2020 (2) TMI 927 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - HELD THAT - Additional evidence filed by the assessee are the copies of the resolutions of the Board of Directors of the company for setting up of a hospital at Vizag and at Nagpur and also land allotment letters by MADC on receipt of payment from the assessee - letters issued by the Ministry of Corporate Affairs dated 31.07.2017 wherein the scheme of merger of Visakha Hospitals VHDL and M/s. Quality Care India Ltd, the assessee herein is approved. It is the argument of the assessee that the business of VHDL has now become the business of the assessee w.e.f. the appointed date i.e. 1.4.2016. We deem it fit and proper to admit the additional evidence and remand the same to the file of the AO for de novo consideration in accordance with law, particularly, the contention of the assessee that the advances from VHDL were received in the financial year 2011-12. Similarly, with regard to the advances of ₹ 1.00 crore from GHCL to the assessee also, the AO may re-examine the issue i.e. the period of receipt of income, whether it had accumulated profits during the relevant period and whether it was for commercial expediency as claimed by the assessee. Assessee s appeal is treated as allowed for statistical purposes.

Summary

Issues:
1. Whether advances received from wholly-owned subsidiaries for strategic investments constitute deemed dividend under section 2(22)(e) of the Income Tax Act.
2. Whether the advances received by the assessee from subsidiaries were for business purposes and exempt from deemed dividend taxation.
3. Whether the additional evidence submitted by the assessee should be admitted and remanded for re-adjudication.

Analysis:

Issue 1:
The primary issue in this case was whether the advances received by the assessee from its wholly-owned subsidiaries, VHDL and GHCL, should be treated as deemed dividend under section 2(22)(e) of the Income Tax Act. The Assessing Officer (AO) contended that since the subsidiaries had reserves and surplus and had advanced funds to the assessee, such advances fell within the definition of deemed dividend. The AO held that the advances were to be brought to tax in the hands of the assessee, considering the substantial interest held by the assessee in the subsidiary companies.

Issue 2:
The assessee argued that the advances received were for strategic investments on behalf of the subsidiaries for setting up multi-specialty hospitals. The assessee contended that these funds were obtained for business purposes and did not fall within the purview of deemed dividend under section 2(22)(e) of the Act. The assessee relied on a decision of the ITAT Hyderabad Bench and presented the transactions as part of a business strategy for expansion and development of healthcare facilities.

Issue 3:
Regarding the admission of additional evidence by the assessee, the Tribunal found that the documents submitted, including resolutions of the Board of Directors and land allotment letters, demonstrated the commercial expediency of receiving funds from the subsidiaries for setting up hospitals. The Tribunal admitted the additional evidence and remanded the case to the AO for re-examination, particularly focusing on the period of receipt of income and whether it was for commercial expediency as claimed by the assessee.

In conclusion, the Tribunal allowed the assessee's appeal for statistical purposes, emphasizing the need for a thorough re-examination of the case by the AO in light of the additional evidence presented. The judgment highlighted the importance of considering the business purpose behind advances received from subsidiaries in determining their tax treatment under the Income Tax Act.