2019 (6) TMI 343 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - assessee company is not shareholder - taxability of loan amount as deemed dividend - M/s. Rajratna Energy Holdings Pvt Limited is a common shareholder for both the assessee Company and M/s. AIC Solar Project Pvt Limited who has advanced a loan to the assessee company - HELD THAT - The issue is squarely covered by the decision of the Hon ble Supreme Court in the case of CIT Vs. Madhur Housing and Development Co. 2017 (10) TMI 1279 - SUPREME COURT wherein held although there were persons having substantial interest in the assessee-company and the company which gave the loan, the assessee-company not being shareholder of the company which gave the loan, the loan was not assessable as deemed dividend in the assessee's hands - Decided in favour of assessee.

Summary

Issues:
1. Delay in filing appeal
2. Taxability of loan under section 2(22)(e) of the IT Act, 1961

Delay in filing appeal:
The appeal was filed with a delay of 51 days, attributed to the ill health of the managing director (MD) of the company responsible for accounting and financing functions. The assessee submitted an affidavit explaining the delay, stating it was due to the MD's health condition, beyond the assessee's control. The tribunal, considering the sufficient reason provided, condoned the delay and admitted the appeal for hearing and adjudication.

Taxability of loan under section 2(22)(e) of the IT Act, 1961:
During assessment, it was noted that a loan was advanced by M/s. AIC Solar Project Pvt Limited to the assessee company, which holds 100% shares of the appellant company and 51% shares in M/s. AIC Solar Project Pvt Limited. The Assessing Officer invoked section 2(22)(e) of the IT Act, 1961, deeming the loan as a dividend in the hands of the assessee company. The AO highlighted various conditions supporting this, such as the relationship between the companies, the nature of the loan, and the lack of evidence of other funding sources. The AO also emphasized that even interest-bearing loans fall within the ambit of section 2(22)(e). The CIT(A) upheld the AO's decision, citing the Supreme Court's ruling in a similar case.

The assessee, in appeal before the tribunal, argued against the CIT(A)'s decision, contending that section 2(22)(e) applies to shareholders and not to non-shareholders receiving loans. The tribunal, referring to a Supreme Court decision, held that the legal fiction of deemed dividend does not extend to non-shareholders, thereby setting aside the CIT(A)'s order and deleting the addition of the loan amount under section 2(22)(e) of the Act. Consequently, the appeal of the assessee was allowed.

In conclusion, the tribunal ruled in favor of the assessee, allowing the appeal and deleting the addition made by the AO under section 2(22)(e) of the IT Act, 1961. The judgment was pronounced on 10th May 2019 by the tribunal members Smt. P. Madhavi Devi and Shri S. Rifaur Rahman.