2015 (10) TMI 1438 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Held that - It is not in dispute that the assessee-company is not a shareholder in M/s Trimex Industries Private Limited. Section 2(22)(e) of the Act clearly says that any payment made by a company by way of advance or loan to a shareholder or to the benefit of the shareholder it has to be treated as deemed dividend under Section 2(22)(e) of the Act. Dividend has to be assessed only in the hands of the shareholders. If the payment was made on behalf of the shareholder or benefit of the shareholder the assessment has to be made only in the hands of the shareholder on whose benefit the advance was made as deemed dividend under Section 2(22)(e) of the Act. In this case even though there are common shareholders/Directors in assessee company as well as its sister concern M/s Trimex Industries Private Limited admittedly the assessee-company is not a shareholder therefore addition if any has to be made only in the hands of common shareholders/Directors on whose benefit the advance was made. Since the assessee-company is not a shareholder in M/s Trimex Industries Private Limited this Tribunal is of the considered opinion that the provisions of Section 2(22)(e) of the Act is not applicable. - Decided in favour of assessee.

Issues:
1. Interpretation of Section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividend.
2. Determination of whether the provisions of Section 2(22)(e) are applicable in a case involving a company and its sister concern.
3. Assessment of whether an advance received by a company from its sister concern constitutes deemed dividend.

Analysis:
The appeal before the ITAT Chennai revolved around the interpretation and application of Section 2(22)(e) of the Income-tax Act, 1961 concerning deemed dividend. The Revenue contended that an addition made by the Assessing Officer under Section 2(22)(e) was justified as the assessee-company received a substantial amount from its sister concern, alleging a violation of the Act. The Revenue argued that the common shareholders and Directors between the two entities triggered the application of Section 2(22)(e). The Departmental Representative emphasized that the transaction, under the guise of advance for purchasing iron ore, should be treated as deemed dividend due to the lack of establishing a commercial nature for the transaction.

In contrast, the representative for the assessee argued that since the assessee company was not a shareholder in the sister concern, the provisions of Section 2(22)(e) should not apply. The representative contended that the advance received was part of a commercial transaction for purchasing iron ore, thus exempting it from the deemed dividend classification. The ITAT considered both arguments and examined the material on record. It was established that the assessee-company was not a shareholder in the sister concern, a crucial factor in determining the application of Section 2(22)(e). The ITAT clarified that under the Act, any payment to a shareholder or for their benefit is deemed dividend and should be assessed in the shareholder's hands. Since the assessee-company was not a shareholder in the sister concern, the provisions of Section 2(22)(e) were deemed inapplicable. Consequently, the ITAT upheld the lower authority's decision, dismissing the Revenue's appeal.

The judgment emphasized the importance of shareholder status in applying Section 2(22)(e) and highlighted that payments benefiting shareholders should be assessed as deemed dividend. The ruling clarified that in cases where the recipient company is not a shareholder, the provisions of Section 2(22)(e) do not apply. This case serves as a precedent for interpreting and applying the provisions of Section 2(22)(e) in transactions involving companies and related entities, ensuring a clear distinction between commercial transactions and deemed dividends.

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