Company loans cannot be taxed as deemed dividend under section 2(22)(e) without 10% shareholding requirement (22)(e)

The ITAT Chennai held that loans advanced by a company to assessee companies cannot be taxed as deemed dividend under section 2(22)(e) as the primary condition was not satisfied. The tribunal determined that for section 2(22)(e) to apply, the loan recipient must be a registered and beneficial shareholder holding at least 10% voting power in the lender company on the date of loan advancement. Since neither the assessee companies nor their shareholders held any shares in the lender company, and no common shareholders existed between the entities, the deemed dividend provisions were inapplicable. The tribunal upheld the CIT(A)'s deletion of additions made by the AO.

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Issues Involved:
1. Deletion of addition made towards deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.
2. Determination of relevant date for shareholding to apply section 2(22)(e).
3. Taxability of deemed dividend in the hands of the company receiving the loan versus the hands of the shareholder.

Summary:

1. Deletion of Addition Made Towards Deemed Dividend:
The Revenue's appeals pertain to the deletion of additions made towards deemed dividend under section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) had added amounts as deemed dividend, arguing that loans advanced by M/s. IG3 Infra Limited to the assessee companies were for the ultimate benefit of the family members of Shri Thiagarajan, who are the promoters of M/s. IG3 Infra Limited. The AO concluded that the amounts paid to the assessee companies represented loans advanced by M/s. IG3 Infra Limited and should be treated as deemed dividend.

The Commissioner of Income Tax (Appeals) [CIT(A)] held that the provisions of section 2(22)(e) were not applicable since neither the assessee companies nor their shareholders held any equity shares in the lender company, M/s. IG3 Infra Limited. The CIT(A) also noted that the AO failed to substantiate the assertion that the ultimate shareholders had benefited from the loan transactions.

2. Determination of Relevant Date for Shareholding:
The CIT(A) held that the relevant date for determining the shareholding to apply section 2(22)(e) is the date on which the loan was advanced. This view was supported by the judgment of the Allahabad High Court in the case of CIT v. H.K. Mittal (1996) 219 ITR 420 (All), which stated that the chief ingredient of section 2(22)(e) is that one should be a shareholder on the date the loan was advanced.

3. Taxability of Deemed Dividend:
The CIT(A) held that the deemed dividend, if any, is taxable in the hands of the shareholder and not in the hands of the company receiving the loan. This view was supported by several judicial precedents, including the binding decision of the Hon'ble Madras High Court in the case of Pr. CIT vs Ennore Cargo Terminal P Ltd (2018) 406 ITR 477 (Mad), which held that the deemed dividend can only be assessed in the hands of the registered shareholder for whose benefit the money was advanced.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, stating that the provisions of section 2(22)(e) were not applicable to the assessee companies as there were no common registered and beneficial shareholders between M/s. IG3 Infra Limited and the assessee companies. The Tribunal also agreed that the relevant date for determining the shareholding is the date of advancing the loans and that the deemed dividend, if any, should be taxed in the hands of the shareholder and not the company receiving the loan. Consequently, the appeals filed by the Revenue were dismissed.

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