2015 (2) TMI 1382 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - treating of loans/advances in the normal course of business as deemed dividend - HELD THAT - From the records it is evident that the assessee-company is not the shareholding company of M/s. Fairmacs Shipping Transport Services Pvt. Ltd.. To fall within the scope of deemed dividend u/s.2(22)(e) payment should have been made by way of advance or loan to a shareholder being a person who is the beneficial owner of shares. Thus the amounts can be treated as deemed dividend only if it is advanced to a person (including juristic person) who is a beneficial shareholder. Special Bench of the Tribunal in the case of ACIT vs. Bhaumik Colour Pvt. Ltd. 2008 (11) TMI 273 - ITAT BOMBAY-E has held that the deemed dividend can be assessed only in hands of a person who is a shareholder of lender company and not in hands of a person other than a shareholder. The view taken by the Special Bench has been approved by the Hon ble Madras High Court in the case of CIT v. Printwave Services (P.) Ltd 2014 (11) TMI 694 - MADRAS HIGH COURT while dealing with similar controversy held that since the assessee company is not beneficial or registered owner of shareholding in the company (sister concern) no dividend normal or deemed could have been received by the assessee-company. Therefore the provisions of Sec.2(22)(e) will not apply. Appeal of assessee allowed,

Summary

Issues:
Treatment of loans/advances as 'deemed dividend' under Sec. 2(22)(e) of the Income-tax Act, 1961.

Analysis:
The case involved an appeal by the assessee against the order of the Commissioner of Income-tax (Appeals)-II, Chennai regarding the treatment of loans/advances as 'deemed dividend' under Sec. 2(22)(e) of the Income-tax Act, 1961. The assessee, a private limited company engaged in logistics, ship handling, and import-export business, had taken loans/advances from a company with common shareholders. The Assessing Officer treated these amounts as 'deemed dividend,' leading to an appeal by the assessee.

The assessee argued that the amounts were inter-corporate deposits in the normal course of business and not received by shareholders, thus not falling under the definition of 'deemed dividend.' The Department contended that since both companies had common shareholders, the amounts qualified as 'deemed dividend' under Sec. 2(22)(e). The Tribunal analyzed the case law, including the decision of the Special Bench and the judgment of the Hon'ble Bombay High Court, to determine the applicability of 'deemed dividend.'

The Tribunal observed that for an amount to be considered 'deemed dividend' under Sec. 2(22)(e), it should be advanced to a beneficial shareholder. As the assessee was not a beneficial shareholder of the lending company, the Tribunal concluded that the provisions of Sec. 2(22)(e) did not apply. Citing the judgment of the Hon'ble Madras High Court in a similar case, the Tribunal held that 'deemed dividend' can only be assessed in the hands of a shareholder of the lending company. Therefore, the Tribunal set aside the impugned order and allowed the appeal of the assessee.

In light of the legal principles and precedents cited, the Tribunal ruled that the amounts received by the assessee did not meet the criteria for 'deemed dividend.' The judgment highlighted the importance of beneficial ownership in determining the applicability of 'deemed dividend' provisions. Ultimately, the Tribunal's decision favored the assessee, emphasizing the specific requirements under Sec. 2(22)(e) for an amount to be classified as 'deemed dividend.'