2018 (1) TMI 1157 - AT - Income Tax

Tribunal overturns deemed dividend ruling under Income Tax Act

The Tribunal allowed the appeal, setting aside the addition of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The decision was based ... Deemed dividend under section 2(22)(e) - taxation of loans or advances as dividend - legal fiction of deeming - recipient not being a shareholder of the payer companyDeemed dividend under section 2(22)(e) - recipient not being a shareholder of the payer company - legal fiction of deeming - Whether an advance of Rs. 10 lakh received by the assessee from M/s Beehive Technologies Pvt. Ltd. could be treated as deemed dividend under section 2(22)(e) when the assessee was not a shareholder of that payer company. - HELD THAT: - The Tribunal found as a fact that the impugned amount was advanced by M/s Beehive Technologies Pvt. Ltd. and that the assessee was not a shareholder of that company. The Tribunal applied the legal principle that the deeming fiction in section 2(22)(e) enlarges the definition of dividend but does not extend to creating a fiction that a non shareholder becomes a shareholder; the fiction operates to treat certain loans/advances as dividend when made by a company to its shareholders or to concerns in which such shareholders have substantial interest, on the presumption that such advances ultimately benefit the shareholders of the lending company. Where the recipient is not a shareholder of the payer company, the fiction cannot be stretched to treat the recipient as a shareholder for the purpose of attracting section 2(22)(e). The Tribunal relied on the ratio in Commissioner of Income Tax vs. Ankitech (P) Ltd. to hold that the provisions of section 2(22)(e) are not attracted in the present facts, and that the addition made by the Assessing Officer and confirmed by the CIT(A) therefore lacked basis.Addition of Rs. 10 lakh as deemed dividend under section 2(22)(e) deleted; appeal allowed.Final Conclusion: The Tribunal allowed the appeal, set aside the orders of the authorities below and directed deletion of the addition of Rs. 10 lakh made as deemed dividend, holding that section 2(22)(e) does not apply where the advance was made by a company of which the assessee was not a shareholder. Issues:- Addition of deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961.- Validity of reassessment under section 147 r.w. section 143(3) of the Act.- Treatment of payment received from M/s Beehive Technologies Private Limited as deemed dividend.- Applicability of Section 2(22)(e) in the case where the assessee is not a shareholder in the payer company.Analysis:1. Addition of Deemed Dividend:The appeal was against the addition of Rs. 10 lakh as deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer added the amount based on information that the assessee received a loan from M/s Beehive Systems Private Limited. However, the assessee argued that the amount was received from M/s Beehive Technologies Private Limited, in which he was not a shareholder. The Delhi High Court judgments cited emphasized that for Section 2(22)(e) to apply, the recipient must be a shareholder of the payer company. The Tribunal found that the assessee was not a shareholder in M/s Beehive Technologies Private Limited, and thus, the addition was unjustified.2. Validity of Reassessment:The assessee challenged the reassessment under section 147 r.w. section 143(3) of the Act, contending that it was solely based on internal information. However, the Tribunal did not find merit in this argument as the focus was on the incorrect application of Section 2(22)(e) rather than the reassessment process itself.3. Treatment of Payment from M/s Beehive Technologies Private Limited:The key contention was whether the payment received from M/s Beehive Technologies Private Limited should be considered deemed dividend. The Tribunal ruled that since the assessee was not a shareholder in that company, the provisions of Section 2(22)(e) did not apply, aligning with the legal principles established in the cited judgments.4. Applicability of Section 2(22)(e) without Shareholder Status:The crux of the matter revolved around the interpretation of Section 2(22)(e) concerning shareholders and deemed dividends. The Tribunal, guided by the Delhi High Court's decision, emphasized that the provisions of Section 2(22)(e) could not be invoked if the recipient was not a shareholder in the payer company. This interpretation led to the direction to delete the addition made by the Assessing Officer.In conclusion, the Tribunal allowed the appeal, setting aside the addition of deemed dividend and directing the Assessing Officer to delete the said addition. The decision was based on the clear interpretation of Section 2(22)(e) and the absence of shareholding by the assessee in the payer company.