. The Company had lent Rs. 40,00.000/- at the instance of the assessee and in the books of accounts of the company the Assessee is shown as the debtor. Even though the loan was repaid within a short period the factum of the loan being granted cannot be denied. Therefore, amout of loan given to the Assessee is taxable as deemed dividends in the hands of the Assessee Decided against assessee. On issue of granting of additional depreciation from accumulated profits in the hands of the company the CIT(A) has held that the issue does not arise for consideration as the company had not claimed additional depreciation

Summary

Issues:
1. Interpretation of section 2(22)(e) of the Income Tax Act regarding deemed dividend.
2. Consideration of loans received by a shareholder from a closely held company.
3. Application of accumulated profits in determining deemed dividend.
4. Treatment of additional depreciation in calculating deemed dividend.
5. Dismissal of appeal against CIT(A) order.

Issue 1: Interpretation of Section 2(22)(e) of the Income Tax Act regarding deemed dividend:
The case involved the interpretation of section 2(22)(e) of the Income Tax Act regarding deemed dividend. The Appellant, a shareholder in a closely held company, had received substantial advances/loans attracting the provisions of section 2(22)(e). The Addl. CIT held that the sum of Rs. 40,00,000/- was to be taxed as deemed dividend in the hands of the assessee. The CIT(A) upheld this decision, emphasizing that the source from which the amount was paid to the appellant was immaterial, and the only condition was that the company should possess accumulated profits to the extent of the deemed dividend. The CIT(A) dismissed the appeal, stating that the action of the AO in subjecting the amount to tax as deemed dividend was valid and justified.

Issue 2: Consideration of loans received by a shareholder from a closely held company:
The Appellant argued that the amounts withdrawn were from the CC account of the company and not for the individual benefit of the shareholder. The CIT(A) rejected this argument, stating that the source of the amount paid to the appellant was irrelevant, and the mere fact that the amount was received by the appellant showed an immediate benefit to him. The CIT(A) emphasized that the accumulated profits of the company, not the profit earned during the year, were crucial in determining deemed dividend.

Issue 3: Application of accumulated profits in determining deemed dividend:
The Appellant claimed a reduction in accumulated profits based on the difference in depreciation as per Company Law and Income Tax Law. The CIT(A) accepted this claim and reduced the accumulated profit accordingly. The Appellant also raised the issue of additional depreciation, which the CIT(A) dismissed as the company had not claimed it. The CIT(A) held that no further reduction of accumulated profit was warranted based on additional depreciation.

Issue 4: Treatment of additional depreciation in calculating deemed dividend:
The Appellant argued that additional depreciation granted to the company should be deducted from the profits for calculating deemed dividend. However, the CIT(A) held that this issue did not arise for consideration as the company had not claimed additional depreciation. The Appellate Tribunal concurred with the decision of the CIT(A) on this matter.

Issue 5: Dismissal of appeal against CIT(A) order:
The Appellant appealed against the CIT(A) order, contending that the amount treated as deemed dividend should not have been taxed. The Appellate Tribunal considered the facts and submissions of both parties, concluding that all requirements of section 2(22)(e) had been satisfied in the present case. The Tribunal upheld the lower authorities' decision that the loan given to the Appellant was taxable as deemed dividends. Consequently, the appeal of the Assessee was dismissed.

This detailed analysis covers the various issues involved in the legal judgment delivered by the Appellate Tribunal ITAT, Hyderabad.