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2019 (2) TMI 990 - AT - Income TaxDeemed dividend addition u/s 2(22)(e) - addition made towards loan u/s 2(22)(e) as the shareholders of the assessee company holding more than 20% shareholding are the major shareholder of M/s Shivsmruti Investment & Services Pvt. Ltd. - Held that - In this case, there is no dispute with regard to the fact that as on date of loan, the company i.e. M/s Shivsmruti Investment & Services Pvt. Ltd. is having reserves and surplus in excess of loans and advances given to the assessee company. Admittedly, the assessee is not the beneficial ownership in the lending company, but two common shareholders are owned more than 40% equity shares in the above company. When the assessee is neither beneficial nor registered in lending company, then loans and advances received from the said company cannot be brought to tax within the ambit of provisions of section 2(22)(e) of the Act. This legal proposition has been laid down in the case of CIT vs Impact Containers Pvt. Ltd. 2014 (9) TMI 88 - BOMBAY HIGH COURT held that when the recipient of the loan was not a shareholder in any of the entities which have advanced loans and advance, then the addition is required to be deleted . As assessee was neither the beneficial nor the registered shareholder of the company, the amount so received is not liable to be taxed as deemed dividend. No error in the reasons recorded by the Ld. CIT(A), while deleting the addition towards the deemed dividend u/s 2(22)(e) of the Act. Hence, we are inclined to uphold the order of the Ld. CIT(A) and dismissed the appeal filed by the Revenue. - Decided in favour of assessee.
Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961 concerning deemed dividend. 2. Determination of whether the recipient company is a beneficial or registered shareholder. Issue-wise Detailed Analysis: 1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961 concerning deemed dividend: The core issue revolves around whether the loan taken by the assessee from M/s Shivsmruti Investment & Services Pvt. Ltd. should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) observed that the assessee had taken a loan of ?66,08,535 from M/s Shivsmruti Investment & Services Pvt. Ltd., where the common directors held more than 46% of the shares. The AO concluded that the loan should be treated as deemed dividend since the lending company had reserves and surplus exceeding the loan amount, invoking Section 2(22)(e) of the Act. The assessee contended that for Section 2(22)(e) to apply, there must be a beneficial and registered interest in the company. Since the assessee was neither a shareholder nor had beneficial interest in M/s Shivsmruti Investment & Services Pvt. Ltd., the provisions should not apply. The assessee relied on the Bombay High Court’s decisions in Universal Medicare (324 ITR 263) and Bhaumik Colours (313 ITR 146). 2. Determination of whether the recipient company is a beneficial or registered shareholder: The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee’s argument, stating that the assessee company is not a shareholder in the lending company, and thus Section 2(22)(e) cannot be invoked. The CIT(A) relied on the Bombay High Court’s decisions, which held that if the recipient of the loan is not a shareholder, the loan cannot be treated as deemed dividend. The Revenue appealed, arguing that the CIT(A) erred in deleting the addition without considering that the shareholders of the assessee company, who held more than 20% shareholding, were major shareholders of the lending company. The Revenue emphasized that the common shareholders’ substantial interest should trigger the deemed dividend provision. The Tribunal examined the provisions of Section 2(22)(e) and the judicial precedents. It noted that the assessee was neither the beneficial nor the registered shareholder of the lending company. The Tribunal cited the Bombay High Court’s rulings in Universal Medicare and Bhaumik Colours, which clarified that deemed dividend provisions apply only if the recipient is a shareholder. The Tribunal also referred to the ITAT Mumbai’s decision in M/s Neha Home Builders Pvt. Ltd. vs. DCIT, which reinforced that loans received by a company not being a shareholder cannot be taxed as deemed dividend. The Supreme Court’s decision in Gopal & Sons (HUF) (2017) 77 taxmann.com 71 was distinguished, as it involved a different factual matrix where the HUF was the beneficial owner. The Tribunal concluded that since the assessee was neither a registered nor a beneficial shareholder, the loan could not be taxed as deemed dividend under Section 2(22)(e). The Tribunal upheld the CIT(A)’s order and dismissed the Revenue’s appeal. Conclusion: The Tribunal affirmed that for Section 2(22)(e) to apply, the recipient must be a shareholder of the lending company. As the assessee was neither a registered nor a beneficial shareholder, the loan received could not be treated as deemed dividend. The Tribunal upheld the CIT(A)’s decision to delete the addition made by the AO, dismissing the Revenue’s appeal.
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