2021 (4) TMI 248 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - transactions of loan between a company and assessee firm - HELD THAT - Admittedly, assessee is not shareholder of the company which has advanced loan to assessee. It is also fact that except for the observation by Ld.AO that Mr.Dinesh Bohra is a partner in the assessee form as well as shareholder in the company that advanced loan to assessee. This by itself cannot be significant to treat the amount advanced as deemed dividend to fall within the purview of section 2 (22) (e). See SARVA EQUITY (P.) LTD. 2014 (4) TMI 788 - KARNATAKA HIGH COURT . Assessee has also relied on the decision of Hon ble Madras High Court in case of CIT vs M/s T.Abdul warhead Co 2020 (9) TMI 977 - MADRAS HIGH COURT in support of the proposition that the said payment would stand attracted under the provisions of sec.2(22)(e) when it is paid by a company in which public are not substantially interested by way of advance or loan to shareholder being a person who is the beneficial owner of the shares. Thus it is abundantly clear that the payment has to be made to a shareholder being a person who is the beneficial owner of shares. In the present facts of the case payment has been made to assessee a partnership firm who was not a shareholder in the company who has advanced the loan. The accounts placed in the paper book by assessee that these were termed as short-term borrowings by assessee during the year relevant to assessment year 2012-13 amounting to ₹ 81,67,625/- which has been reduced to ₹ 71,64,625/- during the year under consideration. The amount received by assessee from M/s Fateh Agro Builders Pvt Ltd., cannot be considered to be deemed dividend under the section 2(22)(e) of the Act. - Grounds raised by assessee stands allowed.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Applicability of deemed dividend under Section 2(22)(e) of the Income Tax Act.
3. Taxability of payments under Section 40(a)(ia) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The assessee appealed against the order dated 10/05/2018, with a delay of 227 days. The delay was attributed to the previous representative's failure to communicate the order to the assessee, as the order was misplaced in the representative's office. The Tribunal, considering the affidavit and the principle that substantive rights should not be denied due to technicalities, condoned the delay in the interest of justice.

2. Applicability of Deemed Dividend under Section 2(22)(e) of the Income Tax Act:
The primary contention was whether the loan of ?81,67,625/- received by the assessee from M/s Fateh Agro Builders Pvt. Ltd. could be considered as deemed dividend under Section 2(22)(e) of the Act. The assessee argued that it was not a shareholder of the lending company, and thus, the provisions of deemed dividend were not applicable. The Tribunal referred to several judgments, including the Hon'ble Karnataka High Court's decision in CIT vs Sarva Equity Pvt. Ltd., which held that deemed dividend provisions apply only to registered shareholders. Since the assessee, a partnership firm, was not a shareholder in M/s Fateh Agro Builders Pvt. Ltd., the Tribunal concluded that the loan could not be treated as deemed dividend under Section 2(22)(e).

3. Taxability of Payments under Section 40(a)(ia) of the Income Tax Act:
The assessee contested the addition of ?7,18,628/- made by the AO under Section 40(a)(ia) for non-deduction of tax at source, arguing that the payments were not based on any contractual obligation under Section 194C but were day-to-day business expenditures. However, this issue was not separately adjudicated in detail as the primary focus was on the deemed dividend matter.

Conclusion:
The Tribunal allowed the appeal, holding that the loan received by the assessee from M/s Fateh Agro Builders Pvt. Ltd. could not be considered as deemed dividend under Section 2(22)(e) of the Act, as the assessee was not a shareholder of the lending company. The appeal was thus allowed, and the grounds raised by the assessee were accepted.