Deemed dividend provisions under section 2(22)(e) cannot apply to loan recipient without beneficial ownership control (22)(e)

ITAT Kolkata held that deemed dividend provisions under section 2(22)(e) cannot be applied to the assessee who received loan from another group company. The tribunal ruled that beneficial ownership lies with the controlling company holding substantial interest in both lender and borrower companies. Since the assessee had no influence over the controlling company's decision-making process, the deeming fiction applies only to the beneficial shareholder, not the loan recipient. The addition treating loan as deemed dividend was deleted, allowing the assessee's appeal.

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Issues Involved:
1. Addition towards deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.
2. Whether the assessee, who is not a shareholder, can be taxed for deemed dividend.

Summary:

Issue 1: Addition towards deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961

The common issue in both appeals is the addition made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] towards deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961. The assessee received a sum of Rs. 5,50,11,501/- as loans/advances from another group company, Apeejay Private Ltd. (APL). The AO treated this amount as deemed dividend because there was a common shareholder, Kathua Steel Works Pvt. Ltd. (KSWPL), holding substantial interest in both the assessee and the lender company. The CIT(A) confirmed this addition.

Issue 2: Whether the assessee, who is not a shareholder, can be taxed for deemed dividend

The assessee argued that it is not a shareholder in APL, and therefore, no addition can be made under Section 2(22)(e). The assessee relied on judicial precedents, including the Special Bench decision in ACIT Vs. Bhaumick Colour Pvt. Ltd. and the Delhi High Court decision in CIT Vs. Ankitech Pvt. Ltd., which state that deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company. The Revenue, however, argued that KSWPL, being a common shareholder with substantial interest in both companies, brings the case within the purview of Section 2(22)(e).

Tribunal's Analysis and Decision:

The Tribunal examined the provisions of Section 2(22)(e) and the legislative intent behind it. The provision aims to tax payments made by closely held companies to shareholders or concerns in which such shareholders have substantial interest, as deemed dividend. The Tribunal noted that the beneficial ownership and control by KSWPL over both companies is crucial. The Tribunal also referred to the Companies Act, 2013, to understand the concepts of beneficial ownership and voting rights.

The Tribunal concluded that the deemed dividend under Section 2(22)(e) should be taxed in the hands of the beneficial shareholder, KSWPL, and not the assessee, who is a non-shareholder. The Tribunal distinguished the case from the Supreme Court decision in CIT Vs. National Travel Services, noting that KSWPL, not the assessee, has the controlling interest and beneficial ownership.

Conclusion:

The Tribunal set aside the findings of the CIT(A) and deleted the addition of Rs. 5,50,11,501/- in the hands of the assessee, treating the amount of loan and advance as deemed dividend under Section 2(22)(e). The appeals were allowed in favor of the assessee. The same observations and findings were applied mutatis mutandis to the other appeal involving a different amount.

Result:

Both appeals of the assessee were allowed. The order was pronounced in the open court on 19th February, 2024.

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