2018 (10) TMI 250 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - beneficial shareholder - protective assessment - assessee was holding more than 10% shareholding in M/s MLPL (the lender company) and also having a substantial interest in M/s OFPL (the borrowing company) - ITAT divided the deemed dividend proportionally - Held that - We find that the reasoning given by the ITAT that there cannot be any proportionate addition of deemed dividend taking into consideration the percentage of the shareholding in the borrowing company, does not give rise to any substantial question of law. In the factual matrix before the ITAT, it held that Section 2(22)(e) does not postulate any such situation. This is especially the case before us as there is only one shareholder that has a shareholding in the lending company as well as in the borrowing company. This being the case and purely factual in nature, we do not think that the ITAT was in any event incorrect in rejecting this argument of the assessee. We may hasten to add that different considerations may arise if two or more shareholders are shareholders of the same lending company and the same borrowing company. In such a factual position it could possibly be argued that the addition ought to be made on a proportionate basis. However, we are not examining this issue in the present case as the facts before us are completely different.

Issues Involved:
1. Conversion of protective assessment into substantive assessment under Section 2(22)(e) of the Income Tax Act, 1961.
2. Proportionate addition of deemed dividend based on shareholding.
3. Taxation of deemed dividend in the hands of a shareholder who is not the recipient of the loan/advance.
4. Applicability of Section 2(22)(e) leading to potential absurdity.
5. Absence of specific provision for proportionate addition under Section 2(22)(e).

Detailed Analysis:

1. Conversion of Protective Assessment into Substantive Assessment:
The appellant challenged the ITAT's decision to convert the protective assessment into a substantive assessment, confirming the entire addition of ?99,36,274/- as deemed dividend under Section 2(22)(e). The appellant argued that the ITAT should have remanded the protective assessment to the A.O. to adjudicate the extent of addition in the hands of the appellant, given that the shareholder was not the recipient of the loan or advance.

2. Proportionate Addition of Deemed Dividend:
The appellant contended that the addition under Section 2(22)(e) should be restricted to their proportionate shareholding in the borrowing company (M/s OFPL), as there were other shareholders. The appellant held 15% equity in M/s MLPL and 45% in M/s OFPL. The ITAT, however, rejected this argument, stating that Section 2(22)(e) does not provide for proportionate addition and that the entire amount should be taxed in the hands of the appellant.

3. Taxation of Deemed Dividend in the Hands of Non-Recipient Shareholder:
The appellant argued that taxing the entire deemed dividend in their hands, despite not being the recipient of the loan or advance, was unfair. The ITAT, relying on the decision in CIT Vs Universal Medicare Pvt. Ltd. (324 ITR 263), held that since the appellant had substantial interest in both the lending and borrowing companies, the conditions under Section 2(22)(e) were satisfied, and the deemed dividend should be taxed in the appellant's hands.

4. Applicability of Section 2(22)(e) Leading to Potential Absurdity:
The appellant claimed that applying Section 2(22)(e) in this manner would lead to an absurd result, as the shareholder with limited interest in the borrowing company would be taxed for the entire deemed dividend. The ITAT dismissed this argument, stating that the clear language of Section 2(22)(e) does not allow for proportionate addition, especially when there is only one shareholder with substantial interest in both companies.

5. Absence of Specific Provision for Proportionate Addition:
The appellant argued that in the absence of a specific provision for proportionate addition, the entire charge under Section 2(22)(e) should fail. The ITAT did not accept this view, maintaining that the statute's unambiguous language does not support proportionate addition and that the entire deemed dividend should be taxed in the hands of the appellant.

Conclusion:
The High Court upheld the ITAT's decision, finding no substantial question of law. The court agreed that the ITAT correctly applied the law as laid down in Universal Medicare Pvt. Ltd. and that the deemed dividend should be taxed in the hands of the appellant, who had substantial interest in both the lending and borrowing companies. The court also noted that different considerations might apply if there were multiple shareholders with substantial interests, but this was not the case here. Consequently, the appeals were dismissed with no order as to costs.

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