ITAT upholds CIT (A) decision, excludes NBFCs from deemed dividend provision

The ITAT dismissed the revenue's appeal, upholding the CIT (A)'s decision to delete the addition of Rs. 2,70,00,000/- made by the AO under section 2(22)(e) of the Income-tax Act, 1961. The ITAT concluded that the lender companies were public limited companies in which the public were substantially interested and were also NBFCs, thus excluded from the deeming provision of section 2(22)(e).

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Issues Involved:
1. Deletion of addition of Rs. 2,70,00,000/- made by the AO under section 2(22)(e) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 2(22)(e) of the Income-tax Act, 1961:

The revenue challenged the deletion of an addition of Rs. 2,70,00,000/- made by the AO under section 2(22)(e) of the Income-tax Act, 1961. The AO had issued a show cause notice to the assessee, questioning why loans of Rs. 1.50 crores from M/s. Sindhu Trade Links Ltd. (STLL) and Rs. 1.20 crores from M/s. Parnami Habitat Developers Ltd. (PHDL) should not be treated as deemed dividends. The AO observed that the directors of the assessee company held substantial interest in these companies and that the companies were closely held by the promoters, thus not qualifying as companies in which the public are substantially interested. The AO countered the assessee's claim that STLL was an NBFC and thus exempt from section 2(22)(e), arguing that the assessee failed to prove that the loans were given in the ordinary course of business. Consequently, the AO added Rs. 2.70 crores to the assessee's total income as deemed dividend.

The assessee appealed to the CIT (A), who deleted the addition. The CIT (A) found that the crucial issue was whether the lender companies were ones in which the public were substantially interested. The CIT (A) noted that section 2(22)(e) applies only to closely held companies and that the lender companies were public limited companies listed on recognized stock exchanges. The CIT (A) emphasized that the AO's interpretation went beyond the intention of the Act and that the addition of Rs. 2.70 crores as deemed dividend was incorrect.

The revenue, aggrieved by this decision, appealed to the ITAT. The DR reiterated the AO's arguments, emphasizing the substantial interest held by the directors and their family members in the lender companies. The DR argued that the companies were not public companies in which the public were substantially interested and that the assessee failed to prove that the companies were widely held public limited companies.

The AR for the assessee reiterated the submissions made before the CIT (A), emphasizing that the lender companies were listed public limited companies and NBFCs. The AR argued that section 2(22)(e) was not applicable as the assessee did not hold shares exceeding 10% in the lender companies, and there was no shareholder holding more than 10% in the lender companies who also held 20% shares in the assessee company. The AR further argued that section 2(22)(e) applies only to closely held companies and not to public limited companies listed on recognized stock exchanges.

The ITAT, after hearing both sides and reviewing the material on record, upheld the CIT (A)'s decision. The ITAT noted that section 2(22)(e) excludes public companies in which the public are substantially interested, as defined in section 2(18) of the Act. The ITAT found that the lender companies were public limited companies listed on recognized stock exchanges and that the assessee had provided sufficient evidence to substantiate this. The ITAT also noted that the lender companies were NBFCs, which are excluded from the deeming provision of section 2(22)(e). Therefore, the ITAT concluded that the loans/advances/ICDs given to the assessee did not fall under section 2(22)(e) and dismissed the revenue's appeal.

Conclusion:
The ITAT dismissed the revenue's appeal, upholding the CIT (A)'s decision to delete the addition of Rs. 2,70,00,000/- made by the AO under section 2(22)(e) of the Income-tax Act, 1961. The ITAT concluded that the lender companies were public limited companies in which the public were substantially interested and were also NBFCs, thus excluded from the deeming provision of section 2(22)(e).

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