2022 (6) TMI 799 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Substantial interest in lending company - common shareholder - assessee company has received a loan of Rs.71 lakhs from M.Ct.M Corporation P Ltd. As the assessee company s shareholders who are having substantial interest are having 10% voting power in the above said company, the loan is to be treated as deemed dividend in the hands of the assessee company - Assessee argued that none of the shareholders who beneficially hold more than 10% of the shares carrying voting rights in lending company beneficially hold more than 20% of shares carrying voting rights in the assessee company - HELD THAT - Such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance. Precisely, for this very reason, the Courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under Section 2(22)(e) of the Act. Insofar as reliance upon Circular No. 495 dated 22.09.1997 issued by CBDT is concerned, such observations are not binding on the Courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that is the correct legal position, such a circular would be of no avail. The definition of shareholder is not enlarged by any fiction. We are of the view that this issue is covered by the decision of Hon ble Supreme Court MADHUR HOUSING AND DEVELOPMENT COMPANY 2017 (10) TMI 1279 - SUPREME COURT wherein it is held that as per provisions of section 2(22)(e) of the Act, the concern like the assessee which has received loan from M.Ct.M Corporation P Ltd., which is giving loan or advance is not a shareholder or member of the receiver company. Therefore, under no circumstances the assessee could be treated as shareholder, member receiving dividend. Hence, the assessment of this loan received by assessee cannot be treated as deemed dividend u/s.2(22)(e) of the Act. Hence, we delete the addition and allow this issue of assessee s appeal. Disallowing VRS payment claimed - As argued this amount was added back by the AO notwithstanding the fact that the assessee itself disallowed the same in computing the taxable income for assessment year 2000-01 - HELD THAT - After hearing both the sides, we remand this matter back to the file of the AO who will verify the fact that the assessee himself disallowed in the computation of income or not and accordingly, will decide the same. This issue of assessee s appeal is set aside and allowed for statistical purposes.

Summary

Issues:
1. Addition made under section 2(22)(e) of the Income Tax Act.
2. Disallowance of VRS payment claimed.

Issue 1: Addition under section 2(22)(e) of the Income Tax Act:

The appeal centered on the addition made by the Assessing Officer (AO) on deemed dividend under section 2(22)(e) of the Income Tax Act. The Appellant contended that the provisions of section 2(22)(e) were incorrectly applied to the sum received from M.Ct.M Corporation Private Limited. The Appellant argued that the shareholders did not hold substantial interest in both the lending and receiving companies, thus the provisions should not apply. The Commissioner of Income Tax (Appeals) upheld the AO's decision, citing the Supreme Court's decision in Navnith Lal C Jaweri Vs. K.K. Sen. The Appellant then appealed to the Tribunal, presenting the shareholding pattern to support their case. The Tribunal referred to the Supreme Court's ruling in CIT vs. Madhur Housing and Development Company, emphasizing that a concern receiving a loan is not a shareholder of the lending company, hence cannot be treated as receiving a dividend. Consequently, the Tribunal ruled in favor of the Appellant, deleting the addition under section 2(22)(e) of the Act.

Issue 2: Disallowance of VRS payment claimed:

The second issue revolved around the disallowance of Voluntary Retirement Scheme (VRS) payment claimed by the assessee. The AO added back a sum towards VRS payments, which the assessee had already disallowed while computing the loss. During the Tribunal proceedings, the ld.counsel for the assessee presented the computation of total income, showing the disallowed VRS payment. The matter was suggested to be verified by the AO and remanded back for further examination. After considering both sides, the Tribunal remanded the issue to the AO to verify if the assessee had indeed disallowed the VRS payment in the income computation. As a result, this issue of the assessee's appeal was set aside and allowed for statistical purposes.

In conclusion, the Tribunal ruled in favor of the assessee, deleting the addition made under section 2(22)(e) of the Income Tax Act. The issue regarding the disallowance of VRS payment claimed was remanded back to the AO for further verification. The appeal filed by the assessee was allowed for statistical purposes.