2014 (9) TMI 172 - HC - Income Tax

Applicability of deemed dividend u/s 2(22)(e) Expenses on construction/renovation of the owned premises incurred Held that - The AO was of the view that the amount of ₹ 2.51 crores was paid on behalf of the assessee - analysis of section 2(22)(e) would reveal that in order attract the provisions of sub-section (22) the payment made by the Company must be by way of advance or loan to the shareholder who is entitled to the shares which do not carry a fixed rate of dividend with or without a right to participate or a payment to him for his individual benefit - no money has been paid by way of advance or loan nor was any payment made for his individual benefit - it is deemed that the Company did spent ₹ 2.51 crores towards repair and renovation on the premises owned by the Respondent - the Company had taken rent on the premises - the asset of the Respondent may have enhanced in value by virtue of repairs and renovation in respect of which it cannot be brought within definition of the advance or loan to the Respondent - Nor can it be treated as payment by the Company on behalf of the Respondent share holder or for the individual benefit of such shareholder the order of the Tribunal is upheld Decided against Revenue.

Summary

Issues:
1. Interpretation of section 2(22)(e) of the Income Tax Act regarding deemed dividend.
2. Determination of whether expenses incurred by a company for the benefit of a shareholder constitute deemed dividend.
3. Assessment of whether the expenditure on construction/renovation of premises owned by a shareholder is covered under section 2(22)(e).

Issue 1: Interpretation of section 2(22)(e) of the Income Tax Act regarding deemed dividend:
The appellant contested the impugned order of the Income Tax Tribunal, which negated the claim that the respondent was a beneficiary of certain amounts by way of deemed dividend under section 2(22)(e) of the Income Tax Act. The tribunal concluded that the provisions of section 2(22)(e) were not attracted in the case of the respondent, leading to the appeal challenging this interpretation.

Issue 2: Determination of whether expenses incurred by a company for the benefit of a shareholder constitute deemed dividend:
The crux of the issue revolved around whether the expenses incurred by a private limited company, of which the respondent was a majority shareholder, for the construction and improvement of premises owned by the respondent, could be considered as deemed dividend under section 2(22)(e). The appellant argued that the expenditure was for the benefit of the respondent, while the tribunal held otherwise, leading to a dispute on the application of the provision.

Issue 3: Assessment of whether the expenditure on construction/renovation of premises owned by a shareholder is covered under section 2(22)(e):
The assessment involved analyzing whether the expenditure made by the company on the construction and improvement of the factory premises owned by the respondent, who was also a majority shareholder in the company, could be categorized as deemed dividend under section 2(22)(e). The appellant treated the sum of Rs. 2.51 crores as deemed dividend in the name of the assessee, triggering a series of appeals and judicial review.

In a detailed analysis, the judgment highlighted that section 2(22)(e) of the Income Tax Act encompasses payments made by a company to a shareholder for the individual benefit of the shareholder, subject to certain conditions. The tribunal's decision was based on the premise that no money was directly paid to the respondent as an advance or loan, nor was any payment made for his individual benefit. The expenditure incurred by the company on the premises owned by the respondent was not considered a payment to the shareholder or for his individual benefit, thereby not meeting the criteria for deemed dividend under the said provision.

The tribunal's ruling was supported by the fact that the company's expenditure on repairs and renovation of the premises, even though enhancing the asset's value, did not constitute a payment to the shareholder as per the provisions of section 2(22)(e). The judgment emphasized that the tribunal's decision was not based on presumption but on a factual assessment of the case, concluding that the order was legally sound and could not be faulted.

Furthermore, the judgment clarified that the challenge was confined to the issue of dividend alone, with no dispute regarding the amount being treated as a perquisite. Citing a previous judgment related to a similar issue, the court dismissed the appeal, noting that the impugned order was not tainted by any error of law. Consequently, the appeal was rejected, and no costs were awarded in the matter.