2015 (1) TMI 1165 - HC - Income Tax

Revenue's Appeal Dismissed on Taxation of Deemed Dividend

The High Court dismissed the Revenue's appeal challenging the taxation of a loan as deemed dividend under Section 2(22)(e) of the Income Tax Act for the ... Deemed dividend under Section 2 (22)(e) - loan received by the Respondent-Assesee from M/s. NS Fincon Pvt. Ltd. - Held that:- On strict interpretation of Section 2(22)(e) of the Act, unless the Respondent-Assessee is the shareholder of the company lending him money, no occasion to apply it can arise. In the present facts, it is an admitted position that Respondent-Assessee is not a shareholder of M/s. NS Fincon Pvt. Ltd. from whom he has received loan. Therefore, no fault can be found with the decision of the Tribunal in having followed the decision of the High Court in Universal Medicare (2010 (3) TMI 323 - BOMBAY HIGH COURT). This view has been further reiterated by another Division Bench of this Court in Impact Containers (2014 (9) TMI 88 - BOMBAY HIGH COURT) rendered on 4th July, 2014. - Decided against revenue. Issues:Challenge to the order of the Income Tax Appellate Tribunal for the Assessment Year 2007-08 regarding the taxation of a loan received by the appellant as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.Analysis:The Revenue challenged the Tribunal's reliance on the judgment in the case of ACIT v/s. M/s. Bhaumik Colours Pvt. Ltd. The Tribunal upheld the order of the CIT(A) based on the decisions of the Special Bench of the Tribunal and the High Court. The Tribunal noted that the issue was covered in favor of the assessee by the decision of the Special Bench in Bhaumik Colours Pvt. Ltd. The Revenue argued that the loan received should be taxed as deemed dividend under Section 2(22)(e) of the Act. However, the CIT(A) held that the loan was not a payment made to a shareholder and that Section 2(22)(e) should be strictly interpreted.The High Court considered the challenge independently and not solely based on the Revenue's concession before the Tribunal. The facts revealed that the appellant received a loan from a company, which the Revenue sought to tax as deemed dividend. The High Court emphasized that deemed dividend can only be assessed in the hands of a shareholder of the lending company. Since the appellant was not a shareholder of the lending company, the High Court dismissed the Revenue's appeal.The High Court referred to previous judgments, including Universal Medicare Pvt. Ltd. and Impact Containers Pvt. Ltd., to support the interpretation that Section 2(22)(e) cannot be applied if the assessee is not a shareholder of the lending company. The Court highlighted the need for strict interpretation of tax laws and resolved that no substantial question of law arose for consideration. Consequently, the High Court dismissed the appeal, with no order as to costs.