2021 (4) TMI 856 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - HELD THAT - The purpose of Section 2(22)(e) of the Income Tax Act, 1961 plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having companies payer distribute, what would legitimately be dividend in the hands of shareholders, money in the form of advance or loan. On going through the order of CIT(A) we observe that he has passed well-reasoned order and, in our considered, it does not require any interference. CIT(A) considered the submissions made by the assessee before him and analyzing the issue with case law, held that the provision of section 2(22)(e) has no application in case of the assessee. Therefore, we do not find any infirmity in the order of the CIT(A) in directing the AO to delete the addition - Decide in favour of assessee.

Summary

Issues involved:
1. Interpretation of section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.
2. Application of section 2(22)(e) to transactions between an individual and a company.
3. Analysis of case law and judicial precedents related to section 2(22)(e).

Detailed Analysis:
1. The appeal by the Revenue challenged the order of the CIT(A) regarding the application of section 2(22)(e) of the Income Tax Act, 1961. The Revenue contended that the CIT(A) erred in holding that the provisions of section 2(22)(e) did not apply to the case of the assessee. The dispute arose from loans and advances given by one company to another, involving common shareholders, triggering the provisions of section 2(22)(e) regarding deemed dividend.

2. The Assessing Officer (AO) initiated proceedings under section 147 and issued a notice to the assessee regarding the deemed dividend under section 2(22)(e). The AO contended that a substantial amount had escaped assessment in the hands of the assessee, who was a shareholder in both companies involved in the transaction. Despite the assessee's submissions, the AO assessed the amount as income of the assessee under section 56(2) read with section 2(22)(e) of the Act.

3. The CIT(A) considered the submissions of the assessee and analyzed the issue extensively with reference to case law, including the decision of the Kolkata High Court. The CIT(A) held that the transaction between the assessee and his company did not fall within the definition of deemed dividend under section 2(22)(e) of the Act. The CIT(A) emphasized that loans or advances received for mutual business benefit do not qualify as deemed dividends. The CIT(A) also cited relevant case laws to support the decision, highlighting the need for a strict interpretation of section 2(22)(e).

4. The ITAT upheld the order of the CIT(A) after considering the arguments presented by the Revenue. The ITAT observed that the purpose of section 2(22)(e) was to tax accumulated profits distributed by closely held companies as loans to shareholders. The ITAT found the CIT(A)'s order well-reasoned and declined to interfere, concluding that the provision of section 2(22)(e) did not apply to the assessee's case. Consequently, the ITAT dismissed the Revenue's appeal, affirming the deletion of the addition made by the AO under section 2(22)(e).

This comprehensive analysis of the legal judgment highlights the interpretation of section 2(22)(e) in the context of deemed dividend, the application of the provision to specific transactions, and the reliance on case law to determine the tax treatment of loans and advances between individuals and companies.