2017 (2) TMI 226 - HC - Income Tax

Deemed dividend addition u/s 2(22)(e) - assessee held more than 90% shares of the lending company - Held that - It is an admitted position that neither BVCPL was the shareholder in the BOPL nor the BOPL was shareholder in the BVCPL. Under the circumstances, merely because the assessee was a common shareholder in BVCPL and BOPL, the loan given by the BVCPL to BOPL could not have been treated as deemed dividend under Section 2(22)(e) of the Act in the hands of the assessee. Delhi High Court in the case of CIT vs. Ankitech Pvt Ltd (2011 (5) TMI 325 - DELHI HIGH COURT) confirmed the deletion made by the learned Tribunal by holding that from whom loan and advance was taken by the assessee must be shareholder in the assessee company. - Decided in favour of assessee

Summary

Issues:
- Interpretation of Section 2(22)(e) of the Income Tax Act
- Treatment of loan as deemed dividend
- Common shareholding in two companies
- Deletion of addition by the Tribunal
- Applicability of legal fiction in tax law

Interpretation of Section 2(22)(e) of the Income Tax Act:
The case involved a dispute regarding the interpretation of Section 2(22)(e) of the Income Tax Act, which deals with the treatment of certain payments made by companies to their shareholders. The Revenue contended that the loan given by one company to another, where a common shareholder holds more than 20% shares in both companies, should be treated as deemed dividend under this section. The key issue was whether the provision applied in cases where the recipient company was not a shareholder in the paying company.

Treatment of loan as deemed dividend:
The Assessing Officer treated a loan given by one company to another, where a common shareholder had significant shareholdings, as deemed dividend under Section 2(22)(e) of the Act. The dispute arose when the Tribunal deleted the addition made by the AO, leading to the Revenue challenging this decision. The core question was whether the loan should indeed be considered as deemed dividend based on the shareholding structure and provisions of the Act.

Common shareholding in two companies:
The case revolved around the fact that the assessee held shares in two companies, and one company had given a loan to the other. The Revenue argued that due to common shareholding exceeding 20%, the loan should be treated as deemed dividend. However, the Tribunal found that the legal provisions did not support this treatment, leading to a disagreement between the parties.

Deletion of addition by the Tribunal:
The Tribunal had deleted the entire addition made by the AO, disagreeing with the application of deemed dividend provisions in this case. This deletion was based on a different interpretation of the law compared to the Revenue's stance. The issue at hand was whether this deletion was justified and aligned with the legal framework.

Applicability of legal fiction in tax law:
The judgment discussed the application of legal fiction in tax law, particularly in determining what constitutes deemed dividend under Section 2(22)(e) of the Act. The Division Bench referred to a decision of the Delhi High Court and emphasized that the provisions aimed to tax dividend in the hands of shareholders. It clarified that the legal fiction should not extend to broadening the concept of shareholders beyond the statutory framework outlined in the Act.

In conclusion, the High Court dismissed the appeal, stating that the loan given by one company to another could not be treated as deemed dividend solely based on common shareholding without meeting the specific requirements outlined in Section 2(22)(e) of the Income Tax Act. The judgment highlighted the importance of adhering to statutory provisions and the limitations of legal fiction in tax law.