2012 (9) TMI 729 - AT - Income Tax

Addition on account of deemed dividend u/s 2(22)(e) - CIT(A) deleted the addition - Held that - The 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 & the expression shareholder referred to in section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of section 2(22)(e) will not apply - the similar issue in assessee s sister concern for assessmentyear 2005-06, wherein clear finding is given in para- 14 that the assessee-company in which public is not substantially interest and one of the Director, Shri K.K. Bansal holds more than 20% share both in assessee- company and MMRML that assessee-company is not holding even a single share in MMRML and no shareholding is held by assesseecompany in MMRML - The perusal of the share holding indicates that the assessee company is not holding a single share in company lending advance, Accordingly, this issue is squarely covered in favour of the assessee. Addition on account of the payment made to GMB as plot development fees - CIT(A) deleted the addition - assessee is engaged in the business of Ship Breaking - Held that - As the assessee-company possessed plot No.96 and on request made to GMB, permission sought was granted for plot No.V-5. The original plot No.96 was acquired by paying premium of Rs.9,11,250/- for 30 months. Since the same was used for 8 months the previous year relevant to assessment year 2003-04 the value written off is Rs.2.43 lakh - as in the year under consideration the total premium for the period from 01.10.2004 to 30.09.2005 was Rs.16.20 lakh and the assessee has claimed a sum of Rs.8.10 lakh for this period. The balance amount of Rs.8,74,200/- was claimed for the period from 01.12.2002 to 30.09.2004 and Rs.1,82,250/- for the period ending 30th September, 2004. In view of this face the assessee has rightly claim deduction of Rs.18,66,460/-, which was allowed by CIT(A)- in favour of the assessee.

Summary

Issues Involved:
1. Deletion of addition on account of deemed dividend under section 2(22)(e) of the Income Tax Act.
2. Deletion of addition on account of payment made to GMB for acquiring rights to use plot for ship breaking, treated as capital expenditure by the AO.

Detailed Analysis:

1. Deletion of Addition on Account of Deemed Dividend under Section 2(22)(e):
The first issue pertains to the addition of Rs.3,08,19,443/- as deemed dividend under section 2(22)(e) of the Income Tax Act. The Assessing Officer (AO) observed that Mahavir Rolling Mill Pvt. Ltd. made payments by way of advances to the assessee company, where Shri K.K. Bansal held more than 10% voting power. The AO contended that these advances should be treated as deemed dividends, given the accumulated profits of Mahavir Rolling Mill Pvt. Ltd.

The assessee argued that it was neither a registered nor a beneficial shareholder of Mahavir Rolling Mill Pvt. Ltd., citing judicial precedents such as CIT v. Hotel Hilltop and ACIT v. Bhaumick Color (P) Ltd., which state that for a loan or advance to be treated as deemed dividend, the recipient must be a shareholder of the lender company. The CIT(A) deleted the addition, referencing the Tribunal's decision in the assessee's own case for the assessment year 2005-06.

The Tribunal upheld the CIT(A)'s order, noting that the issue was already settled in favor of the assessee in the earlier decision. The Tribunal reiterated that deemed dividends under section 2(22)(e) could only be taxed in the hands of shareholders, not non-shareholders, and dismissed the Revenue's appeal on this ground.

2. Deletion of Addition on Account of Payment Made to GMB:
The second issue involves the addition of Rs.12,00,000/- paid to Gujarat Maritime Board (GMB) as plot development fees, which the AO treated as capital expenditure. The AO noted that the payment was for acquiring rights to use the plot for ship breaking and not merely rent, which was separately accounted for.

The assessee contended that these payments were recurring expenses necessary for the business and should be treated as revenue expenditure. The CIT(A) deleted the addition, following the Tribunal's earlier decision in the assessee's case for the assessment year 2005-06, where similar payments were allowed as revenue expenditure.

The Tribunal confirmed the CIT(A)'s order, emphasizing that the plot premium payments were recurring expenses for the usage of the plot and not capital in nature. The Tribunal dismissed the Revenue's appeal on this ground as well.

Conclusion:
The Tribunal dismissed the Revenue's appeal on both grounds, upholding the CIT(A)'s decision to delete the additions. The judgments were based on established legal principles and precedents, confirming that deemed dividends under section 2(22)(e) can only be taxed in the hands of shareholders and that recurring payments for plot usage should be treated as revenue expenditure.