2024 (2) TMI 1278 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - assessee company is a shareholder of lender company or not? - whether the loans advanced by M/s. IG3 Infra Limited to the assessee companies can be brought to tax in the hands of the assessee companies as deemed dividend u/s. 2(22)(e)? - HELD THAT - Primary condition to attract section 2(22)(e) is the recipient of the loan or person benefitted should be a shareholder in the lender or payee company - such shareholder should own not less than 10% of the voting power. It implies that only the equity share holders are covered since they are the ones who are eligible for voting power, thus, excluding all other shareholders like preference etc. The expression 'shareholder, being a person who is the beneficial owner of shares is a subject matter of debate i.e. whether the shareholder to mean registered and beneficial or beneficial alone. As in the case of CIT v. Ankitech (P.) Ltd 2011 (5) TMI 325 - DELHI HIGH COURT has held that the term 'shareholder used in the section referred to both a registered and beneficial shareholder. In view of the above, having withdrawn the appeal by the assessee in the case of National Travel Service v. CIT 2021 (8) TMI 1380 - SC ORDER as on date the binding judgement on the issue of the expression 'shareholder is that of CIT v. Ankitech (P.) Ltd (supra) as affirmed in the case of CIT v. Madhur Housing Development Co 2017 (10) TMI 1279 - SUPREME COURT Thus, respectfully following the same, we hold that the shareholder referred to in section 2(22)(e) of Act implies registered and beneficial shareholder. Relevant date for determining the shareholding in order to examine the applicability of section 2(22)(e) - As we hold that the relevant date for determining the shareholding is the date of advancing of the loans. In the case of assessee companies, neither the assessee companies nor its shareholders are the shareholders of M/s. IG3 Infra Limited as on the date of advancing of loans. There are no common registered and beneficial shareholders between M/s. IG3 Infra Limited and the respondent companies on the date of advancing of loans. Even prior to change in the shareholding pattern of the respondent companies, it is not the case of the revenue that both M/s. IG3 Infra Limited and the respondent companies have equity shareholders with 10% of the voting power or more. None of the family members of Shri Thiagarajan are registered and beneficial shareholders of M/s. IG3 Infra Limited and the respondent companies either before or after change in shareholding of the respondent companies. Thus, we are of the opinion that the provisions of section 2(22)(e) are not applicable to the facts of the respondent companies and accordingly no addition towards deemed dividend is warranted in the hands of the respondent companies. The undisputed facts are Shri Shanmugam Thiagarajan and Smt Rukmini Thiagarajan are not the registered shareholders of M/s. IG3 Infra Limited and consequently, both of them cannot be regarded as a registered and beneficial shareholder . Smt Unnamalai Thiagarajan though is a registered shareholder of M/s. IG3 Infra Limited, her shareholding in the company amounted to 0.002% which is less than the prescribed voting power of 10% to attract the provisions of third limb of section 2(22)(e) of the Act. Thus, none of the three persons of Thiagarajan family satisfy the legal requirements of being a shareholder in M/s. IG3 Infra Limited in order to attract third limb of section 2(22)(e) - Whether the Thiagarajan family benefitted from the loans advanced by M/s. IG3 Infra Limited or not is immaterial when they do not fall within the conditions laid down in section 2(22)(e) of the Act. In view of this, we are of the opinion that even third limb of section 2(22)(e) of the Act is also not applicable to the facts of the case and accordingly no addition under section 2(22)(e) of the Act is warranted in the hands of the respondent companies. No addition under section 2(22)(e) of the Act will survive in the hands of the respondent companies, another question considered is whether deemed dividend if any is taxable in the hands of the respondent companies when the respondent companies are not the shareholders. In this context, reliance is placed on the following judicial precedents The Hon ble Bombay High Court in the case of CIT v. Universal Medicare Private Limited 2010 (3) TMI 323 - BOMBAY HIGH COURT has held that the deemed dividend under section 2(22)(e) of the Act is required to be taxed in the hands of the shareholder and not in the hands of the concern in which such shareholder has substantial interest which received the loan. We hold that the deemed dividend under section 2(22)(e) of the Act is required to be taxed only in the hands of the common registered shareholder in a case where a closely held company advances a loan to a company in which such common shareholder has substantial interest and the said deemed dividend is not taxable in the hands of the company which is in receipt of the loan. Accordingly, on this count as well, the loans advanced by M/s. IG3 Infra Limited cannot be taxed in the hands of the assessee companies since the assessee companies are not the shareholders in M/s. IG3 Infra Limited. We are of the opinion that the ld. CIT(A) has rightly deleted the additions made by the Assessing Officer under section 2(22)(e) of the Act in the hands of the assessee companies. Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made towards deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.
2. Determination of relevant date for shareholding to apply section 2(22)(e).
3. Taxability of deemed dividend in the hands of the company receiving the loan versus the hands of the shareholder.

Summary:

1. Deletion of Addition Made Towards Deemed Dividend:
The Revenue's appeals pertain to the deletion of additions made towards deemed dividend under section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) had added amounts as deemed dividend, arguing that loans advanced by M/s. IG3 Infra Limited to the assessee companies were for the ultimate benefit of the family members of Shri Thiagarajan, who are the promoters of M/s. IG3 Infra Limited. The AO concluded that the amounts paid to the assessee companies represented loans advanced by M/s. IG3 Infra Limited and should be treated as deemed dividend.

The Commissioner of Income Tax (Appeals) [CIT(A)] held that the provisions of section 2(22)(e) were not applicable since neither the assessee companies nor their shareholders held any equity shares in the lender company, M/s. IG3 Infra Limited. The CIT(A) also noted that the AO failed to substantiate the assertion that the ultimate shareholders had benefited from the loan transactions.

2. Determination of Relevant Date for Shareholding:
The CIT(A) held that the relevant date for determining the shareholding to apply section 2(22)(e) is the date on which the loan was advanced. This view was supported by the judgment of the Allahabad High Court in the case of CIT v. H.K. Mittal (1996) 219 ITR 420 (All), which stated that the chief ingredient of section 2(22)(e) is that one should be a shareholder on the date the loan was advanced.

3. Taxability of Deemed Dividend:
The CIT(A) held that the deemed dividend, if any, is taxable in the hands of the shareholder and not in the hands of the company receiving the loan. This view was supported by several judicial precedents, including the binding decision of the Hon'ble Madras High Court in the case of Pr. CIT vs Ennore Cargo Terminal P Ltd (2018) 406 ITR 477 (Mad), which held that the deemed dividend can only be assessed in the hands of the registered shareholder for whose benefit the money was advanced.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, stating that the provisions of section 2(22)(e) were not applicable to the assessee companies as there were no common registered and beneficial shareholders between M/s. IG3 Infra Limited and the assessee companies. The Tribunal also agreed that the relevant date for determining the shareholding is the date of advancing the loans and that the deemed dividend, if any, should be taxed in the hands of the shareholder and not the company receiving the loan. Consequently, the appeals filed by the Revenue were dismissed.