Tribunal rules against Revenue's appeal on deemed dividend, clarifies tax provisions

The Tribunal dismissed the Revenue's appeal, affirming that the addition made by the Assessing Officer under Section 2(22)(e) of the Income Tax Act, 1961 was not justified. The Tribunal held that the deemed dividend provisions apply to shareholders of the lender company, and since the assessee company was not a registered shareholder of the lender company, it could not be taxed under Section 2(22)(e). The Tribunal's decision was in line with judicial precedents and clarified that the provisions aim to tax dividends in the hands of shareholders, not companies that are not shareholders.

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Issues Involved:
1. Application of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.
2. Whether the assessee company, not being a registered shareholder, can be taxed under deemed dividend provisions.

Detailed Analysis:

Issue 1: Application of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.
The Revenue challenged the deletion of an addition amounting to Rs. 8,94,41,125/- made by the Assessing Officer (AO) under Section 2(22)(e) of the Income Tax Act, 1961, which pertains to deemed dividend. The AO had treated an unsecured loan from M/s JP Iscon Ltd to the assessee company as deemed dividend, citing common shareholders holding substantial shares in both companies. The AO argued that since the shareholders of the assessee company held more than 20% shares in JP Iscon Ltd, the unsecured loan should be considered as deemed dividend under Section 2(22)(e).

Issue 2: Whether the assessee company, not being a registered shareholder, can be taxed under deemed dividend provisions.
The CIT(A) deleted the addition, observing that the assessee company was not a registered shareholder of JP Iscon Ltd. The CIT(A) referred to several judicial precedents, including the Special Bench of ITAT Mumbai in the case of Asstt. CIT v/s. Bhaumik Colour (P) Ltd and the Gujarat High Court in the case of CIT v/s Daisy Packers (P) Ltd, which held that deemed dividend can only be assessed in the hands of a shareholder of the lender company. The CIT(A) concluded that the provisions of Section 2(22)(e) are intended to tax the dividend in the hands of a shareholder, not in the hands of a company that is not a shareholder.

The Tribunal upheld the CIT(A)'s decision, stating that Section 2(22)(e) does not apply to an entity that is not a shareholder in the lender company. The Tribunal cited the Gujarat High Court's decision in PCIT vs. Mahavir Inductomelt Pvt Ltd, which clarified that the assessee company must be a shareholder in the lender company for Section 2(22)(e) to apply. The Tribunal also distinguished the Supreme Court's decision in Gopal and Sons (HUF) v. CIT, noting that in that case, the HUF was the beneficial shareholder, whereas in the present case, the assessee company was neither the beneficial owner nor the registered owner of the shares.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming that the addition made by the AO under Section 2(22)(e) was not justified. The Tribunal also dismissed the Cross Objection (CO) filed by the assessee as infructuous, as it merely supported the CIT(A)'s order. The final order was pronounced on 28/02/2022 at Ahmedabad.

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