2016 (8) TMI 1079 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Held that - The assesseecompany i.e. Suresh Enterprises Pvt. Ltd. is not a shareholder in Shejawadkar Builders Pvt. Ltd. Therefore the essential condition for invoking provisions of sec.2(22)(e) is not fulfilled in this case. The recipient of loan should be a shareholder in the companies from which loans have been received was not taken before the lower authorities. Therefore this issue cannot be adjudicated by this Tribunal. This contention cannot be accepted as it is purely a question of law. Fact that the assessee is not a shareholder in the company Shejwadkar Builders Pvt. Ltd., is borne out of the assessment order itself. Therefore the contention raised by the learned DR is rejected. - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961 concerning deemed dividend.
2. Consideration of accumulated profits for deemed dividend.
3. Shareholding status of the assessee-company in the lender companies.
4. Legal contention regarding non-shareholder status not raised before lower authorities.

Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961 concerning deemed dividend:
The primary issue revolves around whether the loans received by the assessee-company from Shejwadkar Builders Pvt. Ltd. and Shejwadkar Construction Co. Ltd. constitute deemed dividends under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) added ?36,47,236/- to the assessee's income, treating the loans as deemed dividends, asserting that the lender companies had a substantial interest in the assessee-company.

2. Consideration of accumulated profits for deemed dividend:
The assessee contended that the CIT(A) failed to consider the nature of the relationship between the holding and subsidiary companies and the carry-forward loss position of Shejwadkar Builders Pvt. Ltd. The assessee argued that accumulated profits should exclude depreciation and other specified disbursements to compute commercial profits accurately. The assessee claimed that after accounting for depreciation, Shejwadkar Builders Pvt. Ltd. had no accumulated profits, thus the addition of ?36,47,236/- was against the provisions of Section 2(22)(e).

3. Shareholding status of the assessee-company in the lender companies:
A critical legal contention raised was that the provisions of Section 2(22)(e) could not be invoked as the assessee-company was not a shareholder in Shejwadkar Builders Pvt. Ltd. or Shejwadkar Construction Co. Ltd. The Tribunal referred to the statutory language of Section 2(22)(e), which stipulates that deemed dividend provisions apply only if the recipient of the loan is a shareholder in the lending company. The Tribunal noted that the assessee-company was not a shareholder in the lender companies, thus the essential condition for invoking Section 2(22)(e) was not met.

4. Legal contention regarding non-shareholder status not raised before lower authorities:
The Departmental Representative argued that the issue of the assessee-company not being a shareholder was not raised before the lower authorities and thus should not be adjudicated by the Tribunal. However, the Tribunal rejected this contention, stating that the issue is purely a question of law and the fact that the assessee is not a shareholder is evident from the assessment order itself.

Conclusion:
The Tribunal concluded that the deemed dividend could not be taxed in the hands of the assessee-company as it was not a shareholder in Shejwadkar Builders Pvt. Ltd. The Tribunal referenced the jurisdictional High Court's decision, which held that deemed dividend tax is leviable only on the shareholder, not on the concern. The Tribunal allowed the appeal filed by the assessee-company, while also noting that the department could tax the deemed dividend in the hands of the actual shareholder through appropriate legal action.

Order:
The appeal filed by the assessee-company was allowed, and the order was pronounced in the open court on 20th July 2016.