2016 (7) TMI 1007 - AT - Income Tax

Revision u/s 263 - deemed dividend u/s. 2(22)(e) - Held that - The loan or advance or payment is, under such circumstances, to be deemed as dividend to the extent the paying company has accumulated profits, the exception being where the lending company is in the business of money lending. We have already noted satisfaction of all the required conditions in the present case, as well as of the lending companies being not in the money lending business, so that exceptions to the provision are excluded. It is clearly limb (b) supra that is attracted in the present case, and which does not provide for a further requirement to show that the monies were intended for the benefit of such shareholder. There is nothing in the decision to suggest such a benefit being required to be shown in all cases. In the facts of that case, it was limb (c) supra that was applied. The assessee- respondent in Mukundray K. Shah (2007 (4) TMI 201 - SUPREME Court) did not in fact have substantial interest in both the concerns, MKF and MKI, so that limb (b) could not, in any case, be applied. In fact, the assessment in that case was of undisclosed income , on the basis of a dairy seized in search, and which revealed the source of funds invested by the assessee in bonds, tracing the source thereof (on the basis of the said diary) to two concerns, and which had been, in turn, released funds by the payer company in which (the assessee) had substantial interest. It was on that basis that the provision of section 2(22)(e) became applicable - Decided against assessee

Summary

Issues Involved:
1. Invocation of Section 263 of the Income Tax Act by the Commissioner of Income Tax (CIT).
2. Taxability of loans taken by Yasham Bio Science Pvt. Ltd. from Yasham Cemphar Pvt. Ltd. and Yasham Importers & Exporters Pvt. Ltd. as deemed dividends under Section 2(22)(e) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Invocation of Section 263 of the Income Tax Act by the Commissioner of Income Tax (CIT):

The CIT invoked Section 263 of the Income Tax Act, 1961, setting aside the assessment order dated 14.2.2014 for the assessment year 2011-12. The CIT held that the amounts lent by Yasham Cemphar Pvt. Ltd. (YCPL) and Yasham Importers & Exporters Pvt. Ltd. (YIEPL) to Yasham Bio Science Pvt. Ltd. (YBPL) were liable to be deemed as dividends under Section 2(22)(e) in the hands of the assessee. The assessee contested this, arguing that the earlier order by the Assessing Officer (AO) was neither erroneous nor prejudicial to the interest of the Revenue. The Tribunal clarified that the AO's failure to examine the issue rendered the order erroneous and prejudicial to the interests of the Revenue, justifying the CIT's invocation of Section 263.

2. Taxability of Loans as Deemed Dividends under Section 2(22)(e):

The Tribunal examined whether the loans taken by YBPL from YCPL and YIEPL should be taxed as deemed dividends under Section 2(22)(e). The Tribunal referenced several legal precedents, including CIT vs. Universal Medicare (P) Ltd. and Asst. CIT vs. Bhaumik Colour (P) Ltd., to conclude that the loans were indeed liable to be deemed as dividends. The Tribunal noted that the primary facts, including shareholding and amounts lent, were undisputed. The assessee argued that no benefit had been derived from the loans, as they were repaid with interest during the relevant year. However, the Tribunal dismissed this argument, citing precedents like Navnit Lal C. Javeri vs. K. K. Sen and Tarulata Shyam vs. CIT, which clarified that repayment of loans and the charging of interest are irrelevant for the application of Section 2(22)(e).

The Tribunal also addressed the assessee's contention that the amounts lent were inter-corporate deposits (ICDs) rather than loans. The Tribunal found no evidence to support this claim and noted that the accounts clearly reflected the amounts as unsecured loans. The Tribunal emphasized that the provision applies to any loan or advance, irrespective of its nature.

The Tribunal further dismissed the argument that the benefit clause of Section 2(22)(e) must be satisfied in all cases. The Tribunal clarified that the provision is triggered by any loan or advance given by a company to a shareholder holding not less than 10% of the voting power or to any concern in which such shareholder has a substantial interest. The Tribunal found that all conditions for the application of Section 2(22)(e) were satisfied in this case.

Conclusion:

The Tribunal upheld the CIT's order, finding no infirmity in the decision to tax the loans as deemed dividends under Section 2(22)(e). The assessee's appeal was dismissed, and the Tribunal's decision was consistent with the law as explained by the Apex Court and the Hon'ble jurisdictional High Court. The order was pronounced in the open court on July 18, 2016.