2016 (2) TMI 703 - AT - Income Tax

Deemed dividend addition u/s. 2(22)(e) - Held that - The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word Dividend is extended to loans and advances to a shareholder or to a concern in which a shareholder is substantially interested deeming them as Dividend in the hands of a shareholder the ordinary and natural meaning of the word Dividend is altered. To this extent the definition of the term Dividend can be said to operate. If the definition of Dividend is extended to a loan or advance to a non shareholder the ordinary and natural meaning of the word dividend is taken away. In the light of the intention behind the provisions of Sec.2(22)(e) and in the absence of indication in Sec.2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also we are of the view that loan or advance to a non-shareholder cannot be taxed as Deemed Dividend in the hands of a non-shareholder. Since the Assessee in the present case is not a shareholder in the lender company addition to be deleted. - Decided in favour of assessee Revision u/s 263 - Held that - We are of the view that the order of CIT cannot be sustained as in any case there can be no addition and there can be no prejudice to the interest of the revenue in as much as no addition on account of deemed dividend u/s.2(22)( e ) can be made in the facts and circumstances of the present case. We therefore quash the order u/s.263 of the Act and allow the appeal by the Assessee.- Decided in favour of assessee

Issues Involved:
1. Whether the loan received by the assessee from M/s Jet Age Finance Limited (JAFL) should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
2. Whether the CIT's order under Section 263 of the Act, setting aside the AO's assessment and directing a re-examination, was justified.

Issue-wise Detailed Analysis:

1. Treatment of Loan as Deemed Dividend under Section 2(22)(e):

The primary issue is whether the loan amounting to Rs. 1,88,75,000 received by the assessee from JAFL should be classified as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The CIT held that the loan should be treated as deemed dividend because Harshavardhan Himatsinghka, a common shareholder, held 20% of the paid-up share capital in both the assessee company and JAFL.

However, the assessee argued that it was not a shareholder in JAFL, and therefore, the provisions of Section 2(22)(e) could not be applied. The Tribunal examined the provisions of Section 2(22)(e), which states that any payment by a company, not substantially interested by the public, to a shareholder holding not less than ten percent of the voting power, or to any concern in which such a shareholder has a substantial interest, should be treated as deemed dividend.

The Tribunal referred to the Special Bench decision in Bhaumik Color Labs, which held that deemed dividend could only be assessed in the hands of a person who is a shareholder of the lender company and not in the hands of a non-shareholder. This view was supported by the Rajasthan High Court in CIT Vs. Hotel Hilltop, where it was held that deemed dividend should be taxed in the hands of the shareholder who benefits from the payment, not in the hands of the concern receiving the loan.

In this case, since the assessee was not a shareholder in JAFL, the Tribunal concluded that the loan could not be treated as deemed dividend under Section 2(22)(e).

2. Justification of CIT's Order under Section 263:

The CIT passed an order under Section 263 of the Act, setting aside the AO's assessment and directing a re-examination of the applicability of Section 2(22)(e). The CIT believed that the AO failed to make necessary inquiries regarding the loan received by the assessee from JAFL.

The Tribunal analyzed whether the CIT's order was justified. It noted that for an order under Section 263 to be valid, there must be an error in the assessment order that is prejudicial to the interests of the revenue. Since the Tribunal had already determined that the loan could not be treated as deemed dividend in the hands of the assessee, there was no error in the AO's assessment that could be considered prejudicial to the revenue.

Consequently, the Tribunal quashed the CIT's order under Section 263, as there was no basis for re-examination and no prejudice to the revenue.

Conclusion:

The Tribunal allowed the appeal by the assessee, concluding that the loan received from JAFL could not be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961, as the assessee was not a shareholder in JAFL. Additionally, the Tribunal found that the CIT's order under Section 263 was not justified and quashed it. The appeal by the assessee was thus allowed, and the order was pronounced on 15.1.2016.

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