2021 (7) TMI 339 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - Tribunal by placing reliance on PRADIP KUMAR MALHOTRA 2011 (8) TMI 16 - CALCUTTA HIGH COURT has held that the advance of loan granted by the Company to the assessee cannot be treated as deemed dividend Section 2(22)(e) - HELD THAT - The aforesaid finding is based on meticulous appreciation of evidence on record. The assessee had produced the documents before the Commissioner of Income Tax (Appeals) and the Commissioner of Income Tax (Appeals) had asked for the remand report from the Assessing Officer. The Commissioner of Income Tax (Appeals), after consideration of the remand report, recorded a finding in this regard, which has been affirmed by the Tribunal. Thus, it cannot be said that the assessee had not adduced any material either before the Commissioner of Income Tax (Appeals) or before the Tribunal. - Decided in favour of the assessee

Summary

Issues:
1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.
2. Whether the advance received by the assessee from the company constitutes deemed dividend under Section 2(22)(e) of the Act.

Issue 1: Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend:

The High Court analyzed the provisions of Section 2(22)(e) of the Income Tax Act, 1961, which defines "dividend" to include certain payments by a company to a shareholder. The Court referred to a Division Bench decision of the Calcutta High Court, which clarified that advances or loans given to shareholders for their beneficial contribution to the company do not fall under the scope of deemed dividend. The key consideration is whether the loan or advance is gratuitous or given in return for an advantage conferred upon the company by the shareholder.

Issue 2: Whether the advance received by the assessee from the company constitutes deemed dividend under Section 2(22)(e) of the Act:

In this case, the assessee, who was the managing director of the company and held more than 10% of the voting power, received an advance from the company. The company utilized the assessee's personal assets as collateral to secure loans for its business operations. The Commissioner of Income Tax (Appeals) and the Tribunal both concluded that the advance given to the assessee was not merely due to his shareholding but was in exchange for the benefit the company derived from his contributions. The Tribunal, relying on the Calcutta High Court decision, held that the advance did not qualify as deemed dividend under Section 2(22)(e) of the Act.

The Court found that the assessee had provided relevant documents before the authorities, and after due consideration, the Commissioner of Income Tax (Appeals) and the Tribunal arrived at well-founded conclusions based on the evidence presented. As a result, the Court dismissed the appeal filed by the revenue, ruling in favor of the assessee. The judgment emphasized the importance of assessing whether advances or loans to shareholders are given as a result of their beneficial contributions to the company, rather than being gratuitous in nature, in determining the applicability of deemed dividend provisions under the Act.