2016 (3) TMI 454 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - whether deemed dividend u/s 2(22)(e) cannot be assessed in the receipt is not the registered share holder of company advancing loan or advance, although recipient person has beneficial interest by way of share holding in both the companies? - Held that - Jurisdictional High Court in the case of CIT V Ankitech Pvt. Ltd. and Ors. 2011 (5) TMI 325 - DELHI HIGH COURT has held that a concern which is given loan or advance by a company cannot be treated as shareholder / member of the latter simply because a shareholder of the lender company holding voting power of toper cent or more therein has substantial interest in such concern. We further note that the Hon ble High Court has further held that if the intention of the legislature was to tax such loan or advance as deemed dividend at the hands of the deeming shareholder, it would have inserted deeming provision in respect of shareholder as well. It was held that deemed dividend u/s 2(22)(e) cannot be taxed in the hands of a nonITA shareholder. Respectfully following the judgment of the Jurisdictional High Court, as aforesaid, we are of the considered opinion that the assessee company (M/s AVA Merchandising (P) Ltd.) not being a shareholder of the creditor company (M/s AMPL), the amount of debit balance cannot be added in the hands of the assessee company as deemed dividend u/s 2(22)(e) of the Act. Therefore, the Ld. CIT(A) was right in deleting the addition - Decided in favour of assessee

Issues Involved:
1. Whether deletion of addition made under section 2(22)(e) of the Income Tax Act, 1961 by the Ld. CIT(A) was correct.
2. Whether deemed dividend under section 2(22)(e) can be assessed in the hands of a non-registered shareholder.
3. Validity of the Cross Objection filed by the Assessee.

Analysis:

Issue 1:
The case involved an appeal by the Department against the Ld. CIT(A)'s order deleting the addition of a certain amount under section 2(22)(e) of the Income Tax Act, 1961. The AO had added the amount as deemed dividend due to substantial interest of an individual in both the appellant company and another company. The Ld. CIT(A) allowed the appeal of the assessee, stating that the appellant company not being a shareholder of the creditor company, the amount of debit balance could not be added as deemed dividend. The Tribunal upheld the Ld. CIT(A)'s decision, citing relevant case laws and holding that deemed dividend u/s 2(22)(e) can only be taxed in the hands of registered shareholders of the lender company.

Issue 2:
The Tribunal considered whether deemed dividend under section 2(22)(e) could be assessed in the hands of a non-registered shareholder. Citing judgments and case laws, the Tribunal held that a concern receiving a loan or advance from a company cannot be treated as a shareholder of the latter, even if a shareholder of the lending company has substantial interest in the concern. The Tribunal emphasized that the legislature did not intend to tax such transactions as deemed dividends in the hands of non-shareholders. Therefore, the Tribunal dismissed the Revenue's appeal, upholding the Ld. CIT(A)'s decision to delete the addition under section 2(22)(e).

Issue 3:
Regarding the Cross Objection filed by the Assessee, it was noted that the filing was time-barred but an application for condonation of delay was submitted. During the hearing, the Assessee's counsel withdrew the Cross Objection, and the Tribunal dismissed it accordingly. The Ld. DR did not object to the withdrawal. As a result, both the Revenue's Appeal and the Assessee's Cross Objection were dismissed by the Tribunal.

In conclusion, the Tribunal upheld the Ld. CIT(A)'s decision to delete the addition under section 2(22)(e) in the Revenue's appeal and dismissed the Cross Objection filed by the Assessee due to withdrawal during the hearing.

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