2021 (4) TMI 868 - HC - Income Tax

Deemed dividend addition u/s 2(22)(e) - As argued section 2(22)(e) of the Act is not applicable to the opponent assessee as it was the recipient of the loans and advances but the same is applicable to the companies, who had made payment - ITAT deleted the addition - HELD THAT - It is an undisputed fact that Akik Tiles Limited is having 23.38% shareholding in the opponent Gladder Ceramics Limited and also having 15.34% shareholding in Marbolite Granito India Limited. Shri Girish Patel, who is the management personnel in Marbolite Granito India Limited, is having 20% shareholding in the opponent assessee. Thus, it appears that the assessee is having substantial interest in the said company. The assessee company is engaged in the business of manufacturing and trading of tiles. It is also noticed that the assessee has also received the loans/advances of ₹ 26,70,709/ from Marbolite Granito India Ltd. The CIT (Appeals) deleted the addition under section 2(22)(e) of the Act of ₹ 97,56,376/ on account of loans and advances received from Akik Tiles Limited and Marbolite Granito India Limited. The provisions of section 2(22)(e) of the Act stipulate of treating such loans/advances as deemed dividend. The observations made in 2018 (1) TMI 1079 - GUJARAT HIGH COURT to the effect that the assessee having not made any payment by way of advance or loan to a shareholder, but on the contrary, has received a loan from Akik Tiles Limited and Marbolite Granito India Limited and hence, the provision of section 2(22)(e) of the Act will not apply since the assessee is recipient of such amount appears to be erroneous. The order 2018 (2) TMI 2031 - GUJARAT HIGH COURT suggests that the substantial question of law whether in case of a company who satisfies the provisions of section 2(22)(e) of the Act, the principles of deemed dividend can be invoked though the company may not be the shareholder of the principal company , is pending before the Larger Bench of the Supreme Court in the case of National Travel Services vs. Commissioner of Income Tax, Delhi VIII, 2018 (1) TMI 1159 - SUPREME COURT . The Coordinate Bench has admitted the appeal with regard to the issue of deemed dividend in the hands of the assessee company under section 2(22)(e) of the Act. Under the circumstances and in view of the aforesaid undisputed facts, the application is allowed.The order 2018 (1) TMI 1079 - GUJARAT HIGH COURT passed in Tax Appeal is hereby recalled to the extent of substantial question of law stated in Paragraph No.2(B) of the captioned Tax Appeal

Summary

Issues:
1. Application for recall of order regarding addition under section 2(22)(e) of the Income Tax Act, 1961.

Analysis:

Issue 1: Application for Recall of Order
The petitioner filed an application seeking the recall of the order dated 16.01.2018 passed in Tax Appeal No.1032 of 2017 to decide the issue of addition made under section 2(22)(e) of the Income Tax Act, 1961. The petitioner argued that the Assessing Officer treated loans and advances received by the opponent-assessee as deemed dividends under section 2(22)(e) of the Act, but the CIT (Appeals) and the Income Tax Appellate Tribunal had deleted these additions. The Court had dismissed the question pertaining to section 2(22)(e) solely on the ground that the provision was not applicable to the recipient assessee but to the companies making the payments. The petitioner contended that there was an error on the face of the record and relied on a previous order to support the recall application.

Issue 2: Interpretation of Section 2(22)(e)
The Court analyzed section 2(22)(e) of the Act, which includes any payment by a company to a shareholder as deemed dividend. It noted that the opponent-assessee had received loans from other companies, not made payments, and therefore, the provision did not apply to the recipient. However, the Court found that the assessee had substantial interest in the companies providing the loans, indicating a potential application of the section. The Court highlighted that the provision treats loans/advances as deemed dividend and reviewed the specific question raised in the Tax Appeal regarding the deletion of a substantial amount.

Issue 3: Error in Previous Order
The Court acknowledged that its previous order's observation that the provision of section 2(22)(e) did not apply to the recipient because they had not made payments was erroneous. It recognized the need for a review based on the facts presented and the potential application of the section due to the substantial interest of the assessee in the companies providing the loans.

Issue 4: Legal Precedent and Pending Appeal
The Court referred to a previous order by a Coordinate Bench regarding the pending issue of deemed dividend in the hands of the assessee company under section 2(22)(e) of the Act. The Larger Bench of the Supreme Court was considering a related question, indicating a legal precedent that needed to be considered. The Court allowed the application for recall, restoring the Tax Appeal to its original status without examining the matter on merits, ensuring the assessee's right to present all contentions.

In conclusion, the Court's detailed analysis of the application for recall, interpretation of section 2(22)(e), acknowledgment of errors in the previous order, consideration of legal precedent, and decision to allow the recall application demonstrate a thorough and comprehensive approach to addressing the issues raised in the judgment.