2016 (3) TMI 630 - AT - Income Tax

Deemed dividend addition u/s 2(22) - whether there was any Loan or Advance by PIPL to the Assessee? - Held that - There is no reason whatsoever to doubt the plea put forth by the Assessee that the sum of ₹ 9 lacs was mistaken paid to RBI in the name of the Assessee instead of PIPL. The reason being that the returned income of the Assessee for the relevant AY was only ₹ 4,26,150/-. The Assessee would get credit of TDS of ₹ 70,480 which was allowed by the AO in the order of assessment. It thus becomes clear that there could not be advance tax liability to the extent of ₹ 9 lacs for the Assessee. The contention of the Assessee therefore that the sum in question was mistaken paid to RBI in the name of Assessee instead of PIPL deserves to be accepted. It is a fact that the sum in question i.e., ₹ 9 lacs never reached the hands of the Assessee and was not available for use by the Assessee. In such circumstances can it be said that there was any Loan or Advance by PIPL to the Assessee. The fact that the rents payable by PIPL to the Assessee were adjusted against the monies refundable by the Assessee to PIPL is a matter of adjustment between the parties. That adjustment cannot be the basis to hold that PIPL has given a loan or advance to the Assessee. The primarily requirement of flow of funds for use by the Assessee from PIPL is essential to say that PIPL gave Loan or Advance to the Assessee. Such a requirement being absent in the present case, it cannot be said that the conditions for applicability of Sec.2(22)( e) of the Act were satisfied. - Decided in favour of assessee

Summary

Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961.
2. Whether the sum of Rs. 9 lacs paid by PIPL on behalf of the assessee constitutes a "loan or advance" under Section 2(22)(e).
3. Whether the deemed dividend can be assessed in the hands of a non-shareholder entity.

Detailed Analysis:

Issue 1: Applicability of Section 2(22)(e) of the Income Tax Act, 1961
The core issue is the applicability of Section 2(22)(e), which defines "dividend" to include any payment by a company, not being a company in which the public are substantially interested, by way of loan or advance to a shareholder holding not less than ten percent of the voting power, or to any concern in which such shareholder has a substantial interest. The purpose of this provision is to bring within the tax net monies paid by closely held companies to their shareholders who have substantial interest in the company, by way of loan or advance, instead of dividend, to avoid tax.

Issue 2: Whether the sum of Rs. 9 lacs paid by PIPL on behalf of the assessee constitutes a "loan or advance" under Section 2(22)(e)
The facts reveal that PIPL took a demand draft for Rs. 9 lacs to pay its advance tax but mistakenly deposited it in the name of the assessee, a partnership firm. The assessee did not receive or utilize this amount as it was deposited with the RBI. The mistake was identified, and the sum was to be refunded to PIPL. The revenue argued that this constituted a "loan or advance" to the assessee, invoking Section 2(22)(e). However, the assessee contended that since the money never reached its hands and was not available for use, it could not be considered a "loan or advance."

The tribunal agreed with the assessee, noting that the sum of Rs. 9 lacs never reached the assessee's hands and was not available for its use. Therefore, it could not be considered a "loan or advance" under Section 2(22)(e).

Issue 3: Whether the deemed dividend can be assessed in the hands of a non-shareholder entity
The assessee argued that it was not a shareholder in PIPL, and the partners of the firm held shares in their individual capacity. The CIT(A) held that the same set of persons held shares in PIPL and were partners in the assessee firm, thus invoking Section 2(22)(e). However, the tribunal referred to the Special Bench decision in CIT Vs. Bhaumik Color (P) Ltd., which held that deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a non-shareholder.

The tribunal also cited the Hon'ble Allahabad High Court's decision in Raj Kumar Singh & Co., which held that if the loan is received by a non-shareholder, it cannot be deemed as dividend. The tribunal concluded that since the assessee was not a shareholder in PIPL, the provisions of Section 2(22)(e) were not applicable.

Conclusion
The tribunal held that the sum of Rs. 9 lacs paid by PIPL did not constitute a "loan or advance" under Section 2(22)(e) as it never reached the assessee's hands. Additionally, deemed dividend under Section 2(22)(e) could not be assessed in the hands of a non-shareholder entity. Therefore, the addition made by the AO was deleted, and the appeal of the assessee was allowed.