2021 (10) TMI 900 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Assessee company has taken loans from the three concerns - as submitted by assessee the loan amounts in question treated as deemed dividend u/s 2(22)(e) by the AO were taken by the assessee-company from the three concerns on interest and since the said lending companies were compensated by interest paid by the assessee-company on the loans, the assessee-company in real sense did not derive any benefit from the said loans so as to attract the provisions of section 2(22)(e) - HELD THAT - As in the case of Pradip Kumar Malhotra 2011 (8) TMI 16 - CALCUTTA HIGH COURT wherein it was held that the phrase by way of advance or loan appearing to sub-clause (e) of section 2(22) must be construed to mean those advances or loans which a shareholder enjoys for simply on account of being a beneficial owner of shares, but if such loan or advance is given to such shareholder as a consequence of any further consideration, which is beneficial to the company, received from such shareholder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of section 2(22)(e). Gratuitous loan or advance given by a company to those classes of shareholder thus would come within the purview of section 2(22)(e) and not the cases where loans or advances given in return to an advantage conferred upon the company by such shareholder. In the present case, the entire amount in question was taken by the assessee-company on interest and since the interest on the said loan was duly paid by the assessee-company after deducting tax at source, we find no infirmity in the impugned orders of the Ld. CIT(A) in deleting the addition made by the AO treating the said amount as deemed dividend under section 2(22)(e) - Decided against revenue.

Summary

Issues Involved:
1. Deletion of additions made by the AO on account of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Additions Made by the AO on Account of Deemed Dividend under Section 2(22)(e) of the Income Tax Act, 1961:

The Revenue appealed against the orders passed by the Ld. CIT(A) - 4, Kolkata, which deleted the additions made by the AO on account of deemed dividend under section 2(22)(e) for the assessment years 2015-16 and 2016-17. The common issue in these appeals was the deletion of additions made by the AO on account of deemed dividend.

The assessee, a company engaged in property development, filed returns for the years under consideration declaring losses. During the assessment proceedings, the AO noticed that the assessee had taken loans from three entities: Multiplex Equipments & Services Pvt. Ltd., Vidyut Electricals & Electronics Pvt. Ltd., and Hind Ceramics Pvt. Ltd. The AO found that the provisions of section 2(22)(e) were attracted and treated the loan amounts as deemed dividend, making additions to the total income of the assessee.

The AO's findings were based on the substantial shareholdings of common key persons in both the assessee company and the lender companies, the lack of public interest in the lender companies, and the accumulated profits of the lender companies exceeding the loan amounts.

Upon appeal, the Ld. CIT(A) deleted the additions for the following reasons:

For A.Y. 2015-16:
The assessee produced ledger accounts and audited balance sheets of the entities involved, showing that interest was charged on the loans and that the loans were substantially returned. The transactions were classified as loan transactions in the books of accounts. The Ld. CIT(A) relied on the jurisdictional High Court's decision in Pradip Kumar Malhotra (338 ITR 538), which held that loans on which consideration in the form of interest was paid by the assessee to the benefit of the company do not attract section 2(22)(e). Therefore, the additions were not sustainable.

For A.Y. 2016-17:
The Ld. CIT(A) noted that the transactions were business transactions where both companies benefited, with interest paid and TDS deducted. The assessee was not a shareholder of the lender companies. Therefore, the deemed dividend under section 2(22)(e) was not applicable.

The Tribunal, after hearing arguments and reviewing the material, upheld the Ld. CIT(A)'s orders. The Tribunal noted that the loans were taken on interest, and the lending companies were compensated by the interest paid by the assessee. The Tribunal relied on the Calcutta High Court's decision in Pradip Kumar Malhotra, which stated that loans or advances given in return for an advantage conferred upon the company by the shareholder do not constitute deemed dividend under section 2(22)(e). Since the interest was duly paid by the assessee after deducting tax at source, the Tribunal found no infirmity in the Ld. CIT(A)'s orders and dismissed the Revenue's appeals.

Conclusion:
Both appeals of the Revenue were dismissed, and the orders of the Ld. CIT(A) deleting the additions made by the AO on account of deemed dividend under section 2(22)(e) were upheld. The Tribunal's decision was based on the principle that loans taken on interest, where the lending companies benefit, do not attract the provisions of deemed dividend under section 2(22)(e).