High Court upholds Tribunal's decision on deemed dividend exclusion under Income Tax Act

The Tribunal's decision to delete the addition of deemed dividend under Section 2(22)(e) of the Income Tax Act was upheld by the High Court. The Tribunal found that the trust deed transferring shares was genuine, and the assessee did not retain beneficial ownership, thus Section 2(22)(e) did not apply. The High Court held that the Tribunal's conclusions were not perverse, dismissing the appeal by the Revenue.

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Issues Involved:
1. Deletion of addition made on account of deemed dividend u/s 2(22)(e) of the Income Tax Act.
2. Whether the Tribunal's order is perverse due to the assessee's failure to disclose the existence of a trust during the search action.

Summary:

Issue 1: Deletion of Addition Made on Account of Deemed Dividend u/s 2(22)(e)

The Revenue appealed against the Tribunal's decision to delete the addition of Rs. 1,06,66,471 made as deemed dividend u/s 2(22)(e) of the Income Tax Act. The Assessing Officer had taxed certain income as deemed dividend based on the assessee's shareholding in M/s. Amod Stampings Pvt. Ltd. During a search operation, it was found that the company had given loans to shareholders with more than 10% voting power, including the assessee. The assessee initially agreed to pay taxes on the deemed dividend but later claimed that a trust was created in 2005, transferring the shares to the trust, thus negating the application of Section 2(22)(e).

The Assessing Officer rejected this claim, stating that the trust was not genuine as it had no bank account, income, or registration, and the shares were still in the names of the trustees. The CIT(A) upheld this view. However, the Tribunal allowed the appeal, noting that the trust deed was executed on a stamp paper and notarized, and the Board of Directors had acknowledged the settlement of shares in favor of the trust. The Tribunal emphasized that a deeming provision should be applied strictly and concluded that the deemed dividend should not be taxed in the hands of the assessee.

Issue 2: Whether the Tribunal's Order is Perverse

The Revenue argued that the Tribunal's decision was perverse as the assessee failed to disclose the trust during the search and initially agreed to pay taxes on the deemed dividend. The Tribunal, however, found that the trust deed was created years before the search, was duly notarized, and the Companies Act did not permit the transfer of shares in the name of the trust. The Tribunal also noted that the trust had no income or bank account due to the company's non-declaration of dividends. The Tribunal concluded that the trust was genuine and the assessee did not retain beneficial ownership of the shares, thus Section 2(22)(e) did not apply.

The High Court upheld the Tribunal's findings, stating that the issue was based on the appreciation of materials on record and the Tribunal's conclusions were not perverse. The appeal was dismissed.

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