2013 (11) TMI 228 - AT - Income Tax

Deemed dividend - section 2(22)(e) - deemed shareholder - Conditions for invoking the provisions of section 2(22)(e) - Transaction can give benefit to the Assessee because the two individuals viz., Mr.Shanbhag and Mr.Sampathkumar hold the entire shares of VPSPL which in turn held 66% of shares of the Assessee Held that - A loan or advance given by a company to the shareholders or to a concern would not qualify as dividend. It has been made so by legal fiction created under s. 2(22)(e). This legal provision relates to dividend and it is the definition of dividend which is enlarged by this deeming provision. Definition of shareholder is not enlarged by any fiction. The loan or advance given under the conditions specified under s. 2(22)(e) has to be treated as dividend. Fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. Intention behind the provisions of s. 2(22)(e) is to tax dividend in the hands of shareholders. A concern which is given loan or advance by a company cannot be treated as shareholder/member of the latter simply because a shareholder of the lender company holding voting power of 10 per cent or more therein has substantial interest in such concern. If the intention of the legislature was to tax such loan or advance as deemed dividend at the hands of deeming shareholder , it would have inserted deeming provision in respect of shareholder as well - None of the conditions for invoking the provisions of section 2(22)(e) of the Act were present in the instant case Deleted the addition Decided against the Revenue.

Summary

Issues Involved:
1. Whether the CIT(Appeals) was justified in deleting the addition made under section 2(22)(e) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1:
The primary issue in this case was whether the CIT(Appeals) was correct in deleting the addition made under section 2(22)(e) of the Income Tax Act, 1961. The case involved a loan given by a company to the assessee, and the applicability of the provisions of section 2(22)(e) in taxing this loan as deemed dividend. The AO treated the loan as deemed dividend under section 2(22)(e), while the CIT(Appeals) disagreed with this interpretation.

The provisions of section 2(22)(e) of the Act were analyzed in detail. The section defines various scenarios where a payment by a company to a shareholder or a concern can be treated as deemed dividend. The section has three limbs, and it was crucial to determine if any of these limbs were applicable in the present case.

The first limb of section 2(22)(e) was found not to be attracted as the assessee did not own any shares in the company providing the loan. The second limb required substantial interest in both the assessee company and the lending company, which was not satisfied in this case. The AO argued that the loan indirectly satisfied the conditions of the second limb, but the CIT(Appeals) disagreed, citing legal principles and the decision of the Hon'ble Delhi High Court.

The CIT(Appeals) relied on the Delhi High Court's decision in a similar case to support the conclusion that the loan could not be treated as deemed dividend since the recipient concern was not a shareholder in the payer concern. The CIT(Appeals) emphasized that the provisions of section 2(22)(e) should be applied as they are without looking behind the corporate veil.

The Tribunal upheld the CIT(Appeals)' decision, stating that since none of the conditions for invoking section 2(22)(e) were present in this case, the addition made by the AO was not justified. The Tribunal emphasized that the intention behind the provisions of section 2(22)(e) was to tax dividend in the hands of shareholders and not in the hands of entities that were not shareholders in the lending company.

In conclusion, the Tribunal dismissed the appeal by the revenue and the cross-objection by the assessee, affirming the CIT(Appeals)' decision to delete the addition made under section 2(22)(e) of the Income Tax Act, 1961.

This detailed analysis highlights the legal interpretation and application of section 2(22)(e) in the context of the case, emphasizing the importance of shareholder status and substantial interest in determining the tax treatment of loans given by companies.