2015 (2) TMI 619 - AT - Income Tax

Deemed dividend - whether deemed dividend can be taxed only in the hands of the share holder and that the section did not apply to the assessee since it was not a share holder of APL? - Held that - In the present case the assessee is admittedly not a shareholder of APL and the shareholders are Shri U. Kantha Rao and Smt. U. Rajani. Therefore, the CIT(A) was correct in holding that the advances cannot be taken as deemed dividend in the hands of the assessee who is not a shareholder of APL. Special Bench in the case of Bhaumik Colour Ltd. (2008 (11) TMI 273 - ITAT BOMBAY-E ) fortifies our view that the Assessing Officer is not correct in assessing the advances as deemed dividend in the hands of the assessee which is not a shareholder of APL. - Decided in favour of assessse.

Summary

Issues:
Assessment of deemed dividend under section 2(22)(e) in the case of a closely held company with common shareholders.

Analysis:
The appeals were filed against the CIT(A)'s order for the assessment years 2006-2007, 2007-2008, and 2008-2009, involving common issues. The assessee, a closely held company, had two shareholders with 50% shares each. A survey revealed that the shareholders held more than 20% of shareholding in another company and had given advances to the assessee. The Assessing Officer brought the advances to tax under section 2(22)(e) as deemed dividends due to lack of explanation by the assessee during assessment. The AR argued that the advances were not in the nature of loans but for business needs, citing various decisions supporting their stance.

During the appellate proceedings, the AR contended that the provisions of sec. 2(22)(e) did not apply to the assessee as it was not a shareholder of the company making the advances. The AR relied on several decisions to support this argument. The Assessing Officer, however, maintained that the advances were used for the benefit of the shareholders, making them liable under sec. 2(22)(e). The CIT(A) emphasized that the assessee and the company making the advances were separate legal entities, rejecting the Assessing Officer's argument.

The department appealed, challenging the CIT(A)'s decision. The Special Bench's decision was cited, emphasizing that deemed dividend under sec. 2(22)(e) can only be assessed in the hands of a shareholder of the lender company. The Tribunal upheld the CIT(A)'s decision, dismissing the department's appeals for all three assessment years. The judgment highlighted the strict interpretation required for sec. 2(22)(e) and the crucial distinction between registered shareholders and beneficial owners in determining liability for deemed dividends.