2012 (10) TMI 126 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - CIT(A) deleted the addition - Held that - As decided in CIT versus Universal Medicare Private Limited 2010 (3) TMI 323 - BOMBAY HIGH COURT the effect of clause (e) of section 2(22) is to broaden the ambit of the expression dividend by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder. The definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. Consequently in the present case the payment even assuming that it was a dividend would have to be taxed not in the hands of the assessee but in the hands of the shareholder Thus the addition made by the AO on account of deemed dividend u/s 2(22)(e) is to be deleted on the ground that the assessee not being shareholder of M/s Max Print System (Bom) Pvt. Ltd. the loan amount received by it from the said company could not be treated as deemed dividend in its hands - in favour of assessee.

Summary

Issues:
Challenge to deletion of addition of deemed dividend u/s 2(22)(e) by CIT (Appeals).

Analysis:
In this case, the Revenue appealed against the CIT (Appeals) order deleting the addition of Rs.1,02,67,725/- as deemed dividend u/s 2(22)(e). The AO treated the amount received by the assessee from a sister concern as deemed dividend due to substantial interest of directors and shareholders in both entities. However, the CIT (Appeals) ruled in favor of the assessee, stating that since the assessee was not a shareholder of the sister concern, the loan amount could not be deemed dividend in its hands. The CIT (Appeals) relied on the decision of the Hon'ble Bombay High Court in CIT vs. Universal Medicare Pvt. Ltd. 190 Taxman 144.

During the appeal, the assessee did not appear, and the arguments of the learned DR were considered. The Tribunal observed that although there was substantial interest between the entities, the assessee was not a shareholder of the sister concern. The Tribunal referred to the Mumbai Special Bench decision in ACIT vs. Bhaumik Colour (P) Ltd. 118 ITD 1 (Mumbai) (SB) to support the contention that for the provisions of section 2(22)(e) to apply, the payee must be a registered holder of shares. The Tribunal also cited the Hon'ble Bombay High Court decision in Universal Medicare (P) Ltd. 190 Taxman 144, emphasizing that dividend must be taxed in the hands of the shareholder, not the concern.

Based on the above legal interpretations, the Tribunal upheld the CIT (Appeals) order, dismissing the Revenue's appeal. The Tribunal concluded that the loan amount could not be considered deemed dividend in the hands of the assessee since it was not a shareholder of the sister concern. The decisions of the Special Bench of the Tribunal and the Hon'ble Bombay High Court were deemed applicable and binding in this case, leading to the deletion of the addition of deemed dividend u/s 2(22)(e) in favor of the assessee.