1994 (2) TMI 109 - AT - Income Tax

Appellant Wins Appeal: Not Liable for Income Tax on Loans

The Tribunal allowed the appeal, ruling that the appellant, not being a registered shareholder of MLL when the loans were advanced, was not subject to ... Deemed Dividend Issues Involved:1. Treatment of loan as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.2. Determination of substantial shareholding and beneficial ownership.3. Legitimacy of the transaction and the role of intermediary (JCPL).4. Applicability of the Benami Transactions (Prohibitions) Act, 1988.5. Validity of tax planning within the framework of the law.Issue-wise Detailed Analysis:1. Treatment of Loan as Deemed Dividend under Section 2(22)(e) of the Income-tax Act, 1961:The appellant challenged the CIT (Appeals) order upholding the ACIT's decision that the loan received from JCPL should be treated as deemed dividend under section 2(22)(e). The Assessing Officer concluded that JCPL was used as a front to cover a loan by MLL to its director and shareholder, and treated the loan equal to the accumulated profits of Rs. 67,37,712 as deemed dividend. The appellant argued that he was not a registered shareholder of JCPL and thus section 2(22)(e) should not apply.2. Determination of Substantial Shareholding and Beneficial Ownership:CIT (Appeals) observed that the appellant had acquired more than 10% of MLL shares between Dec. 1987 and Jan. 1988, satisfying the condition of substantial shareholding. The appellant contended that he was not a registered shareholder at the time of the loan and thus should not be considered a substantial shareholder. The Tribunal concluded that under the Companies Act, a person is recognized as a shareholder only when their name is entered in the register of members. Since the appellant was not a registered shareholder on the dates the loans were advanced, he could not be treated as a shareholder under the Income-tax Act.3. Legitimacy of the Transaction and the Role of Intermediary (JCPL):The appellant argued that JCPL acted independently, borrowing money from MLL at 12% interest and lending it to the appellant at 13%, making a net gain of 1%. The revenue contended that JCPL was merely a conduit to give the transaction a genuine look. The Tribunal rejected the revenue's claim, stating that JCPL's involvement was legitimate and not a farce. JCPL's role as an intermediary was recognized as a business transaction, and the appellant had no control over JCPL.4. Applicability of the Benami Transactions (Prohibitions) Act, 1988:The appellant contended that the revenue failed to establish any material or evidence to suggest that JCPL was a benami of the appellant. The Tribunal agreed, stating that the revenue's suspicion was based on non-realization of facts and there was no evidence to support the claim that JCPL was a front for the appellant.5. Validity of Tax Planning within the Framework of the Law:The appellant argued that legitimate tax planning within the framework of the law should be valid. The Tribunal agreed, citing the Supreme Court decision in Union of India v. Playworld Electronics (P.) Ltd., which allows for lifting the corporate veil to uncover the real transaction if it involves tax evasion. However, the Tribunal concluded that the transactions in question were legitimate, and the appellant's actions were within the legal framework. The Tribunal held that the provisions of section 2(22)(e) were misapplied in this case, and the addition made by the revenue was deleted.Conclusion:The Tribunal allowed the appeal, concluding that the appellant was not a registered shareholder of MLL on the dates the loans were advanced, and therefore, the provisions of section 2(22)(e) of the Income-tax Act were not applicable. The addition made by the revenue was deleted, and the appellant's contentions were upheld.