2012 (10) TMI 361 - HC - Income Tax

Court affirms ITAT decision on deemed dividend classification under Income Tax Act

CIT Versus Khandelwal Associates

The Court upheld the decision of the ITAT and CIT (A) regarding the classification of a loan as deemed dividend under Section 2 (22) (e) of the Income Tax ... Loan treated as deemed dividend u/s 2 (22) (e)r.w.s. 56 (2) (i) - Held that:- As decided in CIT v. Universal Medicare Private Ltd. [2010 (3) TMI 323 - BOMBAY HIGH COURT] payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely the shareholder, . 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 amount was not paid by way of as loan in advance, but for the job work, which was done by the partnership firm for the company and for which the amount was outstanding. - As in the present case also even assuming requirement of the first part of the Section has been complied with, and that advance could be treated as dividend, it had to be taxed not in the hands of the assessee but in the hands of the shareholder - in favour of assessee. A deeming provision can also be subject to rebuttal. In the present case from the finding of fact such deeming provision was rebutted by the assessee and that findings to that effect have been accepted by the ITAT, which we do not find to be either illegal, arbitrary or perverse. Issues:1. Interpretation of Section 2 (22) (e) of the Income Tax Act regarding deemed dividend.2. Application of legal principles in determining whether the loan amount should be treated as deemed dividend.3. Assessment of whether the loan was advanced as a loan or for job work.4. Taxation of deemed dividend in the hands of the shareholder or the recipient firm.5. Consideration of findings of fact by CIT (A) and ITAT in deciding the appeal.Analysis:1. The primary issue in this case revolves around the interpretation of Section 2 (22) (e) of the Income Tax Act concerning deemed dividend. The appellant contested the treatment of a loan as deemed dividend under this section.2. The Court examined the application of legal principles to determine whether the loan amount should be classified as deemed dividend. The ITAT upheld the CIT (A)'s decision, emphasizing that the transactions between the appellant firm and its partners with another company should be considered in a composite manner.3. An essential aspect of the case was the assessment of whether the loan was advanced as a loan or for job work. CIT (A) found that the amount in question was not paid as a loan in advance but for job work done by the partnership firm for the company.4. Another critical issue was the taxation of deemed dividend, whether it should be taxed in the hands of the shareholder or the recipient firm. The Court relied on precedents and held that if the advance could be treated as dividend, it should be taxed in the hands of the shareholder, not the recipient firm.5. The Court considered the findings of fact by CIT (A) and ITAT in deciding the appeal. It concluded that the deeming provision under Section 2 (22) (e) could be subject to rebuttal based on the facts and circumstances of the case. The appeal was dismissed based on the accepted findings of fact by the ITAT, rendering the questions of law raised by the revenue irrelevant.This detailed analysis of the judgment provides a comprehensive understanding of the legal issues involved and the Court's reasoning in reaching its decision.