2018 (11) TMI 1802 - AT - Income Tax

Deemed dividend u/s. 2(22)(e) - Ultimate parent company of the assessee, Checkpoint Systems Inc., was also the ultimate parent company of M/s. OAT System Software India Private Limited from whom assessee company had received a loan - HELD THAT - The diagrammatic representation of the shareholding pattern of the assessee and M/s. OAT System Software India Private Limited, shows that the assessee is not a shareholder of M/s. OAT System Software India Private Limited. Hence, deemed dividend cannot be assessed in the hands of the assessee. Respectfully following the order in the case of Cargill India (P.) Ltd. vs ACIT 2015 (7) TMI 215 - ITAT DELHI wherein, under similar facts has held that as the assessee is not a direct shareholder in the lender company, hence, the loan received by the assessee cannot be treated as deemed dividend. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the loan received by the assessee from M/s. OAT System Software India Private Limited qualifies as deemed dividend under section 2(22)(e) of the Income Tax Act.
2. Whether the interest paid on the loan by the assessee is allowable as a business expenditure.

Detailed Analysis:

1. Deemed Dividend under Section 2(22)(e):
The primary issue in this case is whether the loan amounting to ?4.25 crores received by the assessee from M/s. OAT System Software India Private Limited can be treated as deemed dividend under section 2(22)(e) of the Income Tax Act.

- Assessing Officer's Position: The Assessing Officer (AO) concluded that the loan received by the assessee from M/s. OAT System Software India Private Limited was in the nature of a deemed dividend under section 2(22)(e). This conclusion was based on the fact that the ultimate parent company of both the assessee and the lender was Checkpoint Systems Inc., which held the entire share capital of both entities.

- CIT(A)'s Decision: The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal of the assessee, leading to the Revenue filing this appeal.

- Revenue's Argument: The Revenue contended that the CIT(A) erred in deleting the addition made by treating the loan as deemed dividend under section 2(22)(e). They relied on the Supreme Court decision in the case of National Travel Services, which suggested that the provisions of section 2(22)(e) could be invoked even if the recipient of the loan was not both a beneficial and registered shareholder.

- Assessee's Argument: The assessee argued that the conditions specified in section 2(22)(e) were not met as the assessee was neither a shareholder of the lender company nor did any shareholder of the lender company hold shares in the assessee company. The assessee relied on the Supreme Court judgment in the case of Madhur Housing and Development Company, which upheld that deemed dividend could only be taxed in the hands of the shareholder.

- Tribunal's Findings: The Tribunal noted that the assessee was not a registered shareholder of the lending company, M/s. OAT System Software India Private Limited. The Tribunal referred to the diagrammatic representation of the shareholding pattern, which confirmed that the assessee was not a shareholder of the lender company. Consequently, the Tribunal concluded that deemed dividend could not be assessed in the hands of the assessee. The Tribunal also cited the case of Cargill India (P.) Ltd. vs ACIT, where it was held that a loan received by an entity that is not a direct shareholder in the lender company cannot be treated as deemed dividend.

2. Allowability of Interest as Business Expenditure:
Another issue was whether the interest paid by the assessee on the loan from M/s. OAT System Software India Private Limited was allowable as a business expenditure.

- CIT(A)'s Decision: The CIT(A) allowed the interest paid on the loan as a business expenditure. The Revenue did not challenge this allowance.

- Tribunal's Findings: The Tribunal observed that since the interest paid on the loan was accepted as a business expenditure, the loan itself could not be re-characterized as deemed dividend. This reinforced the Tribunal's decision to uphold the CIT(A)'s order.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision that the loan received by the assessee from M/s. OAT System Software India Private Limited could not be treated as deemed dividend under section 2(22)(e) of the Income Tax Act. The Tribunal also upheld the allowance of interest paid on the loan as a business expenditure. The judgment was pronounced on November 30, 2018, at Chennai.