2019 (2) TMI 459 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - payments made to any concern in which the shareholder is a member - common shareholder having a substantial interest in the assessee company as well as in the creditor companies - excess of Reserve and Surplus over loan - Held that - admittedly the assessee company is not a beneficial owner of any shares in the creditor companies which have advanced the loans. - For the second limb of Section 2(22)(e) of the I.T. Act, 1961 to come into play, the condition that has to be fulfilled is that the creditor companies ought to have given monies by way of an advance or loan to a concern in which the assessee company is a member or partner and in which it has a substantial interest. In other words, what the second limb of section 2(22)(e) contemplates is that, the creditor companies give a loan not directly to its shareholder but to any concern in which such shareholder has a substantial interest. It is then that the same would attract the second limb of Section 2(22)(e) of the I.T. Act, 1961. That is certainly not the factual situation before us. Decided against the revenue.

Summary

Issues:
Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend and loans from related companies.

Analysis:

Issue 1: Deemed Dividend under Section 2(22)(e) of the Income Tax Act, 1961
The case involved a dispute over the applicability of Section 2(22)(e) of the Income Tax Act, 1961, which deals with deemed dividend. The Revenue contended that loans obtained by the assessee company from related companies should be treated as deemed dividend under this provision. The Assessing Officer (A.O.) observed that the creditor companies had reserves and surplus exceeding the amounts advanced to the assessee, leading to the conclusion that the conditions for invoking Section 2(22)(e) were met. However, the CIT(A) and the ITAT held that since the assessee was not a shareholder in the creditor companies, the provision did not apply. The Court agreed with this interpretation, emphasizing that the loans were given to the assessee company, not to the shareholder, and thus did not fall within the scope of deemed dividend as per Section 2(22)(e).

Issue 2: Interpretation of the Second Limb of Section 2(22)(e)
The second limb of Section 2(22)(e) pertains to loans given to concerns in which the assessee company is a member or partner with substantial interest. The Revenue argued that this provision should apply based on the shareholding pattern of the companies involved. However, the Court found that the loans were directly given to the assessee company and not to any concern where the assessee had a substantial interest. Therefore, the Court upheld the decisions of the CIT(A) and the ITAT, ruling that the second limb of Section 2(22)(e) did not come into play in the present case.

Judicial Precedent and Conclusion
The Court referenced a Supreme Court decision regarding deemed dividend in a partnership firm context but clarified that the pending issue before the Supreme Court did not apply to the facts of the present case. Ultimately, the Court answered the questions of law in favor of the assessee company, concluding that the loans from related companies did not qualify as deemed dividends under Section 2(22)(e). The appeal was disposed of with no order as to costs.