2020 (12) TMI 1152 - AT - Income Tax

Addition on account of deemed dividend u/s. 2(22)(e) - assessee company has obtained unsecured loan from Gaurav Securities Pvt. Ltd - One main shareholder of the assessee company was also holding substantial shareholder in the Gaurav Securities Pvt. Ltd. from whom the assessee has obtained the loan - HELD THAT - For the applicability of section 2(22)(e), it is required that the assessee company must be a shareholder in the company from whom the loan or advance has been taken and it does not provide that any shareholder in the assessee company who had taken any loan or advance from another company in which such shareholder is also a shareholder having substantial interest. Since the facts of the case of the assessee are squarely covered by the decisions of Mahavir Inducto Pvt Ltd. 2017 (1) TMI 1159 - GUJARAT HIGH COURT the impugned addition is deleted. Accordingly, this ground of the assessee is allowed. Disallowance of office expenses - assessee has shared common business premises with its associate concern M/s. Gaurav Securities Pvt. Ltd. and in the profit and loss account assessee company has debited substantial expenses related to the office building and its maintenance - AO show cause to assessee why 50% of these expenses should not be disallowed because of sharing of common business premises - HELD THAT - On perusal of the profit and loss account of M/s. Gaurav Securities Pvt. Ltd it is noticed that during the year under consideration it has shown only indirect income in the form of dividend income and interest income which demonstrate that no major activities was carried out during the year under consideration. The Assessing Officer has also failed to controvert the claim of the assessee with specific finding that its associate concern had not carried out any business activity at the premises. The aforesaid facts demonstrates that no major activities has been carried out in the case of M/s. Gaurav Securities Pvt. Ltd. therefore we consider that disallowance of expenses to the extent of ₹ 25% of the amount is reasonable in this case. We restrict the disallowance to the extent of ₹ 25% of the expenses - Decided partly in favour of assessee.

Summary

Issues:
1. Addition on account of deemed dividend u/s. 2(22)(e) of the Act
2. Disallowance out of office expenses

Issue 1: Addition on account of deemed dividend u/s. 2(22)(e) of the Act:

The Assessing Officer observed that the assessee company had obtained an unsecured loan from a company where a common shareholder with substantial interest existed. The AO treated the loan amount as deemed dividend u/s. 2(22)(e) and added it to the total income of the assessee. The CIT(A) upheld this addition. In the appeal before ITAT, the assessee argued that since it was not a registered shareholder in the lending company, the provision of deemed dividend should not apply. The ITAT referred to relevant case laws and held that for the application of section 2(22)(e), the assessee company must be a shareholder in the lending company, which was not the case here. Relying on previous judgments, the ITAT deleted the addition as the facts were similar to cases where the provision was not applicable.

Issue 2: Disallowance out of office expenses:

The Assessing Officer disallowed 50% of the office expenses incurred by the assessee due to sharing of common business premises with an associate concern. The CIT(A) upheld this disallowance. In the appeal before ITAT, the assessee contended that the associate concern did not conduct any business activities at the premises, so no disallowance should be made. After reviewing the facts, the ITAT found that the associate concern had not carried out significant activities during the year. Therefore, the ITAT considered a disallowance of 25% of the expenses amounting to ?2,11,923 as reasonable. Consequently, the ITAT partly allowed the appeal of the assessee.

In conclusion, the ITAT ruled in favor of the assessee by deleting the addition on account of deemed dividend u/s. 2(22)(e) of the Act based on the requirement that the assessee company must be a shareholder in the lending company for the provision to apply. Additionally, the ITAT reduced the disallowance out of office expenses to 25% of the total amount, considering the lack of significant activities by the associate concern at the shared premises.