2019 (1) TMI 1017 - HC - Income Tax

Court rules no deemed dividend on loan from non-shareholder company under Income Tax Act; supports deletion of income and interest addition.

Commissioner of Income Tax Ayakar Bhawan City Centre, Gwalior Versus Prem Motors Kanwal Complex AG Office Road, Gwalior

The court dismissed the appeal, affirming that the loan/advance received by the assessee from a non-shareholder company did not constitute deemed dividend ... Deemed dividend addition u/s 2(22)(e) - member/shareholder of the concerned company where from loan/advance received - Held that:- The issue as to applicability of said provision to a non-member/ non-shareholder of the concerned company which has given the loan/advance has been settled by the decision in “CIT Vs. M/s Ankitech Pvt. Ltd and others [2011 (5) TMI 325 - DELHI HIGH COURT] - thus we do not perceive any illegality in the findings arrived by the Commissioner, Income Tax (Appeals) and affirmed by the Tribunal that the assessee being not a member/shareholder of the concerned company the loan/advance received from such company is not deemed dividend u/s 2(22)(e) of the Act of 1961. Addition on account of income from house property as per the provisions of Section 22 read with Section 23 - Held that:- The “reasonable rent” can only be the “standard rent” which is in syntax with the “municipal valuation” (for an authority please see Dewan Daulat Rai Kapoor Vs. NDMC [1979 (12) TMI 3 - SUPREME COURT] ; Mrs. Sheila Kaushish Vs. CIT [1981 (8) TMI 1 - SUPREME COURT] and Amolak Ram Khosla Vs. CIT [1981 (8) TMI 3 - SUPREME COURT]. In view whereof, there being a concurrent findings of fact, we perceive no illegality as would give rise to a substantial question of law. Addition u/s 40A - payments made to specified persons on rates more that fair market rates - Held that:- Unless established on facts that the payment for such expenditure was excessive or unreasonable having regard to fair market value, it cannot be disallowed. In the case at hand, no such facts are available, nor commended at. There being pure findings of fact, duly concurred, no substantial question of law arises for consideration. - Revenue appeal dismissed. Issues:1. Deemed dividend under Section 2(22)(e) of Income Tax Act, 1961.2. Addition of income from house property under Sections 22 and 23 of the Act.3. Addition of interest under Section 40A(2)(b) of the Act.Deemed Dividend (Section 2(22)(e)):The case involved the interpretation of Section 2(22)(e) of the Income Tax Act, 1961, specifically regarding deemed dividend. The court referred to the decision in 'CIT Vs. M/s Ankitech Pvt. Ltd' to establish that the provision applies to closely-held companies distributing profits as loans or advances to shareholders or related concerns. The court clarified that the legal fiction of deeming such payments as dividends does not extend to non-shareholders. The judgment emphasized that the definition of shareholders is not expanded by legal fiction, and loans or advances to non-shareholders cannot be treated as deemed dividends. The court dismissed the appeal, affirming that the loan/advance received by the assessee from a non-shareholder company did not constitute deemed dividend under Section 2(22)(e).Addition of Income from House Property:Regarding the addition of income from house property under Sections 22 and 23 of the Act, the Assessing Officer made additions based on discrepancies in rental income calculations. The Commissioner, Income Tax (Appeals), deleted the addition, citing differences in rental terms and conditions between tenants. The Tribunal upheld the deletion, emphasizing that the fair rental value should align with municipal valuation. The court found no illegality in the decision, as it was based on factual analysis and supported by relevant case laws. The court concluded that no substantial question of law arose in this regard.Addition of Interest under Section 40A(2)(b):The Assessing Officer added interest under Section 40A(2)(b) of the Act, alleging payments above fair market rates. The CIT (Appeals) deleted the addition, stating that the interest rate paid was reasonable and not excessive compared to market rates. The Tribunal affirmed this decision, highlighting that unless proven excessive, payments should not be disallowed. The court found no grounds for disallowance and concluded that no substantial question of law arose. The appeal was dismissed, and the findings were upheld.In summary, the judgment addressed issues related to deemed dividend, income from house property, and interest addition under specific sections of the Income Tax Act, 1961. The court's detailed analysis and interpretation of relevant provisions led to the dismissal of the appeal in favor of the assessee, based on factual assessments and legal principles.