2017 (12) TMI 864 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - deemed shareholders - whether assessee is not the shareholder of the other Company? - Held that - Hon ble Delhi High Court has also held in case of CIT vs. Ankitech (P.) Ltd. in 2011 (5) TMI 325 - DELHI HIGH COURT that the assessee should be a share holder in the lender company and such holding should be more than 10% of the voting rights, only then Section 2(22)(e) would be attracted. - Decided in favour of assessee.

Summary

Issues: Interpretation of Section 2(22)(e) of the Income Tax Act, 1961

Analysis:

1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961:
The High Court dealt with an appeal by the Revenue against Tribunal orders concerning the interpretation of Section 2(22)(e) of the Income Tax Act, 1961. This section aims to prevent the distribution of profits by a company, other than as dividends, to avoid tax liability for individual shareholders. The provision covers payments made to a shareholder holding at least 10% voting power, or to a concern in which the shareholder has substantial interest, to exempt such payments from being taxed as dividends in the hands of the shareholder.

2. Facts and Allegations:
In the assessment year 2007-08, two cases were considered. In one case, an amount was advanced to a concern in which a shareholder had substantial interest, and in the other case, an amount was advanced to a company where the shareholder had more than 10% shareholding. The Assessing Officer taxed these amounts as dividends, but the assessees contended that only shareholders could be taxed on dividends. The Tribunal sided with the assessees, and it was found that the shareholder did not have substantial interest at the time of advancing the amounts.

3. Judicial Precedents and Arguments:
The Revenue relied on a Delhi High Court decision, while the respondent's counsel distinguished it with another Delhi High Court judgment. The latter judgment clarified that Section 2(22)(e) deems certain payments as dividends, taxable only in the hands of the shareholder. The court also discussed a case where a partnership firm was deemed the beneficial owner of shares, leading to taxation at the firm's hands, aligning with the legislative intent.

4. Applicability of Judicial Precedents:
The High Court upheld the decision in a case involving Private Limited Companies, citing a Supreme Court affirmation of a Delhi High Court judgment. The court agreed with the detailed analysis of Section 2(22)(e) and rejected the Revenue's appeal, ruling in favor of the assessees. The decision was made in line with the interpretations provided in the Ankitech Pvt. Ltd. case, emphasizing the correct construction of the relevant statutory provision.

In conclusion, the High Court, following established judicial precedents and legislative intent, interpreted Section 2(22)(e) of the Income Tax Act, ruling in favor of the assessees and rejecting the Revenue's appeal. The judgment provided clarity on the taxation of payments made by companies to shareholders or concerns with substantial interest, ensuring compliance with tax laws and preventing tax evasion through profit distribution mechanisms other than dividends.