2020 (6) TMI 666 - AT - Income Tax

Deemed dividend u/s 2(22) (e) - effective date for determination of substantial share holding - HELD THAT - Revenue could not establish beyond doubt that the assessee was having substantial interest in CCNPL on the date of advancement of loan by CCNPL to JCTPL. On the other hand, the Ld. CIT(A) has specifically observed that as per the annual return filed with the Registrar of Companies, which is a legal and valid document as per law, the assessee was holder of only one share in CCPNL and the other shares stood transferred to the JCTPL. CIT(A) has noted that it is the mere suspicion of the AO that the assessee was having substantial share holding in the CCNPL on the date of transaction. To apply a deeming fiction, the first set of facts is to be proved beyond doubt and the deeming fiction cannot be applied on the basis of assumption, presumption or suspicion about the first set of facts. CIT(A) also rightly noted that ss per record of Registrar of Companies , the effective date of transfer of shares was May 8, 2012. That one can file belated return with the ROC along with late fee as applicable, as was done by assessee and since the same was accepted by the ROC, hence, for all intents and purposes, the effective date of transaction will be the date as mentioned in the return. Since, the revenue could not rebut the above stated facts beyond reasonable doubt, hence, CIT(A) has rightly declined to apply the deeming provisions of section 2(22) (e) - It has also been observed by the Ld. CIT(A) that in the subsequent assessment years AY 2014-15 and even AY 2015-16, in the scrutiny assessments carried out u/s 143 (3) of the Act, the AO has accepted the very transaction of shares effected in May 2012. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition under section 2(22)(e) of the Income Tax Act.
2. Validity of share transfer and its documentation.
3. Nature of the financial transactions between group companies.
4. Commercial expediency and its impact on deemed dividend provisions.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 2(22)(e) of the Income Tax Act:
The Revenue challenged the deletion of ?12,24,72,654/- added by the Assessing Officer (AO) as deemed dividend under section 2(22)(e). The AO argued that the assessee held substantial shareholding in both companies involved in the transaction, thus invoking the provisions of section 2(22)(e). However, the CIT(A) deleted the addition, stating that the assessee did not hold substantial shareholding in the company after 08.05.2012, and the transactions were for commercial expediency.

2. Validity of Share Transfer and its Documentation:
The AO rejected the share transfer by the assessee as an afterthought, citing late filing with the Registrar of Companies (ROC) and incomplete payment of sale consideration. However, the CIT(A) accepted the share transfer as genuine, supported by documentary evidence from the ROC, which showed the effective date of transfer as May 8, 2012. The CIT(A) noted that the ROC's acceptance of the late filing with a late fee validated the transfer. Additionally, the share transfer deed was found to be genuine despite minor procedural issues.

3. Nature of Financial Transactions Between Group Companies:
The AO contended that the financial transactions between the companies were not Inter-Corporate Deposits (ICD) due to their long duration and lack of interest charges. The CIT(A) disagreed, noting that the transactions were between holding and subsidiary companies and were for business purposes. The CIT(A) cited judicial precedents, including the ITAT Chennai Bench and the Hon'ble Madras High Court, which held that loans between holding and subsidiary companies do not fall under deemed dividend provisions.

4. Commercial Expediency and its Impact on Deemed Dividend Provisions:
The CIT(A) emphasized that the transactions were driven by commercial expediency and did not result in personal benefit to the assessee. The funds were used for business purposes, specifically for the construction of a commercial building by a group company. The CIT(A) referenced various judicial decisions, including the Hon'ble Punjab & Haryana High Court and the ITAT Kolkata Bench, which supported the view that loans given for commercial purposes and involving consideration (interest payment) do not attract deemed dividend provisions under section 2(22)(e).

Conclusion:
The CIT(A) concluded that the assessee did not hold the requisite shareholding for section 2(22)(e) to apply and that the transactions were commercially expedient and involved interest payments, thus not qualifying as deemed dividends. The appeal by the Revenue was dismissed, upholding the CIT(A)'s decision to delete the addition.