2014 (4) TMI 1264 - HC - Income Tax

Court Upholds ITAT's Decision, Emphasizes Proper Procedure for Deemed Dividends Under Income Tax Act Section 2(22)(e.

The Karnataka HC disposed of the appeal in favor of the assessee, aligning with a previous judgment interpreting Section 2(22)(e) of the Income Tax Act, ... Deemed dividend u/s 2(22)(e) - Advance/loan paid - HELD THAT:- Issue decided in favour of assessee as decided in SARVA EQUITY (P.) LTD. [2014 (4) TMI 788 - KARNATAKA HIGH COURT] as held It is only the person whose name is entered in the Register of the shareholders of the Company as the holder of the shares who can be said to be a shareholder qua Company and not the person beneficially entitled to the shares - it is only where a loan is advanced by the Company to the registered shareholder and the other conditions set out in Section 2(22)(e) of the Act are satisfied, that amount of loan would be liable to be regarded as deemed dividend - Decided against revenue. Issues:1. Appeal against the order of the Income Tax Appellate Tribunal.2. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961.3. Application of legal precedent from a previous judgment.4. Disposal of the appeal in favor of the assessee.Analysis:The High Court of Karnataka heard an appeal under Section 260-A of the Income Tax Act, 1961 challenging the order of the Income Tax Appellate Tribunal. The Tribunal had upheld the decision of the First Appellate Authority, which had reversed the order of the Assessing Officer regarding the tax liability of the assessee. The main issue revolved around the interpretation of Section 2(22)(e) of the Act, specifically whether the assessee could be considered liable for tax under this provision. The Court noted that a similar question of law had been addressed in a previous judgment, where it was ruled in favor of the assessee.In light of the previous judgment, the Court considered the arguments presented by both parties. The counsel for the respondent referred to the earlier judgment and contended that the substantial question of law in this case was covered by it. The Revenue's counsel also acknowledged the applicability of the previous judgment and agreed that the current appeal should be decided in line with it. Consequently, the Court disposed of the appeal in favor of the assessee, aligning with the judgment from the previous case.The Court emphasized that the Revenue could take corrective measures, if necessary, by treating the loan or advance amount as deemed dividend in the hands of the shareholders. This would require following the due procedure as prescribed by law. The Court's decision aimed to prevent any potential income escapement by ensuring compliance with the legal provisions. Therefore, the judgment concluded by providing guidance to the Revenue on how to address the issue of deemed income at the hands of shareholders, emphasizing the importance of adherence to legal procedures.