Assessee escapes deemed dividend under section 2(22)(e) as company wasn't registered shareholder of lending entities (22)(e)

ITAT Chennai dismissed both assessee and revenue appeals regarding deemed dividend under section 2(22)(e). The assessee company was neither registered nor beneficial shareholder in group concerns from which unsecured loans were obtained. Two shareholders holding 70% and 30% shares respectively were registered shareholders of lending companies. CIT(A) deleted additions, which was upheld following Madras HC precedent in Ennore Cargo Container Terminal case and Calcutta HC in Pradip Kumar Malhotra case. Regarding CIT(A)'s power for assessment reopening under section 251, ITAT held this could be examined by AO when deciding whether to reopen assessment.

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Issues Involved:
1. Condonation of delay in filing appeals.
2. Taxability of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
3. Authority of CIT(A) to direct reopening of assessment.

Summary:

Condonation of Delay:

It was noted that the appeals filed by both the assessee and the Revenue were delayed by 139 days and 87 days, respectively. The delay was condoned based on the Hon'ble Supreme Court's directions in Miscellaneous Application No.665 of 2021 and Miscellaneous Application No.21 of 2022, which provided an exemption for delays occurring between 15.03.2020 and 14.03.2021.

Taxability of Deemed Dividend:

The primary issue in the Revenue's appeal was the deletion of the addition made by the Assessing Officer (A.O) treating loans received by the assessee-company from seven parties as deemed dividend under Section 2(22)(e) of the Act. The CIT(A) allowed the appeal of the assessee, holding that deemed dividend should be taxed in the hands of registered shareholders only, and not in the hands of the assessee-company, which is not a registered shareholder of the lending companies. The CIT(A) followed the decision of the Hon'ble Madras High Court in PCIT vs. M/s. Ennore Cargo Container Terminal P. Ltd., which stated that deemed dividend can only be assessed in the hands of the registered shareholders.

The A.O had added Rs. 6,84,43,193/- as deemed dividend in the hands of the assessee-company, but the CIT(A) directed that this should be taxed in the hands of the directors, Shri J. Rajiv Subramanian and Shri S. Jeyabalan, in the ratio of their shareholding. The Tribunal affirmed this view, referencing the Hon'ble Calcutta High Court's decision in Pradip Kumar Malhotra vs. CIT, which clarified that deemed dividend under Section 2(22)(e) can only be taxed in the hands of the registered and beneficial shareholders.

Authority of CIT(A) to Direct Reopening of Assessment:

The assessee's appeal contended that the CIT(A) cannot direct the A.O to reopen the assessment under Section 251 of the Act. The Tribunal noted that this issue can be examined by the A.O at the time of deciding whether to reopen the assessment or not under Section 251. Consequently, both the appeals, by the assessee and the Revenue, were dismissed.

Conclusion:

Both the appeals filed by the assessee and the Revenue were dismissed, with the Tribunal affirming the CIT(A)'s decision that deemed dividend cannot be taxed in the hands of the assessee-company, and any direction to reopen the assessment will be examined by the A.O.

Order pronounced on 31st July, 2023.

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