2015 (9) TMI 386 - AT - Income Tax

Addition on account of deemed dividend under section 2(22)(e) - CIT(A) deleted the addition - Held that - As being a registered shareholder is a condition precedent for invoking Section 2(22)(e) of the Act, and that condition is admittedly not satisfied. For this short reason alone, the impugned additions should have been deleted by the CIT(A). We approve the conclusions arrived at by the CIT(A) in this respect and decline to interfere in the matter so far as the relief given by the CIT(A) is concerned. - Decided against revenue. CIT(A)s directions to bring this deemed dividend to tax in the hands of Shri Mehul P Asnani, director in assesses company challenged - Held that - The manner in which the appeal has been decided by the CIT(A) gives an impression, which is a wholly inappropriate impression and which has also been reiterated before us by the learned Departmental Representative, that the impugned additions have been deleted in the hands of the assessee as these additions are required to be made in the hands of someone else. The deletion of the impugned addition in the hands of the assessee company has been thus projected to be, though perhaps at a somewhat subliminal level, dependent of the addition being confirmed in the hands of the director. The directions given by the CIT(A) do prejudice interests of the assessee inasmuch as these directions not being implemented may be viewed as detrimental to the interests of the assessee but then the directions suffer from legal infirmities, from glaring procedural flaws, and are incapable of being implemented anyway. In any case, since these directions are given in the case of this assessee and the appellate order by the CIT(A) in the case of this assessee cannot be challenged, in appeal before us, by a third party, the only way to prevent these directions reaching the finality is a challenge by this assessee himself, particularly because, as is the settled legal position, the statutory provisions are to be construed ut res magis valeat quam pereat i.e., in such a manner as to make it workable rather than redundant. The assessee before us, therefore, has, in our considered view, locus standi to challenge legality of these directions. Thus we vacate the directions in questions. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition of Rs. 70,57,941 as deemed dividend under section 2(22)(e) of the Income Tax Act.
2. Jurisdiction of CIT(A) to direct the addition of deemed dividend in the hands of a shareholder, Shri Mehul P Asnani.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 70,57,941 as Deemed Dividend:
The primary issue in the appeal was whether the addition of Rs. 70,57,941 made by the Assessing Officer (AO) as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961, was justified. The AO observed that the assessee company had taken a loan of Rs. 70,57,941 from Biotech Vision Care Pvt Ltd (BVCPL), where Shri Mehul P Asnani held 90% shareholding in BVCPL and 40% in the assessee company. Since BVCPL had accumulated profits far exceeding the loan amount, the AO treated the loan as deemed dividend.

The CIT(A) deleted this addition, holding that the deemed dividend can only be assessed in the hands of a shareholder, not in the hands of the recipient company which is not a shareholder. The CIT(A) relied on decisions of the ITAT Special Bench and the Bombay High Court, which established that deemed dividend under section 2(22)(e) can only be taxed in the hands of the shareholder. The Tribunal upheld this view, citing the jurisdictional High Court's decision in CIT v. Daisy Packers Pvt Ltd and the ITAT Special Bench's decision in ACIT v. Bhaumik Colours Pvt Ltd, which clarified that being a registered shareholder is a condition precedent for invoking section 2(22)(e). Since the assessee company was not a shareholder in BVCPL, the addition was rightly deleted by the CIT(A).

2. Jurisdiction of CIT(A) to Direct Addition in the Hands of Shareholder:
The second issue was whether the CIT(A) had the jurisdiction to direct the AO to add the deemed dividend in the hands of Shri Mehul P Asnani, a shareholder in BVCPL. The assessee argued that the CIT(A) exceeded his jurisdiction by making such a direction without giving Shri Asnani an opportunity to be heard. The Tribunal noted that under section 153(3) of the Act, any direction to add income in the hands of another person must be preceded by an opportunity of hearing to that person. Since Shri Asnani was not given such an opportunity, the directions by the CIT(A) were legally infirm.

Additionally, the Tribunal emphasized that a direction under section 153(3) must be necessary for the disposal of the case. In this instance, the direction to add the deemed dividend in the hands of Shri Asnani was not necessary for deciding whether the amount was deemed dividend in the hands of the assessee company. The Tribunal criticized the CIT(A) for issuing a direction based on a fallacious logic without examining whether all conditions for taxing the amount as deemed dividend in the hands of Shri Asnani were satisfied.

The Tribunal also addressed the Departmental Representative's contention that the assessee had no locus standi to challenge the directions concerning Shri Asnani. The Tribunal rejected this contention, stating that the directions given by the CIT(A) impacted the assessee's case and could not be challenged by a third party. Therefore, the assessee had the right to challenge the legality of these directions.

In conclusion, the Tribunal vacated the directions given by the CIT(A) to add the deemed dividend in the hands of Shri Asnani and allowed the cross-objection filed by the assessee. The appeal by the AO was dismissed, and the cross-objection by the assessee was allowed.