2016 (11) TMI 394 - HC - Income Tax

Deemed dividend under Section 2(22)(e) - Held that - It is not the case of the Revenue that the respondent assessee company is a mere shell and Capt. Salvi and company are one and the same. In fact, the Assessing Officer proceeds on the basis that as the assessee company and M/s. Alfa Distilleries P. Ltd. and M/s. Vulcan Distilleries P. Ltd. had common shareholders, therefore, the amounts received by the respondent assessee as loans and advances from the two companies are to be considered as deemed dividend under Section 2(22)(e) of the Act. The Tribunal in the impugned order has held that as the respondent assessee is not shareholder of M/s. Alfa Distilleries P. Ltd. and M/s. Vulcan Distilleries P. Ltd. who had advanced loans to the respondent assessee. Therefore, the amount of loans made to the respondent assessee cannot be taxed in the hands of the respondent assessee as it is not a shareholder of M/s. Alfa Distilleries P. Ltd. and M/s. Vulcan Distilleries P. Ltd. It is an undisputed position as fairly submitted by Mr. Suresh Kumar that the question raised herein is concluded against the Revenue and in favour of the respondent assessee by the decisions of this Court in Commissioner of Income Tax Vs. Universal Medicare Pvt. Ltd. 2010 (3) TMI 323 - BOMBAY HIGH COURT and Commissioner of Income Tax Vs. Vs. Impact Containers (P) Ltd. 2014 (9) TMI 88 - BOMBAY HIGH COURT that deemed dividend has to be taxed in the hands of the shareholder of the company giving the loans and / or advance. In this case, admittedly, the respondent assessee is not a shareholder of the two companies i.e. M/s. Alfa Distilleries P. Ltd. and M/s. Vulcan Distilleries P. Ltd. - Decided in favour of assessee.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal under Section 260A of the Income Tax Act, 1961 for Assessment Year 2005-06. Question of law regarding the applicability of Section 2(22)(e) of the Income Tax Act, 1961 to funds received by the assessee company from other companies.

Analysis:
The case involved an appeal challenging the order of the Income Tax Appellate Tribunal for the Assessment Year 2005-06 under Section 260A of the Income Tax Act, 1961. The main question of law raised was whether the funds received by the assessee company from Alfa Distilleries P. Ltd. and Vulcan Distilleries P. Ltd. attracted the provisions of Section 2(22)(e) of the Income Tax Act, 1961. The respondent assessee had obtained loans and advances from these companies, which were connected through a common shareholder, Captain Pramod Salvi. The Assessing Officer contended that these funds should be treated as deemed dividend under Section 2(22)(e) of the Act.

The Revenue argued that since the respondent company and the lending companies had common shareholders, the loans and advances should be considered as deemed dividend. However, the Tribunal disagreed with this interpretation. The Tribunal held that since the respondent company was not a shareholder of the lending companies, the loans received could not be taxed as deemed dividend in the hands of the respondent company. This decision was supported by previous judgments such as Commissioner of Income Tax Vs. Universal Medicare Pvt. Ltd. and Commissioner of Income Tax Vs. Impact Containers (P) Ltd., which established that deemed dividend should be taxed in the hands of the shareholder of the lending company.

Based on this reasoning, the Tribunal concluded that the question raised did not present a substantial question of law and therefore dismissed the appeal. The judgment highlighted the importance of shareholding in determining the taxability of funds received from related companies under Section 2(22)(e) of the Income Tax Act, 1961. The appeal was ultimately dismissed with no order as to costs.