2024 (9) TMI 518 - AT - Income Tax

Deemed dividend u/s. 2(22)(e) - interest free loan from its related company where it is substantially related in shareholding - whether deemed dividend is taxable in the hands of the concern in which the shareholders of the lender company has substantial interest or in the hands of such common shareholder has been a matter of debate before the courts? - since the assessee is not a shareholder of the lendor, the provisions of section 2(22)(e) is not applicable to the assessee with regard to loans taken from the lendor. HELD THAT - From the perusal of section 2(22)(e) and the decisions of Hon ble Delhi High Court in the case of CIT Vs. Ankitech Pvt. Ltd. Others 2011 (5) TMI 325 - DELHI HIGH COURT and Universal Medicare Pvt. Ltd. 2010 (3) TMI 323 - BOMBAY HIGH COURT it is abundantly clear that the deemed dividend u/s. 2(22)(e) of the Act will liable to be taxed in the hands of the shareholder only. The contention of the DR that since M/s. Agarwal Agri Steel Private Limited was holding more than 10% of shares of both lendor and assessee, the lendor and assessee got automatically related and therefore the loan taken by the assessee from the lendor is covered u/s. 2(22)(e) is not correct. Therefore, we are of the considered opinion that the addition made by the AO on account of deemed dividend u/s. 2(22)(e) of the Act in the hands of the assessee is required to be deleted. Therefore, we direct the AO to delete the addition made on account of deemed dividend u/s. 2(22)(e) - Appeal of the assessee is allowed.

Issues:
Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend and its applicability to shareholders and concerns with substantial interest.

Detailed Analysis:

1. Background:
The case involves M/s. Agarwal Sponge & Energy Private Limited appealing against an order by the Commissioner of Income Tax (Appeals) for the assessment year 2013-14. The dispute revolves around the addition of Rs. 16,68,33,979 as deemed dividend under section 2(22)(e) of the Act.

2. Assessment by Assessing Officer (AO):
The AO added the amount as deemed dividend due to a loan obtained by the assessee from a related company, M/s. Agarwal Industries Pvt Ltd, with accumulated profits. The AO invoked section 2(22)(e) based on the common shareholding between the companies.

3. Decision by CIT(A):
The CIT(A) upheld the AO's decision, citing judicial precedents and the interpretation of section 2(22)(e). The CIT(A) referred to the Supreme Court's clarification that deemed dividend is taxable in the hands of common shareholders with substantial interest.

4. Appellate Tribunal Decision:
The Appellate Tribunal analyzed the provisions of section 2(22)(e) and previous court decisions. It concluded that deemed dividend is taxable in the hands of shareholders only, not concerns with substantial interest. The Tribunal found that the loan recipient, the assessee, was not a shareholder of the lender, M/s. Agarwal Industries Pvt Ltd. Hence, the addition made by the AO was deemed incorrect, and the Tribunal directed the AO to delete the addition of Rs. 16,68,33,979.

5. Legal Interpretation:
The Tribunal's decision aligns with the interpretation that deemed dividend under section 2(22)(e) applies to shareholders with substantial interest, not concerns. The Tribunal emphasized the importance of shareholding in determining the taxability of deemed dividends, as clarified by the Supreme Court in previous cases.

6. Conclusion:
The Tribunal's ruling in favor of the assessee highlights the significance of shareholder status in determining the tax liability for deemed dividends under section 2(22)(e). The decision provides clarity on the application of this provision and sets a precedent for similar cases involving related companies and loan transactions.

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