2024 (9) TMI 783 - AT - Income Tax

Company wins appeal as deemed dividend taxable only for shareholders, not loan recipients under Section 2(22)(e)

DCIT, New Delhi Versus Yellow Sapphire International Pvt. Ltd.

ITAT Delhi dismissed revenue's appeal regarding deemed dividend under Section 2(22)(e) and deemed interest income under Section 56(1). The tribunal held ... Deemed dividend u/s 2(22)(e) - accumulated profits in the companies at the time of advancement of loans to the assessee company - HELD THAT:- In a recent decision, in the case of Mahimananda Mishra [2023 (1) TMI 780 - ORISSA HIGH COURT] held that the deemed dividend paid by a company is chargeable to tax in the hands of individual who held the shares in the said company and not in the hands of loan recipient in which the said shareholder was a partner. Further, the ITAT in the case of Rainbow Promoters (P) Ltd. [2022 (2) TMI 939 - ITAT DELHI] has held that the deemed dividend shall be taxed in the hands of share holder not in the hands of loan receiving entity which is not a share holder. In the instant case, it is observed that the assessee company is not a share holder in the companies which have extended loan to it. Shri Udai Karan Singh Dalai is the common share holder having substantial interest in the assessee company as well as in the loan giving companies. Thus, we find that the deemed dividend is not taxable in the hands of the assessee and hence decline to interfere with the reasoned order of the ld. CIT(A) on this issue. Deemed Interest Income u/s 56(1) - notional saving of interest on the borrowed funds - interest free loan given to the assessee company which was sourced from the interest bearing loans taken from different entities - assessee submitted that during the assessment proceedings, AO has duly verified the source of loan taken from the promoter and the sister concerns and the loan given by these entities to the assessee company are not interest bearing - HELD THAT:-CIT(A) held that it is not in dispute that the entities mentioned above have given loan to the assessee company without any interest. There is no provision to tax the saving of interest on notional basis in the hands of borrower in case loan taken by it is without interest or below the market rate. It is a case where sister concerns have taken interest bearing loan in its books and have given loan to the assessee company without interest for acquisition of property. In such case the claim of interest expenditure by the sister entities if any, against their income may be disallowable in terms of Section 37. CIT(A) rightly held that the saving of interest on borrowed funds cannot be taxed as deemed income in the hands of the assessee company. Accordingly, the addition made by the Assessing Officer on account of deemed interest income is deleted. We find that the order of the ld. CIT(A) is reasonable and in accordance with the statute and hence, decline to interfere with the order of the ld. CIT(A). Appeal of revenue dismissed. Issues:1. Whether the addition of deemed dividend u/s 2(22)(e) and deemed interest u/s 56(1) of the Act was correctly deleted by the CIT(A)Rs.Analysis:Deemed Dividend u/s 2(22)(e):The Revenue appealed against the CIT(A)'s order deleting the addition of deemed dividend. The loans were taken from entities where a common shareholder, Shri Udai Karan Singh Dalal, had substantial interests. The assessee argued that the chargeability of deemed dividend should be on the common shareholder, not the recipient company. The High Court's decision in Ankitech (P) Ltd. case was cited, emphasizing that the legal fiction of deeming dividend does not extend to shareholders. The Supreme Court also affirmed this view. The Orissa High Court and ITAT Delhi decisions further supported that deemed dividend should be taxed in the hands of shareholders, not the loan-receiving entity. As the assessee was not a shareholder in the loan-giving companies, the deemed dividend was held not taxable in the assessee's hands. The Tribunal declined to interfere with the CIT(A)'s order based on legal precedents.Deemed Interest Income:The Assessing Officer added deemed interest income based on interest-free loans received by the assessee. The loans were sourced from interest-bearing loans taken by the entities extending the loans. The AO calculated the deemed income based on the market interest rate. The assessee contended that as the loans were interest-free and duly verified by the AO, there was no basis for adding deemed interest income. The CIT(A) noted that the loans were interest-free and below market rate, and there was no provision to tax savings on interest in such cases. The CIT(A) held that the saving of interest on borrowed funds cannot be taxed as deemed income in the assessee's hands. The addition made by the AO on account of deemed interest income was deleted. The Tribunal found the CIT(A)'s decision reasonable and in line with the law, hence declining to interfere.In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the additions of deemed dividend and deemed interest income. The judgments of the High Court, Supreme Court, and ITAT supported the view that deemed dividend should be taxed in the hands of shareholders, not the loan-receiving entity, and that savings on interest cannot be taxed as deemed income if loans are interest-free or below market rate.