2021 (4) TMI 95 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Whether the assessee company, which is not a registered shareholder of the company providing loan to it, may be brought under the scanner of deemed dividend? - HELD THAT - The provisions of section 2(22)(e) of the Act can only be invoked in case of a shareholder who is holding substantial interest. The provision of section 2(22)(e) of the Act nowhere talks about taxing an entity/company which is not a shareholder holder in lender company but to shareholder of such company holding substantial share in lender company - Coming to the case on hand, admittedly, the assessee company in not holding any shares or rights of M/s. Planet Automotive Pvt Ltd. Thus considering the above discussion and judgment of Hon ble court in case of Mahavir Inductomelt 2017 (1) TMI 1159 - GUJARAT HIGH COURT AO was not justified in invoking the provisions of section 2(22)(e) of the Act in given facts and circumstances. Thus we hold that the learned CIT(A) rightly deleted the addition made by the AO. Hence, the ground of appeal of the Revenue is dismissed.

Summary

Issues:
1. Deletion of addition made under section 2(22)(e) of the Income Tax Act.

Analysis:

The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) concerning the addition made under section 2(22)(e) of the Income Tax Act for the Assessment Year 2011-2012. The Revenue contended that the deletion of the addition was erroneous as the appellant company had shown liabilities from a related party, and the transactions were deemed as financial in nature. The Assessing Officer (AO) treated the liabilities as deemed dividends due to common shareholders in both companies. However, the appellant argued that it was not a shareholder of the related party and the transactions were part of the ordinary course of business, supported by ledger entries. The CIT (A) agreed partially with the appellant, noting that the appellant was not a shareholder of the related party. The Revenue challenged this decision. The Revenue argued that since there were common shareholders in both companies, the advances received fell under deemed dividend. The appellant contended that being a non-shareholder, the provisions of section 2(22)(e) did not apply. The appellant also highlighted that the transactions were for business purposes and not loans or advances as per CBDT circular. The appellant further argued that the transactions were current accommodation adjustments, not loans or advances. The Tribunal found that the appellant was not a shareholder of the related party and, based on legal precedents, concluded that section 2(22)(e) did not apply. Therefore, the CIT (A) was correct in deleting the addition, and the Revenue's appeal was dismissed.