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2021 (5) TMI 653 - AT - Income TaxDeemed dividend addition u/s 2(22)(e) - Assessee argued that the assessee company is neither a registered nor a beneficial owner of shares of the lender companies - whether the case of the assessee falls under any of the 3 limbs provided u/s 2(22)(e)? - HELD THAT - As the assessee case falls under the second limb of Section 2(22)(e) of the Act as there is a common shareholders amongst all the four companies having substantial interest and voting power of more than 10%. In the three lender companies Shri Punyapal Surana is having share holding at 23.36% 39.87% and 36.90% as mentioned in Para 7 of this order. The concern referred in Second limb of Section 2(22)(e) of the Act in this case is the assessee company where Shri Punyapal Surana is having share holding of 23.36% . Since all the conditions necessary for treating the deemed dividend of the amount received in the hands of concern (which in this case is the assessee) from other companies (three lender companies) stands fulfilled in our considered view Ld. A.O has rightly invoked the provisions of Section 2(22)(e) of the Act and made addition for deemed dividend. However the addition for deemed dividend should have been made at 2, 19, 74, 818/- as against the addition of 2, 20 87, 842/- made by the Ld. A.O as the addition for deemed dividend cannot exceed the accumulated profits of the lender company as appearing in the books before giving such loan and advance. We thus set aside the finding of Ld. CIT(A) confirm the addition u/s 2(22)(e) of the Act at 2, 19, 74, 818/- and partly allow Revenue s Appeal Ground No.1.
Issues Involved:
1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961. 2. Applicability of deemed dividend provisions to the assessee company. Detailed Analysis: Issue 1: Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 The primary issue revolves around whether the Ld. CIT(A) erred in interpreting the provision of Section 2(22)(e) of the Income Tax Act, 1961, which deals with deemed dividends. The Revenue contended that the Ld. CIT(A) misinterpreted this provision, leading to the deletion of an addition of ?2,20,87,842/- made under this section. Relevant Facts: - The assessee, a Private Limited Company, received loans from three companies where a common shareholder, Mr. Punyapal Surana, had substantial shareholdings. - The Ld. A.O invoked Section 2(22)(e) of the Act, considering these loans as deemed dividends and made an addition of ?2,20,87,842/- to the assessee's income. Ld. CIT(A)'s Interpretation: - The Ld. CIT(A) allowed the appeal, deleting the addition, on the basis that the assessee company is neither a registered nor a beneficial owner of shares in the lender companies. - The Ld. CIT(A) relied on judicial precedents which state that deemed dividends can only be taxed in the hands of the shareholder, not the borrower. Issue 2: Applicability of Deemed Dividend Provisions to the Assessee Company Revenue's Argument: - The Revenue argued that the issue is covered in their favor by the Supreme Court's judgment in the case of National Travel Services V/s CIT, Delhi. - The Revenue emphasized that the common shareholder, Mr. Punyapal Surana, held substantial shares in all companies involved, thus attracting the provisions of Section 2(22)(e). Assessee's Argument: - The assessee contended that it is not a shareholder of the lender companies, and therefore, the deemed dividend provisions should not apply. - The assessee cited multiple judicial precedents supporting the view that deemed dividends can only be taxed in the hands of the shareholder. Tribunal's Analysis: - The Tribunal examined the facts and the relevant judicial precedents, including the Supreme Court's judgment in National Travel Services V/s CIT. - The Tribunal noted that Section 2(22)(e) includes three limbs, and the case falls under the second limb, where the payment is made to a concern in which the shareholder has a substantial interest. - The Tribunal found that Mr. Punyapal Surana, holding substantial shares in all four companies, satisfied the conditions for invoking Section 2(22)(e). - The Tribunal concluded that the addition for deemed dividend should be ?2,19,74,818/- instead of ?2,20,87,842/-, as it cannot exceed the accumulated profits of the lender companies. Conclusion: - The Tribunal set aside the Ld. CIT(A)'s findings and confirmed the addition under Section 2(22)(e) at ?2,19,74,818/-. - The appeal of the Revenue was partly allowed, affirming the applicability of deemed dividend provisions to the assessee company under the specified conditions. Final Order: The appeal of the Revenue is partly allowed, with the addition under Section 2(22)(e) confirmed at ?2,19,74,818/-. The order was pronounced on 30.04.2021.
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