2021 (8) TMI 440 - HC - Income Tax

Deemed dividend addition u/s 2(22)(e) - CIT(A) deleted the addition of deemed dividend simply accepting the submissions made by the assessee - as per ITAT there is no evidence on record to show that this loan was to be utilized only for purpose of business of the company or in any other manner, these facts go to prove that these amounts were advanced as gratuitous loan to the shareholders and provisions of section 2(22)(e) are squarely applicable - HELD THAT - When a loan is advanced by a company to a registered share holder and other conditions mentioned in Section 2(22)(e) of the Act having been satisfied, the amount of loan has to be treated as deemed dividend within the meaning of Section 2(22)(e) of the Act. Tribunal while recording the aforesaid finding and while reversing the finding recorded by the Commissioner of Income Tax (Appeals), has not taken into account the ledger report, certificates issued by a standard chartered bank, books entries as well as the provisions of the agreements dated 22.11.2005 and 24.12.2005. Since the issue with regard to applicability of Section 2(22)(e) of the Act requires factual adjudication, the order dated 12.08.2016 passed by the Tribunal is quashed and the matter is remitted to the Tribunal for decision afresh after taking into account the material available on record. It is therefore not necessary for us to answer the substantial questions of law.

Summary

Issues involved:
1. Validity of notice under Section 148 of the Income Tax Act, 1961.
2. Interpretation of Section 2(22)(e) of the Act regarding deemed dividend.
3. Assessment of loans received by the assessee from a company.

Issue 1: Validity of notice under Section 148:
The appeal raised questions on the Assessing Officer's jurisdiction under Section 147, beyond the recorded reasons under Section 148(2). The Tribunal's decision on the validity of the notice was challenged based on the belief that the Tribunal's finding on loans received by the assessee was speculative and not supported by ledger account details. The appellant argued that the loans were for business purposes, as part of capital infusion agreements, and not for personal benefit. Legal precedents and circulars were cited to support this argument.

Issue 2: Interpretation of Section 2(22)(e) regarding deemed dividend:
The Tribunal determined that loans advanced by a company to a shareholder, meeting Section 2(22)(e) conditions, should be treated as deemed dividend. However, the Commissioner of Income Tax (Appeals) disagreed, stating that the loans were not for personal benefit but for business purposes, aiming to strengthen the company financially. The Tribunal's decision was based on the flow of funds between related entities, triggering Section 2(22)(e) implications.

Issue 3: Assessment of loans received by the assessee:
The Assessing Officer initiated reassessment proceedings after discovering loans received by the assessee from a company in which the assessee held equity shares. The Tribunal upheld the reassessment, considering the loans as deemed dividend under Section 2(22)(e). However, the High Court found discrepancies in the Tribunal's analysis, noting the omission of crucial evidence like ledger reports and bank certificates. Consequently, the matter was remitted to the Tribunal for a fresh decision based on all available records.

In conclusion, the High Court's judgment addressed the validity of the notice under Section 148, the application of Section 2(22)(e) concerning deemed dividend, and the assessment of loans received by the assessee. The decision highlighted the importance of factual evidence and thorough consideration of all relevant material in tax assessment cases, emphasizing the need for a comprehensive review before making final determinations.