2018 (11) TMI 1802 - AT - Income Tax

Tribunal rules loan from M/s. OAT not deemed dividend. Interest allowed as business expenditure.

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision that the loan received by the assessee from M/s. OAT System Software India ... Deemed dividend u/s. 2(22)(e) - registered shareholder requirement for deemed dividend - beneficial ownership versus registered shareholder - re-characterisation of loan as dividend - acceptance of interest payment as indicium of genuine loanDeemed dividend u/s. 2(22)(e) - registered shareholder requirement for deemed dividend - beneficial ownership versus registered shareholder - re-characterisation of loan as dividend - acceptance of interest payment as indicium of genuine loan - Whether the loan of Rs. 4.25 crores received from M/s. OAT System Software India Pvt. Ltd. is taxable as deemed dividend in the hands of the assessee for assessment year 2013-14. - HELD THAT: - The Tribunal held that the statutory conditions for treating an advance as deemed dividend under deemed dividend u/s. 2(22)(e) were not satisfied because the assessee was not a registered shareholder of the lender. The requirements for invocation of section 2(22)(e) are cumulative and apply to a payment to a shareholder (registered or ultimately held in a manner contemplated by law); indirect or ultimate common ownership through an ultimate parent does not by itself convert the advance into deemed dividend where the assessee is not a shareholder of the lending company. The Tribunal followed earlier authority (Cargill India) and accepted the view affirmed by the Supreme Court in Madhur Housing that the assessee must be a shareholder in the lender to attract section 2(22)(e). The reference in National Travel Services to a larger Bench concerning the question of registered versus beneficial shareholder did not, in the Tribunal's view, displace the settled proposition that deemed dividend can be taxed only in the hands of a shareholder. Additionally, the Assessing Officer's contemporaneous allowance of interest as business expenditure was noted as supporting the characterisation of the transaction as a loan and militating against re-characterisation as deemed dividend; the revenue did not challenge the allowance of such interest. Applying these principles to the shareholding chart and facts, the Tribunal concluded that none of the statutory conditions under section 2(22)(e) were met and therefore the addition could not be sustained. [Paras 5, 6]Addition treating the loan as deemed dividend deleted and the Revenue's appeal dismissed.Final Conclusion: The Tribunal dismissed the Revenue's appeal for assessment year 2013-14, holding that the impugned loan could not be treated as deemed dividend under section 2(22)(e) because the assessee was not a shareholder of the lender and the conditions for deeming dividend were not satisfied; the characterisation as a loan (with interest allowed) was upheld. Issues Involved:1. Whether the loan received by the assessee from M/s. OAT System Software India Private Limited qualifies as deemed dividend under section 2(22)(e) of the Income Tax Act.2. Whether the interest paid on the loan by the assessee is allowable as a business expenditure.Detailed Analysis:1. Deemed Dividend under Section 2(22)(e):The primary issue in this case is whether the loan amounting to Rs. 4.25 crores received by the assessee from M/s. OAT System Software India Private Limited can be treated as deemed dividend under section 2(22)(e) of the Income Tax Act.- Assessing Officer's Position: The Assessing Officer (AO) concluded that the loan received by the assessee from M/s. OAT System Software India Private Limited was in the nature of a deemed dividend under section 2(22)(e). This conclusion was based on the fact that the ultimate parent company of both the assessee and the lender was Checkpoint Systems Inc., which held the entire share capital of both entities.- CIT(A)'s Decision: The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal of the assessee, leading to the Revenue filing this appeal.- Revenue's Argument: The Revenue contended that the CIT(A) erred in deleting the addition made by treating the loan as deemed dividend under section 2(22)(e). They relied on the Supreme Court decision in the case of National Travel Services, which suggested that the provisions of section 2(22)(e) could be invoked even if the recipient of the loan was not both a beneficial and registered shareholder.- Assessee's Argument: The assessee argued that the conditions specified in section 2(22)(e) were not met as the assessee was neither a shareholder of the lender company nor did any shareholder of the lender company hold shares in the assessee company. The assessee relied on the Supreme Court judgment in the case of Madhur Housing and Development Company, which upheld that deemed dividend could only be taxed in the hands of the shareholder.- Tribunal's Findings: The Tribunal noted that the assessee was not a registered shareholder of the lending company, M/s. OAT System Software India Private Limited. The Tribunal referred to the diagrammatic representation of the shareholding pattern, which confirmed that the assessee was not a shareholder of the lender company. Consequently, the Tribunal concluded that deemed dividend could not be assessed in the hands of the assessee. The Tribunal also cited the case of Cargill India (P.) Ltd. vs ACIT, where it was held that a loan received by an entity that is not a direct shareholder in the lender company cannot be treated as deemed dividend.2. Allowability of Interest as Business Expenditure:Another issue was whether the interest paid by the assessee on the loan from M/s. OAT System Software India Private Limited was allowable as a business expenditure.- CIT(A)'s Decision: The CIT(A) allowed the interest paid on the loan as a business expenditure. The Revenue did not challenge this allowance.- Tribunal's Findings: The Tribunal observed that since the interest paid on the loan was accepted as a business expenditure, the loan itself could not be re-characterized as deemed dividend. This reinforced the Tribunal's decision to uphold the CIT(A)'s order.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision that the loan received by the assessee from M/s. OAT System Software India Private Limited could not be treated as deemed dividend under section 2(22)(e) of the Income Tax Act. The Tribunal also upheld the allowance of interest paid on the loan as a business expenditure. The judgment was pronounced on November 30, 2018, at Chennai.