2010 (3) TMI 323 - HC - Income Tax

Dividend- An amount of Rs. 32,00,000 was transferred from the bank account of CSPL, to the account of the assessee. V was the director of CSPL. He held over 10 % of the equity capital of CSPL and over 20% of the equity capital of the assessee. The Assessing officer, relied on the provisions of section 2(22)(e) and treated the amount of Rs. 35,00,000 as deemed dividend in the hands of the assessee and directed that the amount be added back to its total income. The assessee contended that one T vice president (Finance) had misappropriated large sums of money by opening bank accounts and the transaction by which an amount of Rs. 32,00,000 was transferred from CSPL was part of the misappropriation. The Assessing Officer came to the conclusion that the provisions of section 2(22)(e) were attracted the moment a loan or advance is made and the subsequent defalcation of funds was immaterial. The Tribunal reversed the order. Held that- the Tribunal had found that as a matter of fact no loan or advance was granted to the assessee, since the amount in question had actually been defalcated and was not reflected in the book of account of the assessee. The fact that there was defalcation had been accepted since this amount was allowed as business loss during the course of assessment year 2006-07. Even assuming that it was a dividend, it would have to be taxed not in the hand of the assessee but in the hands of the shareholder.