2012 (2) TMI 702 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition of Rs. 1,58,14,061/- made u/s 2(22)(e) as deemed dividend.

Summary:

Issue 1: Deletion of Addition of Rs. 1,58,14,061/- Made u/s 2(22)(e) as Deemed Dividend

The Department filed an appeal against the order dated 03.02.2011 by CIT(A)-19, Mumbai, concerning the quantum of assessment for AY 2007-08. The primary issue was the deletion of an addition of Rs. 1,58,14,061/- made u/s 2(22)(e) as deemed dividend.

The appellant, engaged in the hotel business, had taken unsecured loans from M/s. EMS Electricals & Engg. Pvt. Ltd. The Assessing Officer (AO) noted that the directors of both companies held significant shares and that M/s. EMS Electricals & Engg. Pvt. Ltd had substantial reserves. The AO held that the provisions of section 2(22)(e) were applicable and taxed the loan amount as deemed dividend in the hands of the assessee company.

Before CIT(A), the assessee contended that deemed dividend u/s 2(22)(e) could only be assessed in the hands of a shareholder, and since the assessee company was not a shareholder of M/s. EMS Electricals & Engg. Pvt. Ltd., the provisions were not applicable. The assessee relied on the judgments of CIT vs. Universal Medicare Pvt. Ltd. and ACIT vs. Bhaumik Colour (P) Ltd.

The CIT(A) agreed with the assessee, citing the Supreme Court's decision in Sarathy Mudaliar and other relevant judgments, and held that deemed dividend could only be taxed in the hands of a registered shareholder. Since the assessee company was not a shareholder of the lender company, the addition was deleted.

The Department argued that the provisions of section 2(22)(e) should apply as the directors were common and had substantial voting rights. However, the assessee's counsel maintained that the issue was covered by the Special Bench judgment in ACIT vs. Bhaumik Colour (P) Ltd., which was also affirmed by the Bombay High Court in CIT vs. Universal Medicare Pvt. Ltd.

The Tribunal, after considering the rival submissions and the orders of the AO and CIT(A), upheld the CIT(A)'s decision. It was noted that the assessee company was not a shareholder of the lender company, and the provisions of section 2(22)(e) could not be extended to a non-shareholder. The Tribunal relied on the Special Bench judgment in ACIT vs. Bhaumik Colour (P) Ltd. and the Bombay High Court's decision in CIT vs. Universal Medicare Pvt. Ltd., which clarified that deemed dividend could only be taxed in the hands of the shareholder.

In conclusion, the Tribunal dismissed the Department's appeal and upheld the deletion of the addition of Rs. 1,58,14,061/- made u/s 2(22)(e).

Order pronounced on this 29th day of February, 2012.