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

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 that deemed dividend is taxable in hands of shareholders, not the loan recipient company, following precedents from Orissa HC and ITAT Delhi. Since assessee company was not a shareholder in lending companies, deemed dividend was not taxable in its hands. Regarding deemed interest income, ITAT upheld CIT(A)'s finding that notional interest savings on interest-free loans cannot be taxed as deemed income in borrower's hands, as no statutory provision exists for such taxation.

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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.

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