2020 (10) TMI 255 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - whether AO was right in holding that the only exclusion provided by the Statute under Section 2(22)(e) was in the case of money lending business and the payments that are made in the ordinary course of business, as, for doing money lending business, a person is required to obtain a licence from the Reserve Bank of India or whether it is a non banking financial company? - HELD THAT - As decided in M/S. T. ABDUL WAHID CO. 2020 (9) TMI 977 - MADRAS HIGH COURT Section 2(22)(e) provision would stand attracted when a payment is made by a company, in which public are not substantial interested by way of advance or loan to a share holder, being a person who is the beneficial owner of the shares. On facts, it is clear that the payment has been made to the assessee, a partnership firm. The partnership firm is not a share holder in the company. The records placed before the assessing officer clearly shows the nature of transaction between the firm and the company and it is neither a loan nor an advance, but a deferred liability. These factshave been noted by the assessing officer. In such circumstances, this Court is of the view that the Tribunal rightly reversed the order passed by the CIT(A) affirming the order of the assessing officer - Decided against revenue

Summary

Issues:
1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.
2. Application of case law in determining beneficial ownership of shares for the applicability of Section 2(22)(e).
3. Treatment of loans as deemed dividend under Section 2(22)(e) based on accumulated profits and shareholder benefits.

Analysis:
1. The appeal before the Madras High Court involved the interpretation of Section 2(22)(e) of the Income Tax Act, 1961, specifically regarding deemed dividend. The court considered whether the exclusion provided by the statute under this section was limited to money lending businesses or payments made in the ordinary course of business, requiring a license from the Reserve Bank of India or being a non-banking financial company.

2. The court analyzed the application of case law in determining beneficial ownership of shares for the applicability of Section 2(22)(e). The Assessing Officer held that the assessee did not fall under the categories exempted by the statute. The court referred to previous decisions, including the Delhi High Court case of CIT Vs. National Travel Services, to assess the correctness of treating the loan as deemed dividend and disallowing interest payments as expenditures.

3. The court further examined the treatment of loans as deemed dividend under Section 2(22)(e) based on accumulated profits and shareholder benefits. Referring to previous judgments, the court dismissed the appeal by the Revenue, affirming the Tribunal's decision. The court concluded that the payment made to the assessee, a partnership firm, did not meet the criteria for deemed dividend under the Act, as it was a deferred liability and not a loan or advance. This decision aligned with the Tribunal's findings, leading to the dismissal of the appeal and confirmation of the impugned order.