2014 (7) TMI 213 - AT - Income Tax

Deemed dividend u/s 2(22)(e) of the Act - Excess advances received against the services to be rendered from another company - on person is holding 90% share or voting right in both the companies. - Held that - Similar issue came up for consideration before the coordinate bench in assessee s own case Dy. Commissioner of Income-tax Versus M/s Margadarshi Marketing (P) Ltd. 2013 (10) TMI 476 - ITAT HYDERABAD wherein it was held that loan or advance given under the conditions specified u/s 2(22)(e) of the Act would also be treated as dividend - The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction - the recipient would be a shareholder by way of deeming provision - if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend u/s 2(22)(e) of the Act. The provision for deduction of tax at source and adjustment of tax is only in respect of the payments to the shareholder would clearly indicate that even after the amendment, the effect of clause (e) of sub section (22) of Sec. 2 would apply only when the payment is made to shareholder - Wherever, the tax is to be deducted at source from a dividend or deemed dividend and the consequential effect of giving effect to such deduction of tax at source, etc., reference was made only to the payments to the shareholder - This would indicate clearly that clause (e) would apply only in case of payments to the shareholder and not to others - the advances cannot be treated as deemed dividend coming within the ambit of section 2(22)(e) of the Act. CIT(A) has come to the conclusion that the amounts received by the assessee from M/s Ushodaya Enterprises is in regular course of trade is outside the purview of section 2(22)(e) of the Act - AO has brought any materials to establish the fact that the amount received was not in regular course of trade but in the nature of loan and advance as envisaged u/s 2(22)(e) of the Act there was no reason to interfere with the order passed by the CIT(A) in all the AYs - the order of the CIT(A) is upheld in deleting the addition made by the AO towards deemed dividend u/s 2(22)(e) of the IT Act Decided against Revenue.

Summary

Issues Involved:
1. Whether the amount received by the assessee from M/s Ushodaya Enterprises Ltd. qualifies as deemed dividend under section 2(22)(e) of the Income Tax Act.
2. Whether the assessee, not being a shareholder of M/s Ushodaya Enterprises Ltd., can be taxed under the provisions of deemed dividend.

Issue-wise Detailed Analysis:

1. Qualification of Amount as Deemed Dividend under Section 2(22)(e):
The core issue revolves around whether the advances received by the assessee from M/s Ushodaya Enterprises Ltd. can be classified as deemed dividend under section 2(22)(e) of the Income Tax Act. The Assessing Officer (AO) had treated the advances as deemed dividend, asserting that the excess advances received against services rendered fell within the purview of section 2(22)(e). However, the assessee contended that these advances were trade credits adjusted against bills for services rendered, not loans.

The CIT(A) examined the nature of these advances and concluded that they were part of a running account of commercial trade. Therefore, they did not fall within the scope of deemed dividend as per section 2(22)(e). The CIT(A) referred to previous findings in the assessee's appeals for earlier assessment years (2006-07 and 2009-10), which supported this view.

2. Taxability of Non-Shareholder under Deemed Dividend Provisions:
A significant point of contention was whether the assessee, who is not a shareholder of M/s Ushodaya Enterprises Ltd., could be subjected to tax under the deemed dividend provisions. The CIT(A) noted that the assessee was not a shareholder of the lender company, M/s Ushodaya Enterprises Ltd. This fact was crucial because section 2(22)(e) of the Act specifies that deemed dividend provisions apply to payments made to shareholders.

The ITAT upheld the CIT(A)'s decision, referencing the Hon'ble Delhi High Court's ruling in CIT Vs. Ankitech P. Ltd. and the ITAT Mumbai Special Bench's decision in Bhaumic Colours (P) Ltd., which clarified that deemed dividend provisions do not extend to non-shareholders. The legal fiction created by section 2(22)(e) applies to the definition of dividend but does not extend to treating non-shareholders as shareholders for tax purposes.

Conclusion:
The ITAT, after considering the rival submissions and perusing the records, found no infirmity in the CIT(A)'s order. The advances received by the assessee from M/s Ushodaya Enterprises Ltd. were part of regular trade transactions and not loans or advances as envisaged under section 2(22)(e). Moreover, since the assessee was not a shareholder, the deemed dividend provisions could not be applied.

The appeals filed by the Department were dismissed, and the CIT(A)'s order deleting the addition made by the AO was upheld. The ITAT's decision was consistent with previous rulings in the assessee's own case for earlier assessment years, reinforcing that the advances in question did not qualify as deemed dividend under section 2(22)(e) of the Act.