2015 (5) TMI 7 - HC - Income Tax

Deemed dividend under Section 2(22)(e) - Appellate Tribunal deleting the addition on the ground that assessee company is not a registered share holder of the lender company - Held that - As decided in Ankitech Pvt. Ltd. 2011 (5) TMI 325 - DELHI HIGH COURT if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under Section 2(22)(e) of the Act What is provided under Section 2(22)(e) of the Act seems to be that the assessee-Company must be a shareholder in the Company from whom the loan or advance has been taken and should be holding not less than 10% of the voting power. It does not provide that any shareholder in the assessee-Company who had taken any loan or advance from another Company in which such shareholder is also a shareholder having substantial interest, Section 2(22)(e) of the act may be applicable. No error has been committed by the learned Tribunal in deleting the addition made by the Assessing Officer invoking Section 2(22)(e) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend and its applicability to a company not being a registered shareholder of the lender company.

Analysis:

Issue 1:
The primary issue in this case is whether the Appellate Tribunal erred in deleting the addition based on Section 2(22)(e) of the Income Tax Act, considering the definition of deemed dividend.

Analysis:
The case involved an assessee company engaged in ship breaking activity that received a loan from a group company. The Assessing Officer invoked Section 2(22)(e) as common shareholders had substantial interest in both companies. The dispute arose over whether the loan should be treated as deemed dividend due to the shareholding pattern. The Assessing Officer added the loan amount as deemed dividend, which was upheld by the CIT(A) but later deleted by the Tribunal citing relevant case laws.

Issue 2:
The second issue pertains to the interpretation of Section 2(22)(e) in light of the decision of the Delhi High Court and its application to the present case.

Analysis:
The High Court analyzed the intention behind Section 2(22)(e), emphasizing that the provision aims to tax dividend in the hands of shareholders. The Court considered the legal fiction created by the section and concluded that loans meeting the specified conditions would be treated as dividend. It clarified that the provision does not extend to non-shareholders and highlighted that the recipient of such loans is deemed a shareholder for tax purposes.

Issue 3:
The final issue involves a comparison of the arguments presented by the revenue with the provisions of Section 2(22)(e) and the Court's interpretation of the same.

Analysis:
The revenue attempted to introduce a new category of shareholders for applicability under Section 2(22)(e), which the Court rejected. The Court emphasized that the provision requires the assessee company to be a shareholder in the lending company with a certain voting power. It dismissed the revenue's argument and upheld the Tribunal's decision to delete the addition as no error was found in the Tribunal's interpretation of the law.

In conclusion, the High Court dismissed the Tax Appeal, confirming the Tribunal's decision to delete the addition under Section 2(22)(e) of the Income Tax Act. The judgment provides a detailed analysis of the legal provisions and their application to the specific facts of the case, ensuring clarity on the interpretation of deemed dividend in such scenarios.