2012 (11) TMI 749 - AT - Income Tax

Deemed dividend - Addition u/s 2(22)(e) of the Income Tax Act - assessee company received a sum of Rs. 2,08,50,000/- from M/s. Dugar Growth Funds (P) Ltd. for investment - Held that - Since the assessee is not shareholder in this case therefore in view of the jurisdictional high Court s decision addition is not called for in the hands of the assessee. Therefore action of Ld. CIT(A) deleting the impugned addition is upheld and appeal of the revenue is dismissed. However AO is expected and directed to take necessary steps so that income could not escape assessment as it is to be treated as deemed dividend u/s 2(22)(e) in the hands of the said concerned person.

Summary

Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961.
2. Determination of deemed dividend and its taxation.
3. Interpretation of legal provisions and judicial precedents.

Issue-wise Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961:
The primary issue in this case was whether the sum of Rs. 72,67,605/- received by the assessee company from M/s. Dugar Growth Funds (P) Ltd. should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) had added this amount to the income of the assessee, arguing that since Miss Pooja Jain held 31.11% shares in M/s. Dugar Growth Funds P. Ltd. and 25% in the assessee company, the provisions of Section 2(22)(e) were attracted.

2. Determination of Deemed Dividend and its Taxation:
The CIT(A) deleted the addition made by the AO, emphasizing that Section 2(22)(e) is a deeming fiction and should not be given a wide meaning. The CIT(A) noted that:
- The payment should be made on behalf of or for the individual benefit of such shareholders.
- The liability of tax should be on the person on whose behalf or for whose individual benefit the amount is paid by the company.
- The deemed dividend can only be taxed in the hands of a person who is both a registered and beneficial shareholder.
- The assessee company, Elite Farms P. Ltd., was not a shareholder in Dugar Growth Funds P. Ltd., and hence, deemed dividend could not be taxed in its hands.
- The funds advanced were out of borrowed funds and not from accumulated profits.

3. Interpretation of Legal Provisions and Judicial Precedents:
The Tribunal upheld the CIT(A)'s decision, relying on the Delhi High Court's ruling in CIT vs. Ankitech Pvt. Ltd. and other relevant case laws. The Tribunal reiterated that:
- The intention behind Section 2(22)(e) is to tax dividend in the hands of shareholders and not non-shareholders.
- Legal fiction created under Section 2(22)(e) does not extend to non-shareholders.
- The recipient of the loan or advance should be a shareholder to be taxed under this provision.

The Tribunal also noted that the Revenue could take corrective measures to tax the deemed dividend in the hands of the actual shareholders, ensuring no income escapes assessment.

Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming that the addition under Section 2(22)(e) was not applicable to the assessee company as it was not a shareholder in Dugar Growth Funds P. Ltd. The AO was directed to take necessary steps to ensure the deemed dividend is taxed in the hands of the concerned shareholder, Miss Pooja Jain, thereby preventing any escapement of income.