2014 (3) TMI 20 - AT - Income Tax

Tribunal rules Inter-Corporate Deposits not deemed dividends

The Tribunal upheld the CIT(A)'s decision, ruling that Inter-Corporate Deposits (ICDs) should not be considered as deemed dividends under section 2(22)(e) ... Deemed dividend u/s 2(22)(e) of the Act – Inter corporate deposits received – Held that:- The decision in Commissioner of Income Tax, Versus M/s. Bombay Oil Industries Ltd. [2012 (9) TMI 406 - BOMBAY HIGH COURT] followed - inter corporate deposits cannot be taxed as deemed dividend - it cannot be considered to be in the nature of loans and advances so as to treat it as deemed dividend u/s 2(22)(e) of the Act - Even assuming that the ICDs are loans and advances, still it cannot be treated as deemed dividend u/s 2(22)(e) of the Act - A plain reading of provisions contained u/s 2(22)(e) of the Act makes it clear that any loan or advance made to a shareholder by a company in which the public are not substantially interested would be treated as deemed dividend in the hands of such shareholders. The CIT(A) has correctly reached the conclusion that none of the shareholders of assessee or the assessee itself is a shareholder of Company from whom Loan is taken - neither Company imparting loan nor its shareholders are holding any shares in the assessee - Section 2(22)(e) does not provide that having a common Director in two companies would make Section 2(22)(e) applicable – Thus, Section 2(22)(e) is not applicable in respect of the loan advanced to the assessee – thus, there was no infirmity in the order of the CIT(A) – Decided against Revenue. Issues Involved:1. Erroneous order of the CIT(A).2. Classification of Inter-Corporate Deposits (ICDs) under section 2(22)(e) of the Income Tax Act.3. Applicability of deemed dividend provisions to non-shareholders.4. Substantial interest of a common shareholder in both companies.Detailed Analysis:1. Erroneous Order of the CIT(A)The Revenue contended that the order of the CIT(A) was erroneous both in law and on the facts of the case. The CIT(A) had held that the inter-corporate deposits (ICDs) received from Excel Rubber Ltd. could not be considered along with loans and advances for the purpose of applying the provisions of section 2(22)(e) of the Income Tax Act.2. Classification of Inter-Corporate Deposits (ICDs) under Section 2(22)(e)The primary issue was whether ICDs could be classified as loans and advances under section 2(22)(e) of the Act, which pertains to deemed dividends. The CIT(A) analyzed the provisions and concluded that ICDs should not be treated as loans and advances for the purpose of deemed dividend. This conclusion was supported by the decision of the Mumbai 'H' Bench of the Tribunal in the case of Bombay Oil Industries V/s. DCIT, which held that ICDs cannot be taxed as deemed dividends.3. Applicability of Deemed Dividend Provisions to Non-ShareholdersThe CIT(A) held that the provisions of section 2(22)(e) could only be invoked in the hands of the shareholder and not the concern in which the shareholder has a substantial interest. Since the assessee company was not a shareholder in Excel Rubber Pvt. Ltd., the provisions could not be invoked. This view was consistent with various judicial precedents, including the Hon'ble Delhi High Court's decision in CIT Vs. Ankitech P. Ltd., which clarified that loans or advances could only be treated as deemed dividends in the hands of the shareholder, not the concern.4. Substantial Interest of a Common Shareholder in Both CompaniesThe Assessing Officer had argued that because Sri G.R. Reddy had a substantial interest in both the companies, the amounts received by the assessee should be treated as deemed dividends. However, the CIT(A) and subsequently the Tribunal noted that the assessee was not a shareholder in Excel Rubber Pvt. Ltd., and therefore, the provisions of section 2(22)(e) could not be applied. The Tribunal upheld the CIT(A)'s decision, emphasizing that the legal fiction created by section 2(22)(e) does not extend to treating the concern as a shareholder.ConclusionThe Tribunal confirmed the CIT(A)'s order, which excluded ICDs from the ambit of deemed dividends under section 2(22)(e). It reiterated that the deemed dividend provisions apply only to shareholders and not to concerns where the shareholder has a substantial interest. The appeal by the Revenue was dismissed, and the CIT(A)'s decision was upheld, aligning with the judicial precedents and the Tribunal's earlier rulings in similar cases.Order PronouncementThe order was pronounced in the court on 17.2.2014, dismissing the Revenue's appeal.