Company loans deemed dividends under IT Act, exceptions dismissed. Taxable in recipient's hands.

The court held that the loans received by the assessee company should be treated as deemed dividends under Section 2(22)(e) of the Income Tax Act, 1961. The exception under sub-clause (ii) did not apply as money lending was not a substantial part of the lender's business. Deemed dividends are not exempt under Section 10(34) read with Section 115-O and remain taxable in the recipient's hands. The appeals were dismissed, and the ITAT's order was upheld.

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Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961.
2. Interpretation of "deemed dividend" under Section 2(22)(e).
3. Exception under sub-clause (ii) of Section 2(22)(e).
4. Taxability of deemed dividend under Section 10(34) read with Section 115-O.

Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961:
The case revolves around whether the loans received by the assessee company from Sun Polytex Pvt. Ltd. and Sisarama Plastics Pvt. Ltd. should be treated as "deemed dividend" under Section 2(22)(e) of the Income Tax Act, 1961. The assessee company held more than 10% of the shares in these companies, which is a critical factor for the application of this section.

2. Interpretation of "deemed dividend" under Section 2(22)(e):
The court examined whether the loans received by the assessee company could be considered "deemed dividend." The Assessing Officer (AO) added the loan amounts to the income of the assessee company, treating them as deemed dividends. The CIT(A) initially deleted these additions, considering them as inter-corporate deposits, but the ITAT reversed this decision, reinstating the AO's order.

3. Exception under sub-clause (ii) of Section 2(22)(e):
The assessee argued that the loans should be excluded from the definition of "deemed dividend" under sub-clause (ii) of Section 2(22)(e), which excludes loans made in the ordinary course of business where money lending is a substantial part of the company's business. The court found that money lending was not a substantial part of Sun Polytex Pvt. Ltd.'s business, as the company primarily engaged in manufacturing PP/HDPE Fabric. The court upheld the ITAT's decision that the loan did not qualify for the exception under sub-clause (ii).

4. Taxability of deemed dividend under Section 10(34) read with Section 115-O:
The assessee contended that deemed dividends should be exempt under Section 10(34) read with Section 115-O, which exempts dividend income from tax in the hands of the shareholder since the company pays tax on the dividend. However, the court clarified that "deemed dividend" under Section 2(22)(e) is not covered by this exemption. Therefore, deemed dividends remain taxable in the hands of the recipient.

Conclusion:
The court concluded that the loans received by the assessee company from Sun Polytex Pvt. Ltd. and Sisarama Plastics Pvt. Ltd. should be treated as deemed dividends under Section 2(22)(e) of the Income Tax Act, 1961. The exception under sub-clause (ii) did not apply as money lending was not a substantial part of the lender's business. Additionally, deemed dividends are not exempt under Section 10(34) read with Section 115-O and are taxable in the hands of the recipient. The appeals were dismissed, and the ITAT's order was upheld.

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