Court rules on interpretation of deemed dividend provision under Income Tax Act, 1961

The High Court dismissed the appeal filed by the revenue under Section 260-A of the Income Tax Act, 1961, regarding the interpretation of Section 2(22)(e) on deemed dividend. The court held that the provision does not extend to shareholders but pertains to the definition of dividend. It emphasized that loans or advances under Section 2(22)(e) should be treated as dividend only in the hands of the lender's shareholders, not the borrowing concern. The judgment clarified the distinction between shareholders and the treatment of such transactions, ruling in favor of the assessee and against the revenue.

---

---

Issues:
1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.

Analysis:
The High Court heard an appeal filed by the revenue under Section 260-A of the Income Tax Act, 1961 against an order of the Income Tax Appellate Tribunal for the assessment year 2007-08. The main issue was whether the ITAT was correct in law in deleting the addition made on account of deemed dividend u/s 2(22)(e) of the Act by treating the transaction between the assessee company and another company as a commercial/trade transaction and not as a loan and advances. The Tribunal held that a deemed dividend could only be assessed in the hands of a person who is a shareholder of the lender company and not in the hands of the borrowing concern in which such shareholder is a member or partner with substantial interest. Although both the lender and borrower had common shareholders, the assessee-company was not a shareholder of the lender company.

The High Court referred to a similar view taken by the Delhi High Court in the case of CIT v. Ankitech (P) Ltd. & Ors, emphasizing that a loan or advance given under the conditions specified under Section 2(22)(e) of the Act would be treated as dividend due to a legal fiction created under the Act. However, the legal fiction does not extend to shareholders, and the provision relates to the definition of dividend, not shareholders. The court highlighted that if the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of the deeming shareholder, the Legislature would have inserted a deeming provision in respect of shareholders as well, which was not the case. The court also noted that Circulars issued by the Central Board of Direct Taxes are not binding on the Courts and that such circulars would be of no avail if the loan or advance cannot be treated as deemed dividend at the hands of a concern which is not a shareholder. Consequently, the question of law was answered against the revenue and in favor of the assessee.

In conclusion, the appeal was dismissed, and no costs were awarded in the matter. The judgment clarified the interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend, emphasizing the distinction between shareholders and the treatment of loans or advances under the Act.

---