2014 (6) TMI 471 - AT - Income Tax

Tribunal clarifies Section 2(22)(e) application to borrowers, not lenders, emphasizing business purpose evidence.

The Tribunal dismissed both the Assessee and Revenue appeals, affirming the CIT(A)'s decision. It clarified that Section 2(22)(e) of the Income Tax Act ... Deemed dividend u/s 2(22)(e) of the Act – Transaction undertaken with other companies – Held that:- The AO has passed an ambiguous order - amount advanced by the assessee to various group company and concerns of M/s Sammag Group are treated as deemed dividend u/s. 2(22)(e) of the Act, and taxed in the hands of the recipients for advance on prorata basis and substantive addition shall be made in the hands of the registered and beneficial shareholders on substantive basis by seeking or resorting to the appropriate action, as per the provisions of the Act - AO has erred in understanding the provisions of the Act - Section 2(22)(e) does not contemplate the addition in the hands of the lenders rather it provides for addition as deemed dividend in the hands of the borrowers - Furthermore, as expounded by the Special Bench of the Tribunal in ACIT vs. Bhaumik Colours P Ltd. [2008 (11) TMI 273 - ITAT BOMBAY-E] - section 2(22)(e) can be invoked only in the hands of the borrowers who were registered shareholders only - there is no basis of making assessment as deemed divided u/s 2(22)(e) of the Act in the hands of the assessee on protective basis - CIT(A) is correct in holding that the addition u/s 2(22)(e) in this case cannot be made in the hands of the assessee – Decided against Assessee. Issues:1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.2. Treatment of advances given to group companies under normal business circumstances.3. Application of provisions of section 2(22)(e) to loans given for business purposes.Analysis:1. The case involved cross-appeals by the Assessee and the Revenue regarding the Order of the Ld. CIT(A) dated 26.3.2013 for assessment year 2009-10. The Assessee's appeal challenged the application of Section 2(22)(e) on transactions with Saamag Group companies, while the Revenue's appeal contested the deletion of an addition made under Section 2(22)(e) by the Assessing Officer.2. The Assessing Officer proposed to tax advances given by the Assessee to group companies as deemed dividend under Section 2(22)(e). The Assessee argued that these were business advances and did not attract Section 2(22)(e). However, the AO treated the advances as deemed dividend, leading to an addition in the hands of recipients on protective basis. The CIT(A) deleted the addition, stating that Section 2(22)(e) applies to borrowers, not lenders, and there was no evidence that the advances were for business purposes.3. The Tribunal noted the AO's ambiguous order and clarified that Section 2(22)(e) applies to borrowers, not lenders. The AO's assertion that the Assessee received advances from other companies of the Saamag Group was also found to lack a basis for deeming dividend in the Assessee's hands. The Tribunal upheld the CIT(A)'s decision that the addition under Section 2(22)(e) could not be made in the Assessee's hands. The issue of applying Section 2(22)(e) to loans for business purposes was deemed academic due to the primary finding.4. Ultimately, both the Assessee and Revenue appeals were dismissed, with the Tribunal affirming the CIT(A)'s decision regarding the application of Section 2(22)(e) and the treatment of advances given to group companies. The judgment emphasized the distinction between lenders and borrowers under Section 2(22)(e) and the necessity of evidence for business purposes in such transactions.