2017 (5) TMI 1365 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - loan & advanced to the shareholders in the guise of share application money to the another concern / company - taxability in the hands of shareholders - Held that - The intention of the legislature is clarified in circular issued by the CBDT as at the time of amendment of clause (e) of sub section (22) of sec. 2 is further fortified by the fact that for deduction of tax at source. Sec. 194 provide that such deduction of tax has to be made in the case of the payments of the nature mentioned in clauses (a), (b), (c), (d) and (e) of sub section (22) of Section 2 only in a case where such payments were made to a shareholder. Section 199 also indicates that adjustment of TDS would be provided in the assessment of shareholder only. The very fact that the provision for deduction of tax at source and adjustment of tax is only in respect of the payments to the shareholder would clearly indicate that even after the amendment, the effect of clause (e) of sub section (22) of Sec. 2 would apply only when the payment is made to shareholder. Wherever, the tax is to be deducted at source from a dividend or deemed dividend and the consequential effect of giving effect to such deduction of tax at source, etc., reference was made only to the payments to the shareholder. This would indicate clearly that clause (e) would apply only in case of payments to the shareholder and not to others. In view of the foregoing discussion and following the special bench decision of Mumbai Tribunal in the case of ACIT Vs. Bhaumic Colour Pvt. Ltd. 2008 (11) TMI 273 - ITAT BOMBAY-E as well as the decision of the Hon ble Delhi High court in the case of CIT Vs. Ankitech P. Ltd. 2011 (5) TMI 325 - DELHI HIGH COURT , we hold that the dividend income is taxable in the hands of shareholders and not in the hands of the concern. Accordingly, we dismiss the assessee s ground on this issue. Once we find that the loan or advance is not taxable in the hands of such concern and should be taxed in the hands of shareholder and that is a correct legal position according to us, such a circular would be of no use. Further, Circulars are not binding on the courts. Accordingly, we dismiss this ground of assessee. Unable accept the contention of the AR that the deemed dividend should be assessed in the hands of the assessee proportionately to the extent of assessee s shareholding in the recipient company. Therefore, we dismiss the ground raised by the assessee on this issue. - Decided against assessee.

Summary

Issues Involved:
1. Reopening of assessment under section 148.
2. Application of section 2(22)(e) - Deemed dividend.
3. Taxability of deemed dividend - Shareholder vs. recipient company.
4. Interpretation of CBDT Circular No. 495 of 1987.
5. Proportionate taxation of deemed dividend based on shareholding.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 148:
The assessee's return for AY 2007-08 was initially processed under section 143(1) on 05/08/2008. The case was reopened by issuing a notice under section 148 on 30/03/2013 after recording reasons. Subsequent notices under sections 143(2) and 142(1) were issued along with a show cause notice to assess deemed dividend under section 2(22)(e).

2. Application of Section 2(22)(e) - Deemed Dividend:
The assessee held significant shares in M/s Caspian Capital and Finance Pvt. Ltd. and other companies. M/s Caspian Capital advanced amounts to M/s Metro Architectures & Contractors Pvt. Ltd. and M/s Orbit Travels & Tours Pvt. Ltd. under the guise of share application money, which the AO treated as unsecured loans, thereby invoking section 2(22)(e) to assess these amounts as deemed dividends in the hands of the assessee.

3. Taxability of Deemed Dividend - Shareholder vs. Recipient Company:
The CIT(A) and AO considered the entire share application money as deemed dividend under section 2(22)(e) in the hands of the assessee and her husband, leading to double taxation concerns. The CIT(A) directed apportionment based on shareholding patterns but maintained that if taxed in both hands, apportionment should occur; otherwise, it should not.

4. Interpretation of CBDT Circular No. 495 of 1987:
The assessee argued that the CBDT Circular No. 495 mandates taxing deemed dividends in the hands of the recipient company. However, the Tribunal noted that subsequent judicial decisions have clarified that deemed dividends should be taxed in the hands of the shareholder, not the recipient company. The Tribunal emphasized that judicial decisions supersede the circular.

5. Proportionate Taxation of Deemed Dividend Based on Shareholding:
The assessee contended that deemed dividends should be taxed proportionately based on shareholding in the recipient companies. The Tribunal, however, upheld that deemed dividends should be taxed in the hands of the shareholders holding substantial interest in both the payer and recipient companies, without proportionate apportionment.

Conclusion:
The Tribunal dismissed all the appeals, confirming that deemed dividends under section 2(22)(e) should be taxed in the hands of shareholders holding substantial interest, not in the hands of the recipient companies. The Tribunal also rejected the applicability of CBDT Circular No. 495 in this context, emphasizing adherence to judicial precedents. The Tribunal further dismissed the concept of proportionate taxation based on shareholding in recipient companies, aligning with the principle that deemed dividends are taxable in the hands of shareholders with substantial interest.