2013 (10) TMI 460 - AT - Income Tax

Deemed dividend u/s 2(22)(e) of the Income Tax Act loans and advances - inter corporate deposits CIT observed that ICDs received by the assessee cannot be considered along with loans and advances for the purpose of application of the provisions of section 2(22)(e) of the Act. - Held that - Reliance has been placed upon the judgment in the case of Seamist Properties Pvt. Ltd. vs. ITO 2004 (8) TMI 323 - ITAT BOMBAY-G , wherein it has been held that legislature is clarified in circular issued by the CBIT as at the time of amendment of clause (e) of sub section (22) of sec. 2 is further fortified by the fact that for deduction of tax at source. Sec. 194 provide that such deduction of tax has to be made in the case of the payments of the nature mentioned in clauses (a), (b), (c), (d) and (e) of sub section (22) of Section 2 only in a case where such payments were made to a shareholder - The very fact that the provision for deduction of tax at source and adjustment of tax is only in respect of the payments to the shareholder would clearly indicate that even after the amendment, the effect of clause (e) of sub section (22) of Sec. 2 would apply only when the payment is made to shareholder - Wherever, the tax is to be deducted at source from a dividend or deemed dividend and the consequential effect of giving effect to such deduction of tax at source, etc., reference was made only to the payments to the shareholder. This would indicate clearly that clause (e) would apply only in case of payments to the shareholder and not to others. In the present case, assessee is not a shareholder of the lender company - Hence, ICDs and the advances to the assessee cannot be treated as deemed dividend at the hands of the assessee Decided against the Revenue.

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer by treating the amount received as deemed dividend under Section 2(22)(e) of the Income Tax Act.
2. Nature of Inter Corporate Deposits (ICD) and advances received by the assessee.
3. Shareholding status of the assessee in the lender company.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made by the Assessing Officer:
The Department challenged the order of the CIT(A) which deleted the addition made by the Assessing Officer by treating the amount received as deemed dividend under Section 2(22)(e) of the Income Tax Act. The CIT(A) held that the amounts received by the assessee from M/s Excel Rubber Pvt. Ltd. cannot be treated as deemed dividend under Section 2(22)(e) and accordingly deleted the addition.

2. Nature of Inter Corporate Deposits (ICD) and Advances:
During the reassessment proceedings, the assessee explained that the amounts received from M/s Excel Rubber Pvt. Ltd. were in the form of Inter Corporate Deposits (ICD) and advances for business purposes, and hence, cannot be treated as deemed dividend. The CIT(A) considered the submissions and various judicial precedents, particularly the decision of ITAT, Mumbai Bench in the case of Bombay Oil Industries Ltd. Vs. DCIT, and held that ICDs received by the assessee cannot be considered along with loans and advances for the purpose of application of the provisions of Section 2(22)(e).

3. Shareholding Status of the Assessee:
The core promoter, Shri G.R. Reddy, possessed more than 10% of voting rights in the assessee company and also more than 20% in Excel Rubber Pvt. Ltd. However, the assessee itself was not a shareholder in M/s Excel Rubber Pvt. Ltd. The CIT(A) followed the decision of the Hon'ble Delhi High Court in CIT Vs. Ankitech P. Ltd. & Others and the ITAT, Hyderabad Bench in MTAR Technologies Pvt. Ltd. Vs. ACIT, which held that deemed dividend under Section 2(22)(e) can only be taxed in the hands of the shareholder. Since the assessee was not a shareholder of M/s Excel Rubber Pvt. Ltd., the loans and advances received could not be treated as deemed dividend in its hands.

Conclusion:
The Tribunal upheld the CIT(A)'s order, agreeing that the ICDs and advances received by the assessee could not be treated as deemed dividend under Section 2(22)(e) because the assessee was not a shareholder in M/s Excel Rubber Pvt. Ltd. The Tribunal also referenced various judicial precedents, including the Hon'ble Delhi High Court's decision in CIT Vs. Ankitech P. Ltd. and the ITAT, Mumbai Special Bench's decision in Bhaumic Colours (P) Ltd., which supported this conclusion. Consequently, the Department's appeal was dismissed.