2018 (8) TMI 374 - AT - Income Tax

Addition u/s 2(22)(e) - loan given to shareholder - Held that - Deemed dividend is chargeable to tax in the hands of the shareholder in case there is a loan to a shareholder or any other concern. It is also triggered in case of a company making any payment on behalf of or for the individual benefit of such shareholder. The maximum cap of such deemed dividend is the accumulated profit possessed by the company making the payment or giving the loan. Therefore according to that provision to attract provisions of section 2(22)(e) of the act in case of a loan given to shareholder following conditions must be satisfied. In the lender company M/s Beverly Park Maintenance Services Ltd., assessee holds shares without any voting rights. Therefore the condition of 10% of holding in the lender company fails. Secondly the assessee must hold more than 20% in M/s Madhur Housing and development Co. In fact the assessee holds 15% noncumulative preference shares of ₹ 10 each with a fixed rate of dividend in that company. Thus in our considered opinion assessee cannot be said to be holder of 20% or more in equity shares of the borrowing company. Further the shares held by assessee on behalf of the partnership firm are also without any voting right. No infirmity in the order of the Ld. CIT (A). Accordingly the grounds raised by revenue stands dismissed.

Issues:
1. Deletion of addition of deemed dividend under section 2(22)(e).
2. Shareholding in lending and borrowing companies.
3. Application of provisions of section 2(22)(e) of the Act.

Analysis:

Issue 1: Deletion of addition of deemed dividend under section 2(22)(e)
The appeal was filed by the revenue against the deletion of the addition of deemed dividend of ?1,87,85,000 made by the Assessing Officer under section 2(22)(e). The Commissioner of Income Tax (Appeals) had deleted this addition for the assessment year 2006-07. The Revenue raised grounds challenging this deletion, arguing that the CIT(A) erred in holding that the assessee was not a shareholder in a specific company and did not have substantial interest in another company.

Issue 2: Shareholding in lending and borrowing companies
The case involved the assessment of an individual for the assessment year 2006-07. The Assessing Officer reopened the case based on a loan given by one company to another, where the assessee held shares through holding companies. The dispute centered around whether the conditions of section 2(22)(e) were met, particularly regarding the shareholding and voting rights of the assessee in the lending and borrowing companies. The CIT(A) analyzed the shareholding structure and concluded that the essential conditions of section 2(22)(e) were not satisfied, leading to the deletion of the deemed dividend addition.

Issue 3: Application of provisions of section 2(22)(e) of the Act
The provisions of section 2(22)(e) of the Act were crucial in determining the taxation of deemed dividend in the hands of the shareholder. The Tribunal examined the requirements for taxing a loan given by a company to a shareholder or another concern. It outlined the conditions that must be met for such taxation to apply, including the beneficial ownership of shares, voting power thresholds, and substantial interest criteria. The Tribunal analyzed the shareholding structure of the assessee in both the lending and borrowing companies to ascertain whether the conditions for taxing deemed dividend were fulfilled. Ultimately, it upheld the CIT(A)'s decision to delete the addition of deemed dividend, as the necessary conditions were not met based on the shareholding patterns and voting rights of the assessee.

In conclusion, the Tribunal dismissed the appeal of the revenue, affirming the deletion of the deemed dividend addition under section 2(22)(e) for the assessment year 2006-07.

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