2017 (1) TMI 1159 - HC - Income Tax

Deemed dividend addition u/s 2(22)(e) - Held that - As the assessee was not share holder of Mahavir Rolling Mills Pvt Ltd to whom loan was given, it cannot be said that the learned Tribunal has committed any error in deleting the addition made by the Assessing Officer on deemed dividend. - Decided in favour of assessee

Summary

Issues:
Interpretation of Section 2(22)(e) of the Income Tax Act regarding deemed dividend income.

Analysis:
The case involved a Tax Appeal against the order of the Income Tax Appellate Tribunal regarding the addition of deemed dividend income under Section 2(22)(e) of the Income Tax Act. The appellant, a company engaged in Ship Breaking, had filed its return for AY 2007-08, which was scrutinized by the Assessing Officer resulting in additions to the income. The Assessing Officer added amounts on account of excess interest and deemed dividend income, leading to a revised assessment of the appellant's income. The appellant appealed to the CIT(A) who upheld the addition of excess interest but deleted the addition related to deemed dividend income. The Revenue then appealed to the Tribunal, which affirmed the CIT(A)'s decision, prompting the Revenue to file the present Tax Appeal.

The main contention in the appeal was whether the Tribunal erred in deleting the addition made on account of deemed dividend income. The Revenue argued that the addition was justified under Section 2(22)(e) of the Act due to payments made to a director who was a substantial shareholder in both the appellant company and another company. However, the Court noted that the appellant was not a shareholder in the company to whom the loan was given, and therefore, the addition of deemed dividend income was not warranted.

The Court referenced a previous decision by a Division Bench which clarified the interpretation of Section 2(22)(e) in relation to shareholders and voting power. The Court emphasized that for Section 2(22)(e) to apply, the assessee-company must be a shareholder in the company from whom the loan or advance is taken and should hold not less than 10% of the voting power. Since the appellant was not a shareholder of the company in question, the Tribunal's decision to delete the addition of deemed dividend income was upheld.

Ultimately, the Court found that no substantial question of law arose in the case, and therefore, the Tax Appeal was dismissed.