Tribunal rules recipient must be a shareholder for loan to be deemed dividend

The Tribunal upheld the Commissioner of Income Tax (Appeals) decision, ruling that for Section 2(22)(e) of the Income Tax Act to apply, the recipient must be a shareholder of the lending company. As the assessee was neither a registered nor a beneficial shareholder in the lending company, the loan received could not be deemed as dividend. The Tribunal dismissed the Revenue's appeal, affirming the deletion of the addition made by the Assessing Officer.

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Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961 concerning deemed dividend.
2. Determination of whether the recipient company is a beneficial or registered shareholder.

Issue-wise Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961 concerning deemed dividend:

The core issue revolves around whether the loan taken by the assessee from M/s Shivsmruti Investment & Services Pvt. Ltd. should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) observed that the assessee had taken a loan of Rs. 66,08,535 from M/s Shivsmruti Investment & Services Pvt. Ltd., where the common directors held more than 46% of the shares. The AO concluded that the loan should be treated as deemed dividend since the lending company had reserves and surplus exceeding the loan amount, invoking Section 2(22)(e) of the Act.

The assessee contended that for Section 2(22)(e) to apply, there must be a beneficial and registered interest in the company. Since the assessee was neither a shareholder nor had beneficial interest in M/s Shivsmruti Investment & Services Pvt. Ltd., the provisions should not apply. The assessee relied on the Bombay High Court’s decisions in Universal Medicare (324 ITR 263) and Bhaumik Colours (313 ITR 146).

2. Determination of whether the recipient company is a beneficial or registered shareholder:

The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee’s argument, stating that the assessee company is not a shareholder in the lending company, and thus Section 2(22)(e) cannot be invoked. The CIT(A) relied on the Bombay High Court’s decisions, which held that if the recipient of the loan is not a shareholder, the loan cannot be treated as deemed dividend.

The Revenue appealed, arguing that the CIT(A) erred in deleting the addition without considering that the shareholders of the assessee company, who held more than 20% shareholding, were major shareholders of the lending company. The Revenue emphasized that the common shareholders’ substantial interest should trigger the deemed dividend provision.

The Tribunal examined the provisions of Section 2(22)(e) and the judicial precedents. It noted that the assessee was neither the beneficial nor the registered shareholder of the lending company. The Tribunal cited the Bombay High Court’s rulings in Universal Medicare and Bhaumik Colours, which clarified that deemed dividend provisions apply only if the recipient is a shareholder.

The Tribunal also referred to the ITAT Mumbai’s decision in M/s Neha Home Builders Pvt. Ltd. vs. DCIT, which reinforced that loans received by a company not being a shareholder cannot be taxed as deemed dividend. The Supreme Court’s decision in Gopal & Sons (HUF) (2017) 77 taxmann.com 71 was distinguished, as it involved a different factual matrix where the HUF was the beneficial owner.

The Tribunal concluded that since the assessee was neither a registered nor a beneficial shareholder, the loan could not be taxed as deemed dividend under Section 2(22)(e). The Tribunal upheld the CIT(A)’s order and dismissed the Revenue’s appeal.

Conclusion:

The Tribunal affirmed that for Section 2(22)(e) to apply, the recipient must be a shareholder of the lending company. As the assessee was neither a registered nor a beneficial shareholder, the loan received could not be treated as deemed dividend. The Tribunal upheld the CIT(A)’s decision to delete the addition made by the AO, dismissing the Revenue’s appeal.

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