2013 (5) TMI 148 - AT - Income Tax

ITAT Mumbai: Loans to Non-Shareholders Not Deemed Dividends

The ITAT Mumbai ruled in favor of the appellant, holding that loans or advances to a non-shareholder cannot be taxed as deemed dividends under section ... Deemed dividend u/s. 2(22)(e) - assessee-company is engaged in the Processing and Trading of Iron Ore taken loans from M/s. Alfa Distilleries P. Ltd. & M/s. Vulcan Distilleries P. Ltd. - Held that:- As decided in case of Bhaumik Colours P. Ltd [2008 (11) TMI 273 - ITAT BOMBAY-E] in the light of the intention behind the provisions of section 2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of the a non shareholder. As in the present case nowhere it is a case of the A.O. that the assessee-company is a shareholder of M/s. Alfa Distilleries P. Ltd. or M/s. Vulcan Distilleries P. Ltd. and as the assessee is not the shareholder of those companies, no addition can be made in the hands of the assessee treating the advances / loans borrowed by the assessee company from those two companies. The CIT (A) tried to distinguish the case of the assessee with that of Bhaumik Colours P. Ltd. (supra) but judicial discipline require that all authorities below should follow the ratio and principles laid down by the higher courts and Tribunal in judicial spirit - assessee’s appeal is allowed. Issues:Challenging addition made towards deemed dividend u/s.2(22)(e) of the Act for A.Y. 2006-07.Analysis:1. The appellant, an assessee company engaged in Processing and Trading of Iron Ore, filed a return of income for A.Y. 2006-07. The Assessing Officer (A.O.) noted loans from M/s. Alfa Distilleries P. Ltd. & M/s. Vulcan Distilleries P. Ltd. The A.O. observed significant shareholdings by a common director in these companies and the appellant. The A.O. treated advances/loans received by the appellant from these companies as deemed dividends u/s.2(22)(e) and made an addition of Rs 14,70,183.2. The A.O.'s addition was challenged before the Ld. CIT (A) but was upheld. The appellant then appealed to the ITAT Mumbai. The ITAT, after considering relevant case laws, found that the appellant was not a shareholder in the lending companies. Referring to the decision in the case of Bhaumik Colours P. Ltd., the ITAT concluded that loans or advances to a non-shareholder cannot be taxed as deemed dividends. The ITAT emphasized that the legal fiction of deeming loans as dividends does not apply to non-shareholders.3. The ITAT highlighted the decision in the case of CIT vs. Universal Medicare (P) Ltd., affirming the interpretation of the provisions of s.2(22)(e). The High Court's decision reiterated that dividends must be taxed in the hands of the shareholder, and in this case, the payment, even if deemed a dividend, should be taxed in the shareholder's hands. The ITAT emphasized that the appellant not being a shareholder of the lending companies precludes the addition of deemed dividends in the appellant's hands.4. The ITAT stressed the importance of judicial discipline, requiring lower authorities to adhere to higher courts' decisions. As the appellant was not a shareholder in the lending companies, the addition made by the A.O. was deemed unjustified. Consequently, the ITAT ruled in favor of the appellant, deleting the addition entirely and allowing the grounds raised by the assessee.5. In conclusion, the ITAT allowed the appellant's appeal, pronouncing the order on 8th April 2011.