2017 (6) TMI 875 - AT - Income Tax

Deemed dividend addition U/s.2(22)(e) - as assessee company is not a registered shareholder of M/s. Cheran Spinners Ltd, whether there can be any assessment under deemed dividend U/s.2(22)(e) of the Act in respect of the sum received by the assessee? - Held that - In view of the judgment of the Madras High Court in Ennore Cargo Container Terminal P. Ltd (2017 (4) TMI 615 - MADRAS HIGH COURT) this Tribunal is of the considered opinion that the assessment U/s.2(22)(e) of the Act, has to be made only in the hands of the registered shareholder. The assessee company admittedly is not a registered shareholder. There cannot be any assessment in the hands of the assessee, as rightly submitted by the assessee. At the best, it can be assessed only in the hands of the so called common shareholders of the assessee company. - Decided in favour of assessee.

Summary

Issues: Assessment of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961 in a case where the assessee company received a loan from another company where there are common shareholders.

Analysis:
1. The appeal was against the order of the Commissioner of Income Tax (Appeals) regarding the assessment of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961 for the assessment year 2011-12. The main issue was whether the assessment could be made in the hands of the assessee company, which received a loan from another company where there were common shareholders.

2. The counsel for the assessee argued that since the assessee company was not a registered shareholder of the company from which it received the loan, the assessment should be made in the hands of the registered shareholders based on a judgment of the Madras High Court. It was contended that the assessee company was not a registered shareholder and, therefore, should not be assessed under Section 2(22)(e) of the Act.

3. On the other hand, the Departmental Representative argued that even though the assessee company was not a registered shareholder of the lending company, the loan was advanced for the benefit of the shareholders of the assessee company. Referring to a judgment of the Apex court, it was argued that the assessment could be made in the hands of the assessee company. The Departmental Representative contended that the judgment of the Apex Court was applicable in this case.

4. The Tribunal considered both submissions and examined the relevant legal precedents. It noted that the assessee company was neither a registered shareholder nor a beneficial shareholder of the lending company. Citing the judgment of the Madras High Court, the Tribunal held that the assessment under Section 2(22)(e) of the Act should be made only in the hands of the registered shareholder. Since the assessee company was not a registered shareholder, the assessment could not be made in its hands. The Tribunal found that the lower authorities had erred in their assessment and, therefore, set aside their orders and deleted the addition made by the Assessing Officer.

5. Consequently, the Tribunal allowed the appeal of the assessee, holding that the assessment under Section 2(22)(e) of the Act could not be made in the hands of the assessee company. The order was pronounced on 31st May 2017 in Chennai.