2017 (5) TMI 65 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - loan obtained by Assessee on interest - Held that - As far as the amount considered as deemed dividend as a loan from M/s RPC is concerned, this is not a loan obtained during the year but repayment made during the year. There was an opening balance of ₹ 16,98,000/- at the beginning of the year and Assessee paid an amount of ₹ 1,00,000/- on 08-07-2006 and year ending balance has been reduced to ₹ 15,98,000/-. Since the amount is a repayment to the company and not a loan obtained from the company, invoking provisions of Sec. 2(22)(e) of the IT Act on this amount does arise, accordingly, this amount is deleted. On the issue of loan from M/s VTC, the account copy indicates that there was opening balance as well to an extent of ₹ 1.08 Crores. We were informed that no proceedings u/s 2(22)(e) of the IT Act were initiated in earlier year. However these amounts are not interest free. Assessee paid interest at 8% per annum to an extent of ₹ 9,92,477/- during the year, thus, we are of the opinion that this amount is not a benefit obtained by Assessee, but there is a benefit to the company. Thus the order made by A.O and sustained by Ld. CIT(A) on account of loan received by Assessee, on which consideration in the form of interest was paid by Assessee to the benefit of the company, is not sustainable.See Pradip Kumar Malhotra Versus Commissioner of Income-tax, West Bengal-V 2011 (8) TMI 16 - CALCUTTA HIGH COURT . - Decided in favour of assessee.

Summary

Issues:
- Application of provisions of Sec. 2(22)(e) of the IT Act on an amount obtained by the Managing Director on interest from the company.
- Contesting the reopening of assessment under Sec. 147 of the IT Act.
- Interpretation of Sec. 115 O and Sec. 2(22)(e) of the IT Act regarding a loan obtained by the Assessee on interest.
- Whether the loan obtained by the Assessee from the company qualifies as 'deemed dividend' under Sec. 2(22)(e) of the IT Act.
- Treatment of an amount as deemed dividend under Sec. 2(22)(e) based on the nature of the loan.

Analysis:

1. The appeal involved a dispute regarding the application of Sec. 2(22)(e) of the IT Act on an amount obtained by the Managing Director on interest from the company. The Assessee contended that the amount should not be treated as 'deemed dividend' under this provision.

2. The Assessee, a Managing Director of two companies, received substantial amounts from both companies, leading to the initiation of proceedings under Sec. 147 of the IT Act. The Assessee argued that the amounts were received as loans on interest and not as deemed dividends.

3. The CIT(A) rejected the Assessee's contentions regarding the reopening of assessment but upheld the addition under Sec. 2(22)(e) of the IT Act. The Assessee's arguments based on interpretations of relevant sections and circulars were not accepted.

4. The CIT(A) upheld the addition as deemed dividend under Sec. 2(22)(e) despite the Assessee's submissions regarding the nature of the loan and personal guarantees provided. The CIT(A) emphasized that certain considerations, such as past dividends and guarantees, were not relevant under the Act.

5. The Assessee's appeal before the ITAT reiterated arguments regarding the loan from one company and repayment from another. The Assessee cited legal precedents to support the claim that the loan obtained on interest should not be treated as 'deemed dividend'.

6. The ITAT analyzed the nature of the transactions and considered the Assessee's payments of interest on the loan. Referring to a similar case, the ITAT concluded that the loan received on interest, with consideration in the form of interest paid back to the company, did not qualify as 'deemed dividend' under Sec. 2(22)(e) of the IT Act.

7. Consequently, the ITAT allowed the Assessee's appeal, deleting the amount treated as deemed dividend under Sec. 2(22)(e) of the IT Act. The judgment was based on the principle that loans given and repaid with interest, providing a benefit to the company, should not be categorized as 'deemed dividends'.

This detailed analysis highlights the key legal arguments, interpretations, and precedents considered in the judgment, leading to the final decision in favor of the Assessee.