Assessee wins appeal as beneficial ownership below threshold for deemed dividend under section 2(22)(e) application (22)(e)

ITAT Ahmedabad allowed the assessee's appeal against PCIT's revision order u/s 263. The PCIT had found error in the assessment order for non-application of deemed dividend provisions u/s 2(22)(e) on loans received from companies. ITAT held that since the assessee's beneficial ownership and voting power in the lending companies fell below the statutory criteria for invoking s.2(22)(e), the provision was not applicable. The PCIT's finding of error was unsustainable based on his own recorded facts. Additionally, the revision violated natural justice principles as the assessee was not given adequate hearing opportunity as mandated u/s 263.

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Issues Involved:
1. Condonation of delay in filing the appeal.
2. Validity of the order under Section 263 of the Income Tax Act, 1961.
3. Invocation of Section 2(22)(e) of the Income Tax Act, 1961 (Deemed Dividend).

Summary of Judgment:

1. Condonation of Delay:
The appeal filed by the assessee was delayed by 315 days. However, due to the COVID-19 pandemic, the Hon'ble Supreme Court extended the limitation period for filing appeals. Consequently, the delay was condoned, and the appeal was admitted for hearing on merits.

2. Validity of the Order under Section 263:
The assessee challenged the order passed by the Pr. Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act, 1961, which set aside the assessment order on the grounds of being erroneous and prejudicial to the interests of the revenue. The Pr. CIT invoked Section 263 due to the omission by the Assessing Officer (AO) to apply the provisions of Section 2(22)(e) concerning deemed dividends.

3. Invocation of Section 2(22)(e) (Deemed Dividend):

a. Loans from MAP Ltd.:
The Pr. CIT found that the loans received by the assessee from MAP Ltd. qualified as deemed dividends under Section 2(22)(e). However, the Tribunal noted that the assessee held only 6.63% of the voting rights in MAP Ltd., which is below the 10% threshold required for invoking Section 2(22)(e). Thus, the Tribunal held that the provisions of Section 2(22)(e) were not applicable to the loans received from MAP Ltd., and the Pr. CIT's finding was unsustainable.

b. Loans from MAP Cotton Pvt. Ltd.:
The Pr. CIT also identified loans received from MAP Cotton Pvt. Ltd. as deemed dividends. However, this issue was not confronted to the assessee during the revisionary proceedings. The Tribunal emphasized that Section 263 mandates giving the assessee an opportunity of being heard. Since this principle of natural justice was violated, the Tribunal held that the Pr. CIT's finding regarding loans from MAP Cotton Pvt. Ltd. was also unsustainable.

Conclusion:
Both errors noted by the Pr. CIT were found unsustainable in law. The Tribunal set aside the order of the Pr. CIT and allowed the appeal of the assessee.

Result:
The appeal of the assessee was allowed.

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