2018 (4) TMI 445 - AT - Income Tax

Deemed divided u/s.2(22)(e) - assessee-company as well as the lender-company are interconnected and has common shareholders holding substantial interest in both the companies contemplated under s.2(22)(e) - Held that - The assessee company in the instant case has received an amount of RS. 25 lakh from lender (Prima Transformers Pvt. Ltd.). In agreement with the contention of Mr. Pipara that where the assessee company was not a share holder of the lender- company per se, then notwithstanding a fact that both the companies have common share holder having substantial interest in both the companies, the taxability of deemed dividend in terms of provisions of s.2(22)(e) of the Act would not arise in the hands of the recipient-company (assessee) which is not the registered share holders of the lender company. In the absence of assessee holding the shares in lending-company, the money received by assessee is thus not qualified to be taxed as deemed dividend in the hands of assessee-company. Hence, we do not see any reason to interfere with the order of the Ld. CIT(A) absolving the assessee from the clutches of s.2(22)(e) of the Act. Thus, we decline to interfere with the relief granted by the CIT(A). Trade advances stand excluded from the ambit of section 2(22)(e) of the Act. Reopening of assessment - Held that - Protective assessment under s.147 to merely safe-guard the interest of the Revenue is not sustainable in re-assessment proceedings under s.147 of the Act. A protective assessment impliedly means that the AO is not sure about the escapement in the hands of this assessee but merely seeks to cover the possible revenue loss. This, in our view, is contrary to the mandate of section 147 which provides that it is incumbent upon the AO to have positive belief towards escapement (in contrast to probable escapement) based on the material available on record. Clearly, the action of the AO runs counter to the mandate of section 147 of the Act. Notably, the case of escapement of income qua assessee herein is not finally ascertained even at the assessment stage pursuant to notice for re-opening under s.147/148 of the Act.

Summary

Issues Involved:
1. Deletion of addition on account of deemed dividend under section 2(22)(e) of the Income-tax Act.
2. Applicability of section 2(22)(e) in the hands of shareholders holding substantial interest in both lender and borrower companies.
3. Protective assessment under section 147 of the Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Deemed Dividend under Section 2(22)(e):

The Revenue appealed against the deletion of the addition of ?25,00,000 made on account of deemed dividend under section 2(22)(e). The Assessing Officer (AO) observed that the assessee company received ?25 lakhs from Prima Automation Pvt. Ltd., where common shareholders held substantial interest in both the lender and borrower companies. The AO contended that the provisions of section 2(22)(e) were applicable since the lender company had accumulated profits. However, the CIT(A) deleted the addition, emphasizing that the assessee company was not a shareholder of the lender company, and thus, section 2(22)(e) was not applicable. The Tribunal upheld the CIT(A)’s decision, citing judicial precedents, including the Gujarat High Court's ruling in Corrtech Energy Pvt. Ltd., which established that deemed dividend provisions do not apply if the recipient is not a shareholder of the lender company.

2. Applicability of Section 2(22)(e) in the Hands of Shareholders:

The Revenue also challenged the CIT(A)’s deletion of additions in the hands of shareholders holding substantial interest in both the lender and borrower companies. Specifically, the case of Shri Vinod Vitthalbhai Patel was examined, where the AO made protective additions under section 2(22)(e). The CIT(A) reversed this, stating that the shareholder had not received any loan directly and thus could not be taxed under section 2(22)(e). The Tribunal agreed, referencing the Gujarat High Court’s decision in Daisy Packers Pvt. Ltd. and the Supreme Court’s ruling in CIT vs. Madhur Housing and Development Company, which confirmed that loans to non-shareholder entities are not taxable as deemed dividends.

3. Protective Assessment under Section 147:

The Tribunal addressed the issue of protective assessment under section 147, raised by the assessee. It was argued that protective assessments imply probable escapement, which contradicts the requirement of a firm belief in escapement for invoking section 147. The Tribunal found merit in this argument, noting that protective assessments to safeguard revenue interests are not sustainable under section 147, which mandates a positive belief in escapement based on available material. Consequently, the Tribunal upheld the CIT(A)’s decision to delete the protective additions.

Conclusion:

The Tribunal dismissed all eight appeals of the Revenue, affirming that:
- Deemed dividend provisions under section 2(22)(e) do not apply if the recipient is not a shareholder of the lender company.
- Shareholders not directly receiving loans cannot be taxed under section 2(22)(e).
- Protective assessments under section 147 are not sustainable if they imply probable rather than confirmed escapement of income.