2018 (12) TMI 1706 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - double taxation - as alleged since both the shareholders are having 50% stake in both the companies, the amount may be proportionately added in the hands of both the assessee - HELD THAT - We find merit in the contention of the Ld.AR. Adding the amount of ₹ 53,69,803/- in the hands of each of the assessees would amount to double taxation and that is not permissible. Moreover with respect to the transaction of extending loan by M/s. Chennai Micro Finance Ltd., to M/s. Tallboy Stationaries Pvt. Ltd., the provisions of Section 2(22)(e) of the Act attracts the amount of deemed dividend only to the extent of the loan amount which is further restricted to the extended of reserves and surplus of the Company advancing loan. Therefore in the relevant cases before us the aggregate additions in the hands of the shareholders who are the assessees cannot be made more than ₹ 53,69,803/-. Hence it would be an appropriate analogy that the entire amount which is liable to be treated as deemed dividend has to be apportioned between both the shareholders in whose cases the conditions stipulated for attracting the provisions of Section 2(22)(e) of the Act are satisfied. Therefore as pleaded by the Ld.AR, it would be judicious to make addition in the hands of both the assessee equally.

Summary

Issues:
- Interpretation of Section 2(22)(e) of the Act
- Double taxation concern regarding loan amount

Analysis:

Interpretation of Section 2(22)(e) of the Act:
The appeals were against orders passed by the Ld. Commissioner of Income Tax (Appeals) in relation to two individuals for the assessment year 2006-07. The issue in question was the addition of a specific amount in the hands of the assessees under Section 2(22)(e) of the Act. The assessees argued that the entire loan amount could not be added to their income individually as it would result in double taxation. They contended that since both shareholders held 50% equity shares in the companies involved, the loan amount should be proportionately added to each of them. The Tribunal agreed with this interpretation, stating that adding the full amount to each assessee would indeed lead to double taxation, which is impermissible under the law. The Tribunal further clarified that the provisions of Section 2(22)(e) only attract the amount of deemed dividend to the extent of the loan amount, subject to the reserves and surplus of the company extending the loan. Therefore, the aggregate additions in the hands of the shareholders could not exceed the total loan amount. Consequently, the Tribunal ordered a proportionate division of the deemed dividend between the shareholders, resulting in a specific amount being added to each of their incomes.

Double taxation concern regarding loan amount:
The Tribunal addressed the concern raised by the assessees regarding potential double taxation arising from the addition of the loan amount in their individual incomes. The assessees argued that since both of them held 50% stakes in the companies involved, adding the full loan amount to each of their incomes would amount to double taxation. The Tribunal agreed with this contention and ruled that such double taxation was not permissible. The Tribunal emphasized the need to apportion the deemed dividend appropriately between the shareholders to avoid any unjust imposition of tax liability. Consequently, the Tribunal ordered a partial allowance of the appeals, directing the addition of specific amounts to each of the assessees' incomes in a proportionate manner based on their shareholding and involvement in the relevant transactions.

In conclusion, the Tribunal's judgment clarified the interpretation of Section 2(22)(e) of the Act in the context of the case and addressed the issue of potential double taxation concerning the loan amount. By ensuring a fair and proportionate allocation of the deemed dividend between the shareholders, the Tribunal upheld the principles of tax law and provided a balanced resolution to the dispute at hand.