2012 (6) TMI 235 - AT - Income Tax

Deemed dividend - Whether loans obtained by the assessee from its subsidiaries were in the nature of deemed dividends as per section 2(22)(e) of the Income-tax Act assessee company had received loan amounts from different subsidiaries and those borrowed funds were in turn advanced to other subsidiaries Held that - The assessee company has not availed any benefit out of those loans availed from its subsidiaries. The assessee company had not retained those loan funds for its own activities. All the loan amounts have been redistributed to subsidiaries. These are normal business transactions carried out by any holding company. Where regular business transactions are carried on by an assessee in its ordinary course of business in the above manner, they cannot be treated as deemed dividend for the purpose of section 2(22)(e) of the Act.

Issues Involved:
1. Applicability of Section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividends.
2. Validity of reassessment proceedings under Section 147 of the Income-tax Act, 1961.
3. Eligibility of a retired ITAT member to practice before the tribunal.

Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividends:

The primary issue was whether the loans received by the assessee company from its subsidiaries could be treated as deemed dividends under Section 2(22)(e) of the Income-tax Act, 1961. The assessee, a holding company, received loans from its fully owned subsidiaries and passed these funds to other subsidiaries. The Assessing Officer treated these loans as deemed dividends.

The assessee argued that these transactions were business transactions and not for the benefit of any shareholder. The Tribunal had previously ruled in favor of the assessee for the assessment year 2005-06, stating that the conditions for treating such loans as deemed dividends were not satisfied.

The Commissioner of Income-tax (Appeals) distinguished this case by referring to the Supreme Court's decision in Miss P. Sarada v. CIT, which held that once a loan is given to a shareholder, it is deemed as a dividend, regardless of repayment. However, the Tribunal found the facts of the present case different, as the loans were part of the assessee's role in managing its subsidiaries' finances and not for its benefit.

The Tribunal concluded that these transactions were normal business activities of a holding company and did not constitute deemed dividends under Section 2(22)(e). The additions made by the assessing authority were deleted.

2. Validity of reassessment proceedings under Section 147 of the Income-tax Act, 1961:

The assessee challenged the validity of the reassessment proceedings initiated under Section 147, arguing that the conditions for reopening the assessments were not met. The reassessments were based on the Assessing Officer's finding that the loans were deemed dividends, which the assessee contended was a misinterpretation of the law.

The Tribunal did not specifically address the validity of the reassessment proceedings in detail, focusing instead on the substantive issue of whether the loans were deemed dividends. By ruling in favor of the assessee on the primary issue, the Tribunal implicitly found the reassessment proceedings to be unjustified.

3. Eligibility of a retired ITAT member to practice before the tribunal:

A preliminary issue was raised regarding the eligibility of Shri Akber Basha, a retired ITAT member, to appear before the Tribunal. Rule 13E of the Income-tax Appellate Tribunal Members (Recruitment and Conditions of Service) Rules, 1963, as amended in 2009, prohibits retired members from practicing before the Tribunal.

However, the Allahabad High Court had stayed the operation of this rule and the Special Bench decision in Concept Creations v. Addl. CIT, allowing retired members to practice before benches where they had not served. The Tribunal acknowledged the stay and permitted Shri Basha to appear in this case.

Conclusion:

The Tribunal allowed the appeals, ruling that the loans received by the assessee from its subsidiaries were not deemed dividends under Section 2(22)(e) of the Income-tax Act, 1961, as they were part of normal business transactions of a holding company. The reassessment proceedings were effectively rendered invalid by this decision. Additionally, the Tribunal permitted Shri Akber Basha to practice before it, in line with the stay granted by the Allahabad High Court. The stay petitions filed by the assessee were dismissed as infructuous.

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