2018 (12) TMI 687 - AT - Income Tax

Deemed dividends taxable in shareholders' hands, not assessee company's. CIT(A) jurisdiction upheld. Advances as unsecured loans.

The ITAT dismissed the appeals for AY 2006-07 and AY 2007-08, holding that deemed dividends from OEIPL were taxable in the shareholders' hands, not the ... Deemed dividend made u/s 2(22)(e) - taxation in the hands of the appellant company who is not the shareholder of lender company - Held that:- The issue is squarely covered in favour of the assessee so far as the contention of the learned authorised representative is that the deemed dividend cannot be taxed in the hands of the appellant company as it is not a shareholder of the lender company. Same is the finding of the learned Commissioner of income Tax A. So far as this issue is involved we do not find any infirmity in the order of the ld CIT (A), hence we uphold it to the extent that deemed dividend is chargeable to tax in the hands of the share holder only. Accordingly, we do not find any merit in the appeal of the revenue for assessment year 2006 – 07 and 2007-08. Commissioner of income tax appeal has given a correct finding on the issue that the amount of loan given by the lender to the appellant company is chargeable to tax in the hands of the shareholders. The proper opportunity was also given by the Commissioner of income tax appeals to the shareholder. The shareholder did not comment that this amount is not chargeable to tax in his hands, but has only stated that the above amount given by the lender to the appellant is only a business advance and therefore provisions of deemed dividend does not apply to the facts of the case. On careful analysis of the order of the learned Commissioner of income tax appeals, he has merely directed the learned assessing officer to add the said amount as deemed dividend under section 2 (22) (e) in the hands of the shareholder. No infirmity is found in the order of the learned Commissioner of income tax appeals in holding so after giving proper opportunity of hearing to the shareholder also Accordingly, for A Y 2006 – 07 we dismiss ground number 1 and all its sub grounds holding that the advances received by the appellant from the lender is liable to tax as deemed dividend in the hands of the shareholder as it is not a business advance. We also dismiss ground number 2 of the appeal, where the learned Commissioner of income tax appeals has correctly held that the aforesaid amount is chargeable to tax in the hands of the shareholder after giving proper opportunity to the shareholder and the learned Commissioner appeals when deleting the addition in the hands of the assessee was duty-bound to say, in whose hands the deemed dividend is chargeable to tax - Decided against assessee Issues Involved:1. Taxation of deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.2. Jurisdiction of CIT(A) in directing taxability in the hands of shareholders.3. Classification of advances as business advances or unsecured loans.Issue-wise Detailed Analysis:1. Taxation of Deemed Dividend under Section 2(22)(e) of the Income-tax Act, 1961:The primary issue in these appeals is whether the amounts received by the assessee from M/s Optic Electronic India Private Limited (OEIPL) should be taxed as deemed dividends under Section 2(22)(e) of the Income-tax Act, 1961. The revenue argued that the amounts should be taxed in the hands of the assessee company, while the assessee contended that these amounts were business advances and not loans.For the Assessment Year (AY) 2006-07, the Assessing Officer (AO) added Rs. 6,25,87,356 as deemed dividend in the hands of the assessee company. The CIT(A) held that this amount should be taxed in the hands of the shareholder, Mr. Chetan Seth, who held substantial shares in both the lender (OEIPL) and the assessee company. Similarly, for AY 2007-08, the AO added Rs. 5,23,63,198 as deemed dividend, which the CIT(A) directed to be taxed in the hands of Mr. Chetan Seth and M/s Ambi Finance and Investment Pvt. Ltd., proportionately.The ITAT upheld the CIT(A)'s decision that deemed dividend should be taxed in the hands of the shareholders and not the assessee company, citing the decision of the Delhi High Court in CIT vs. Ankitech Pvt. Ltd. and the Supreme Court's affirmation of this principle.2. Jurisdiction of CIT(A) in Directing Taxability in the Hands of Shareholders:The assessee argued that the CIT(A) exceeded his jurisdiction by directing the taxability of the amounts in the hands of Mr. Chetan Seth. The CIT(A) had issued a show-cause notice to Mr. Chetan Seth under Explanation 3 of Section 153 of the Income-tax Act, and after considering his response, held that the amounts should be taxed as deemed dividends in his hands.The ITAT found no infirmity in the CIT(A)'s actions, noting that proper notice and opportunity were given to Mr. Chetan Seth. The ITAT cited the Delhi High Court's decision in Ramesh Chandra vs. ACIT, which emphasized the necessity of providing adequate opportunity of hearing to the concerned party before making an adverse order.3. Classification of Advances as Business Advances or Unsecured Loans:The assessee claimed that the amounts received from OEIPL were business advances for the construction and sale of property. The CIT(A) rejected this claim, stating that the evidence provided was an afterthought and that the advances were unsecured loans. The ITAT upheld the CIT(A)'s findings, noting that the CIT(A) had provided detailed reasons for classifying the amounts as unsecured loans and not business advances.The ITAT dismissed the assessee's appeals for both AY 2006-07 and AY 2007-08, confirming that the advances received were liable to tax as deemed dividends in the hands of the shareholders and not the assessee company.Conclusion:The ITAT dismissed the appeals of both the revenue and the assessee for AY 2006-07 and AY 2007-08. The deemed dividends were held to be taxable in the hands of the shareholders, Mr. Chetan Seth and M/s Ambi Finance and Investment Pvt. Ltd., and not the assessee company. The ITAT upheld the CIT(A)'s jurisdiction and findings regarding the classification of advances as unsecured loans. The order was pronounced in the open court on 10/12/2018.