2021 (7) TMI 316 - AT - Income Tax

Deemed dividend u/ s 2(22)(e) - HELD THAT - A perusal of the shareholding pattern placed before us shows that none of the shareholders of the lender company holding 10% or more of the voting power holds substantial interest in the assessee company. This being so, the basic condition s.2(22)(e) of the Act is not fulfilled in the present case. We, thus, totally fail to understand the approach of the AO in applying the law for additions of this magnitude. Secondly, we also affirmatively take note of the plea raised on behalf of the assessee that the lender company has given interest bearing loan to assessee and the loan is not interest free. The said loan cannot be said to be for the individual benefit of any such shareholder . In the similar circumstances, the Hon ble Calcutta High Court in the case of Pradip Kumar Malhotra 2011 (8) TMI 16 - CALCUTTA HIGH COURT has observed that advances given by the lender was not for the individual benefit of the shareholder but for business purposes and therefore such transactions would not fall within the sweep of deeming fiction created under s.2(22)(e) - This reason also on a standalone basis is sufficient to exclude the applicability of Section 2(22)(e) of the Act on the money received by the assessee. As seen from any angle, additions are totally unjustified made by way of deemed dividend in the case of the assessee as rightly held by the CIT(A) on the factual backdrop. We thus see no error in the conclusion drawn in the first appellate order albeit for the reasons noted above. Disallowance towards the excess interest paid to the persons covered u/ s 40A(2)(b) - HELD THAT - Identical issue has come up before the co-ordinate bench in the earlier year relevant to AY 2011-12 wherein the co-ordinate bench has approved the reversal of disallowance made by the CIT(A) in these similar facts - AO has not discharged the onus which lay upon it to show that the interest paid is excessive or unreasonable having regard to fair market value of facility so provided. We thus see no reason to interfere with the order of the CIT(A). Accordingly, Ground no.2 of the Revenue s appeal is dismissed.

Summary

Issues Involved:
1. Addition in respect of deemed dividend under Section 2(22)(e) of the Income Tax Act.
2. Disallowance of excess interest paid under Section 40A(2)(b) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition in respect of deemed dividend under Section 2(22)(e) of the Income Tax Act:

The Revenue appealed against the deletion of an addition of ?1,71,90,000/- made by the Assessing Officer (AO) under Section 2(22)(e) of the Income Tax Act. The AO observed that the assessee, a limited company, received an unsecured loan from Cama Motors Pvt. Ltd., and common directors held more than 10% of the share capital in both companies. Therefore, the AO treated the loan as deemed dividend.

The CIT(A) reversed the addition, noting that the assessee did not hold any shares in the lending company, and the shareholders of the lending company did not hold substantial interest in the assessee company. The CIT(A) relied on precedents, including the Hon'ble Mumbai Tribunal's decision in ACIT Vs. Bhaumik Colour and the Gujarat High Court's decision in CIT v/s Daisy Packers (P) Ltd, which state that deemed dividend under Section 2(22)(e) can only be assessed in the hands of the shareholder of the lending company.

The Tribunal upheld the CIT(A)'s decision, emphasizing that none of the shareholders of the lender company held substantial interest in the assessee company. Additionally, the loan was not interest-free and was given in the ordinary course of business, which further excluded the applicability of Section 2(22)(e). The Tribunal cited the Calcutta High Court's decision in Pradip Kumar Malhotra vs. CIT, which supports that advances given for business purposes do not fall within the deeming provisions of Section 2(22)(e).

2. Disallowance of excess interest paid under Section 40A(2)(b) of the Income Tax Act:

The AO disallowed ?6,66,077/- out of interest payments made to sister concerns, considering 12% interest as reasonable compared to the 15% paid by the assessee. The CIT(A) reversed this disallowance, noting that the assessee had paid lower interest rates to related parties compared to bank borrowings, which were higher than 15%.

The Tribunal upheld the CIT(A)'s decision, referencing a similar issue in the assessee's own case for AY 2010-11, where it was established that the interest rates paid to related parties were not excessive compared to market rates. The AO failed to provide a basis for considering 12% as the market rate, and the Tribunal found no reason to interfere with the CIT(A)'s order.

Conclusion:

The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s deletion of both the addition under Section 2(22)(e) and the disallowance under Section 40A(2)(b). The judgment emphasized the importance of factual accuracy and adherence to legal precedents in determining deemed dividends and reasonable interest payments.