2011 (6) TMI 1013 - AT - Income Tax

Tribunal rules ICDs not deemed dividends, overturns Revenue's appeal

I.T.O., Ward-8 (1), Ahmedabad Versus Seasons Hotels Pvt. Ltd., Ahmedabad

The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeals. It was determined that the amounts received were Inter Corporate Deposits ... - Issues Involved:1. Whether the amounts received by the assessee from Inder Hotels Pvt. Ltd. qualify as deemed dividend u/s 2(22)(e) of the I.T. Act, 1961.2. Whether the transactions were in the nature of Inter Corporate Deposits (ICDs) and for business expediency.3. Whether the assessee, not being a registered shareholder, can be taxed for deemed dividend u/s 2(22)(e).Summary:Issue 1: Deemed Dividend u/s 2(22)(e)The Revenue filed appeals against the deletion of additions made by the AO on account of deemed dividend income u/s 2(22)(e) for the assessment years 2004-2005, 2005-06, and 2006-07. The AO added amounts as deemed dividend income, arguing that the assessee received loans and advances from Inder Hotels Pvt. Ltd., where common directors had substantial interest. The AO's decision was based on the interpretation that these transactions fell within the purview of deemed dividend u/s 2(22)(e).Issue 2: Nature of Transactions as ICDs and Business ExpediencyThe assessee contended that the amounts received were Inter Corporate Deposits (ICDs) given for business expediency, and thus, should not be treated as deemed dividend. The assessee supported this argument with various case laws, including Bombay Oil Industries Ltd. vs. Dy. CIT, which held that ICDs are different from loans or advances and do not come under deemed dividend u/s 2(22)(e). The CIT(A) accepted this argument, noting that the transactions were for business purposes and the lender companies had surplus funds which they lent to earn interest.Issue 3: Assessee Not a Registered ShareholderThe assessee also argued that it was not a registered shareholder of Inder Hotels Pvt. Ltd., and hence, the provisions of section 2(22)(e) should not apply. This argument was supported by the ITAT Special Bench decision in CIT vs. Bhaumik Colour P. Ltd., which stated that deemed dividend can only be assessed in the hands of a registered shareholder. The CIT(A) accepted this argument and deleted the additions.Tribunal's Decision:The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee was not a registered shareholder and thus, section 2(22)(e) did not apply. Additionally, the Tribunal concurred that the transactions were in the nature of ICDs for business expediency, further supporting the CIT(A)'s deletion of the additions. Consequently, all three appeals filed by the Revenue were dismissed.Conclusion:The Tribunal dismissed the Revenue's appeals, affirming that the amounts received by the assessee were ICDs for business purposes and that the assessee, not being a registered shareholder, could not be taxed for deemed dividend u/s 2(22)(e).