2017 (1) TMI 243 - HC - Income Tax

Tds u/s 194 - non deduction of tds on deemed divided u/s 2(22)(e) - Held that - Issue is required to be answered in favour of the assessee. The tax is not liable to be deducted at source u/s Section 194 of the Income Tax Act on deemed dividend to a concern in which shareholder of assessee company is a member as a partner and in which he has substantial interest as per provisions of Section 2(22)(e) of the Act. It can t be covered u/s 194.

Summary

Issues involved:
- Challenge to Tribunal's judgment by Department regarding TDS deduction on deemed dividend under Income Tax Act.
- Interpretation of Sections 2(22)(e) and 194 of the Income Tax Act.
- Consideration of legal precedents and judgments to determine tax liability on deemed dividend payments.
- Application of legal fiction and deeming provisions in tax law.

Detailed Analysis:

1. Challenge to Tribunal's Judgment: The Department challenged the Tribunal's decision where the appeal was dismissed, and cross objections were allowed for statistical purposes. The case involved the issue of TDS deduction on deemed dividend payments made by the assessee, leading to a show cause notice under sections 201(1)/201(1A) of the Income Tax Act.

2. Interpretation of Sections 2(22)(e) and 194: The Court framed substantial questions of law related to the applicability of Section 194 and Section 2(22)(e) of the Act. The contention revolved around whether tax should be deducted at source on deemed dividend payments to a concern where the shareholder holds substantial interest, as per the provisions of the Act.

3. Legal Precedents and Judgments: The Department relied on judgments from the Bombay High Court and the Gujarat High Court to support its argument regarding the interpretation of Section 2(22)(e) and the tax liability on deemed dividend payments. The Court also considered a decision of the Supreme Court highlighting the legislative intent behind enacting Section 2(22)(e) to prevent tax avoidance through advancing profits as loans.

4. Application of Legal Fiction: The Court analyzed the purpose of Section 2(22)(e) and Section 194 in light of the Delhi High Court's decision, emphasizing that the legal fiction created under the Act enlarges the definition of dividend. It was clarified that the deeming provision does not extend to shareholders beyond the specified conditions under the Act.

5. Conclusion: After hearing arguments from both sides, the Court concluded that the tax is not liable to be deducted at source under Section 194 on deemed dividend payments to a concern where the shareholder has a substantial interest. The decision was based on the interpretation of relevant provisions and legal precedents, leading to the dismissal of the appeals.

6. Final Judgment: The Court dismissed the appeals, and a copy of the judgment was directed to be placed in each file. The decision clarified the tax liability aspect concerning deemed dividend payments and the application of TDS provisions under the Income Tax Act.

This detailed analysis of the judgment provides insights into the legal issues, interpretations of relevant sections, consideration of precedents, and the final decision reached by the Court.