2024 (4) TMI 320 - AT - Income Tax

Deemed dividend u/s. 2(22)(e) - sum/loan received by the assessee from another group company - HELD THAT - From the understanding of the provisions of the Companies Act 2013 and the legislative intent of bringing amendment to section 2(22)(e) by the Finance Act 1987 the beneficial ownership is with KSWPL under whose substantial control loan from APL is granted to the concern i.e. ASMSPL assessee. ASMSPL i.e. the assessee cannot influence the decision making of company KSWPL. Similarly APL cannot influence the decision making process of KSWPL. In both the companies the controlling interest (substantial interest) is held by KSWPL. It is in fact KSWPL who is in a position to influence the decision making process of the two companies. Therefore the deeming fiction of section 2(22)(e) can be applied only in the hands of KSWPL who is the beneficial owner of shares in both the lender and the receiving companies. A loan or advance received by assessee (a concern) is not per se in the nature of income. It is in fact deemed accrual of income u/s. 5(1)(b) of the Act in the hands of the beneficial shareholder and not in the hands of the receiver (concern) who is a non-shareholder. Also the definition of dividend under the Act is an inclusive definition which was expanded to include even a loan or advance though in the natural and ordinary course it is not an income. The basic character of dividend is a share in profits of the company given to its shareholder. Assessee and APL are in no way in a position to compel KSWPL in any way for exercising its voting rights in a particular manner. In fact in the present case it is the other way that KSWPL because of its shareholding is in a position to compel both the assessee and APL by exercising its voting power to conduct in a particular way. Thus even by going with the observations and findings in the case of National Travel Services 2018 (1) TMI 1159 - SUPREME COURT the beneficial shareholder in the present case is KSWPL under whose controlling interest and influence APL has given loan/advance to the assessee. Accordingly the deeming provisions of section 2(22)(e) under the second limb are attracted on KSWPL. Also taking into consideration the provisions contained in section 5(1)(b) the income accrues or arises or is deemed to accrue or arise in the hands of KSWPL and not in the hands of the assessee in the present case. This leads us to bringing legal fiction to a logical conclusion that by invoking second limb of section 2(22)(e) accrual of income and its taxability cannot be held to be in the hands of the assessee i.e. ASMSPL (the concern) before us. We thus set aside the findings of CIT(A) and delete the addition made by treating the amount of loan and advance as deemed dividend u/s. 2(22)(e) of the Act. Accordingly ground taken by the assessee is allowed.

Summary

Issues Involved:
1. Addition towards deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.
2. Whether the assessee, who is not a shareholder, can be taxed for deemed dividend.

Summary:

Issue 1: Addition towards deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961

The common issue in both appeals is the addition made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] towards deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961. The assessee received a sum of Rs. 5,50,11,501/- as loans/advances from another group company, Apeejay Private Ltd. (APL). The AO treated this amount as deemed dividend because there was a common shareholder, Kathua Steel Works Pvt. Ltd. (KSWPL), holding substantial interest in both the assessee and the lender company. The CIT(A) confirmed this addition.

Issue 2: Whether the assessee, who is not a shareholder, can be taxed for deemed dividend

The assessee argued that it is not a shareholder in APL, and therefore, no addition can be made under Section 2(22)(e). The assessee relied on judicial precedents, including the Special Bench decision in ACIT Vs. Bhaumick Colour Pvt. Ltd. and the Delhi High Court decision in CIT Vs. Ankitech Pvt. Ltd., which state that deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company. The Revenue, however, argued that KSWPL, being a common shareholder with substantial interest in both companies, brings the case within the purview of Section 2(22)(e).

Tribunal's Analysis and Decision:

The Tribunal examined the provisions of Section 2(22)(e) and the legislative intent behind it. The provision aims to tax payments made by closely held companies to shareholders or concerns in which such shareholders have substantial interest, as deemed dividend. The Tribunal noted that the beneficial ownership and control by KSWPL over both companies is crucial. The Tribunal also referred to the Companies Act, 2013, to understand the concepts of beneficial ownership and voting rights.

The Tribunal concluded that the deemed dividend under Section 2(22)(e) should be taxed in the hands of the beneficial shareholder, KSWPL, and not the assessee, who is a non-shareholder. The Tribunal distinguished the case from the Supreme Court decision in CIT Vs. National Travel Services, noting that KSWPL, not the assessee, has the controlling interest and beneficial ownership.

Conclusion:

The Tribunal set aside the findings of the CIT(A) and deleted the addition of Rs. 5,50,11,501/- in the hands of the assessee, treating the amount of loan and advance as deemed dividend under Section 2(22)(e). The appeals were allowed in favor of the assessee. The same observations and findings were applied mutatis mutandis to the other appeal involving a different amount.

Result:

Both appeals of the assessee were allowed. The order was pronounced in the open court on 19th February, 2024.