2015 (8) TMI 82 - AT - Income Tax

Deemed dividend under section 2(22)(e) - Payment for public issue RPL - IPO - HNIR - Held that - The explanation of the assessee that the IPO of M/s RPL was applied by the assessee for and on behalf of M/s Germstar Constructions P Ltd is hard to believe. It is well established principle of law that mere repayment of money borrowed by the share holder will not escape him from the provisions of sec. 2(22)(e) of the Act. Hence the fact that the assessee has paid back the excess share application money refunded by M/s RPL will not be of any help to the assessee. Hence, we agree with the contentions of the revenue that the decision rendered in the case of Sunil Sethi (2008 (9) TMI 618 - ITAT DELHI) is not applicable to the facts prevailing in the instant case. Accordingly, we are of the view that the AO was justified in assessing the amount of ₹ 62.00 lakhs as deemed dividend in the hands of the assessee - Decided against assessee.

Summary

Issues:
Assessment of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961 in assessment year 2007-08.

Detailed Analysis:

Issue 1: Assessment of Deemed Dividend
The revenue appealed the order granting partial relief by Ld CIT(A)-34, Mumbai regarding the assessment of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961. The assessee, a Director and shareholder in a closely held company, had borrowed funds from the company. The AO examined the applicability of section 2(22)(e) on the borrowed amount. The AO assessed the amounts borrowed as deemed dividend, totaling Rs. 80.10 lakhs. The ld.CIT (A) deleted the assessment of Rs. 18.10 lakhs related to lease deposits and confirmed the assessment of Rs. 1,04,160 pertaining to share application money, setting aside the balance amount of Rs. 60,95,840. The revenue challenged this decision.

Issue 2: Applicability of Precedent
The tribunal referred to a precedent where it was held that if funds were given to the director for official company purposes and returned unused due to non-materialization of business transactions, it did not constitute a loan. The revenue contended that this precedent did not apply to the current case.

Issue 3: Examination of Circumstances
The tribunal analyzed the events and explanations provided by the assessee. The funds received were for investing in an Initial Public Offering (IPO), and it was not shown that the company was involved in share dealings. The tribunal noted discrepancies in the explanations provided, including the retention of shares by the assessee and lack of evidence supporting the company's intention to apply for shares.

Issue 4: Conclusion
Considering the circumstances, the tribunal found the explanation provided by the assessee regarding acting as an agent for the company in applying for shares hard to believe. Mere repayment of borrowed funds does not exempt the assessee from the provisions of section 2(22)(e). The tribunal agreed with the revenue that the precedent cited was not applicable in this case and upheld the AO's assessment of Rs. 62.00 lakhs as deemed dividend, setting aside the CIT(A)'s decision.

In conclusion, the tribunal allowed the revenue's appeal, upholding the assessment of deemed dividend under section 2(22)(e) for the assessment year 2007-08.