2019 (12) TMI 1561 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - loan received by assessee - HELD THAT - It is an admitted fact that M/s Punjab Metallic Pvt. Ltd. is not a share holder of the assessee company from whom the loan was received by the assessee. Therefore the amount of loan cannot be treated as a deemed dividend under section 2(22)(e) of the Act, in the hands of the assessee company as per the ratio laid down by the Hon'ble Jurisdictional High Court in the case of CIT Vs. Sharman Woolen Mills Ltd. 2011 (9) TMI 752 - PUNJAB AND HARYANA HIGH COURT - Thus impugned addition made by the A.O. and sustained by the Ld. CIT(A) is deleted. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.
2. Application of legal principles in determining the taxability of loans received by the assessee.
3. Analysis of case laws in support of the assessee's position.
4. Assessment of the facts and circumstances surrounding the loan transactions.

Issue 1: Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend:
The case involved an appeal by the Assessee against the order of Ld. CIT(A)-1, Chandigarh, concerning the addition of ?11,00,000 under Section 2(22)(e) of the Act on account of deemed dividend. The Assessing Officer (AO) concluded that the loan received by the assessee from M/s Punjab Metallic Pvt. Ltd. fell within the purview of Section 2(22)(e) as the shareholding patterns indicated substantial interest. The AO considered the lack of dividend declaration by M/s Punjab Metallic Pvt. Ltd. and the adequacy of accumulated profits to cover the loan amount. The CIT(A) upheld the addition, citing the substantial interest clause and the financial position of the lending company.

Issue 2: Application of legal principles in determining the taxability of loans received by the assessee:
The Assessee contended that since they were not a shareholder of M/s Punjab Metallic Pvt. Ltd., the deeming provisions of Section 2(22)(e) were inapplicable. The Assessee relied on various case laws to support their argument, emphasizing that the loan could not be treated as deemed dividend due to the absence of shareholding. The Tribunal observed that as per the Hon'ble Jurisdictional High Court's ruling in a similar case, where the lending company's shareholders did not match with the assessee, the loan could not be assessed as deemed dividend. Consequently, the Tribunal deleted the addition made by the AO and upheld by the CIT(A).

Issue 3: Analysis of case laws in support of the assessee's position:
The Assessee and the Tribunal referenced several case laws such as CIT vs. Sharman Woolen Mills Ltd., CIT vs. Ankitech Pvt. Ltd., CIT vs. G.T.Z. Securities Ltd., CIT vs. Sarva Equity Pvt. Ltd., and CIT vs. Impact Containers Pvt. Ltd. to bolster the argument that the loan should not be considered as deemed dividend. These cases highlighted the importance of shareholding in determining the taxability of loans under Section 2(22)(e) of the Act.

Issue 4: Assessment of the facts and circumstances surrounding the loan transactions:
The AO's decision to treat the loan as deemed dividend was based on the shareholding patterns, lack of dividend declaration by the lending company, and the availability of accumulated profits to cover the loan amount. The CIT(A) also emphasized these factors in upholding the addition. However, the Assessee successfully argued that since they were not shareholders of the lending company, the loan could not be categorized as deemed dividend. The Tribunal, following the legal precedent, ruled in favor of the Assessee and deleted the addition.

In conclusion, the Tribunal allowed the Assessee's appeal, emphasizing that the loan received could not be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961, due to the absence of shareholding between the parties involved.