2022 (2) TMI 1397 - AT - Income Tax

Deemed dividend u/s.2(22)(e) - AO treated the unsecured loan as deemed dividend - whether it is sine qua non that the assessee company, which is not a registered shareholder, obtains any loan from companies in which its shareholder also holding substantial share may brought under the scanner of deemed dividend? - HELD THAT - Coming to the case on hand, admittedly the assessee company is not holding any shares or rights of M/s. JP Iscon Ltd. Thus considering the above discussion and judgment of Hon ble jurisdictional court in case of Mahavir Inductomelt 2017 (1) TMI 1159 - GUJARAT HIGH COURT AO was not justified in invoking the provision of section 2(22)(e) - CIT(A) rightly deleted the addition made by the AO. We note that in the case which arose before T. Abdul Wahid Co. 2020 (9) TMI 977 - MADRAS HIGH COURT the facts were that the assessee, a partnership firm, received unsecured loan from a company and the AO opined that one of partners of assessee-firm, being also a shareholder in the said company, holding 26.25 per cent shares had substantial interest in the firm and, consequently, concept of deemed dividend under section 2(22)(e) of the Act would apply. The High Court, on appeal by the Revenue, held that since payment had been made to the assessee, a partnership firm and assessee was not a shareholder in company, it was neither a loan nor an advance, but a deferred liability and, thus, section 2(22) (e) of the Act would not apply. The decision of Gopal and Sons (HUF) 2017 (1) TMI 331 - SUPREME COURT was distinguished by the Madras High Court after observing that as in the case before the Supreme Court the assessee was the beneficial shareholder, whereas on facts, it was not so, in the assessee's case. Admittedly, the assessee in the case on hand was neither the beneficial owner of the shares nor registered owners of the shares. Accordingly, in our humble understanding, the principles laid down by the Hon ble Supreme Court in the case of Gopal and Sons (HUF) 2017 (1) TMI 331 - SUPREME COURT are not applicable in the given facts and circumstances. Thus the ground of appeal raised by the Revenue is hereby dismissed.

Summary

Issues Involved:
1. Application of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.
2. Whether the assessee company, not being a registered shareholder, can be taxed under deemed dividend provisions.

Detailed Analysis:

Issue 1: Application of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.
The Revenue challenged the deletion of an addition amounting to ?8,94,41,125/- made by the Assessing Officer (AO) under Section 2(22)(e) of the Income Tax Act, 1961, which pertains to deemed dividend. The AO had treated an unsecured loan from M/s JP Iscon Ltd to the assessee company as deemed dividend, citing common shareholders holding substantial shares in both companies. The AO argued that since the shareholders of the assessee company held more than 20% shares in JP Iscon Ltd, the unsecured loan should be considered as deemed dividend under Section 2(22)(e).

Issue 2: Whether the assessee company, not being a registered shareholder, can be taxed under deemed dividend provisions.
The CIT(A) deleted the addition, observing that the assessee company was not a registered shareholder of JP Iscon Ltd. The CIT(A) referred to several judicial precedents, including the Special Bench of ITAT Mumbai in the case of Asstt. CIT v/s. Bhaumik Colour (P) Ltd and the Gujarat High Court in the case of CIT v/s Daisy Packers (P) Ltd, which held that deemed dividend can only be assessed in the hands of a shareholder of the lender company. The CIT(A) concluded that the provisions of Section 2(22)(e) are intended to tax the dividend in the hands of a shareholder, not in the hands of a company that is not a shareholder.

The Tribunal upheld the CIT(A)'s decision, stating that Section 2(22)(e) does not apply to an entity that is not a shareholder in the lender company. The Tribunal cited the Gujarat High Court's decision in PCIT vs. Mahavir Inductomelt Pvt Ltd, which clarified that the assessee company must be a shareholder in the lender company for Section 2(22)(e) to apply. The Tribunal also distinguished the Supreme Court's decision in Gopal and Sons (HUF) v. CIT, noting that in that case, the HUF was the beneficial shareholder, whereas in the present case, the assessee company was neither the beneficial owner nor the registered owner of the shares.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming that the addition made by the AO under Section 2(22)(e) was not justified. The Tribunal also dismissed the Cross Objection (CO) filed by the assessee as infructuous, as it merely supported the CIT(A)'s order. The final order was pronounced on 28/02/2022 at Ahmedabad.