ITAT rules in favor of assessee on deemed dividend; emphasizes shareholder requirement. Disallowance reduced for lack of activities.

The ITAT ruled in favor of the assessee by deleting the addition on account of deemed dividend u/s. 2(22)(e) of the Act, emphasizing the requirement that the assessee company must be a shareholder in the lending company for the provision to apply. Additionally, the ITAT reduced the disallowance out of office expenses to 25% of the total amount, considering the lack of significant activities by the associate concern at the shared premises.

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Issues:
1. Addition on account of deemed dividend u/s. 2(22)(e) of the Act
2. Disallowance out of office expenses

Issue 1: Addition on account of deemed dividend u/s. 2(22)(e) of the Act:

The Assessing Officer observed that the assessee company had obtained an unsecured loan from a company where a common shareholder with substantial interest existed. The AO treated the loan amount as deemed dividend u/s. 2(22)(e) and added it to the total income of the assessee. The CIT(A) upheld this addition. In the appeal before ITAT, the assessee argued that since it was not a registered shareholder in the lending company, the provision of deemed dividend should not apply. The ITAT referred to relevant case laws and held that for the application of section 2(22)(e), the assessee company must be a shareholder in the lending company, which was not the case here. Relying on previous judgments, the ITAT deleted the addition as the facts were similar to cases where the provision was not applicable.

Issue 2: Disallowance out of office expenses:

The Assessing Officer disallowed 50% of the office expenses incurred by the assessee due to sharing of common business premises with an associate concern. The CIT(A) upheld this disallowance. In the appeal before ITAT, the assessee contended that the associate concern did not conduct any business activities at the premises, so no disallowance should be made. After reviewing the facts, the ITAT found that the associate concern had not carried out significant activities during the year. Therefore, the ITAT considered a disallowance of 25% of the expenses amounting to Rs. 2,11,923 as reasonable. Consequently, the ITAT partly allowed the appeal of the assessee.

In conclusion, the ITAT ruled in favor of the assessee by deleting the addition on account of deemed dividend u/s. 2(22)(e) of the Act based on the requirement that the assessee company must be a shareholder in the lending company for the provision to apply. Additionally, the ITAT reduced the disallowance out of office expenses to 25% of the total amount, considering the lack of significant activities by the associate concern at the shared premises.

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