Deemed dividend provisions under section 2(22)(e) cannot apply when assessee lacks registered shareholding or beneficial ownership (22)(e)

ITAT Cochin held that deemed dividend provisions under section 2(22)(e) cannot be applied where the assessee is not a registered shareholder of the company. The tribunal found that since the assessee was neither a registered shareholder nor beneficial owner of shares in the company, the statutory requirements for deemed dividend treatment were not satisfied. The addition made by revenue authorities was deleted, and the appeal was decided in favor of the assessee, following precedent established in similar cases.

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Issues:
1. Whether the addition of deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961 was correctly confirmed by the CIT(A)Rs.
2. Whether the provisions of section 2(22)(e) can be applied when the assessee is not a registered shareholder of the company providing the loanRs.

Analysis:
Issue 1:
The appeal was against the order of the CIT(A) confirming the addition of Rs. 9,50,000/- as deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961. The Revenue treated the loan received by the assessee as deemed dividend due to substantial interest of the Directors in the lending company. The CIT(A) upheld the addition, stating that the deeming provision applies even if the appellant is not a shareholder but has a common managing director with substantial interest in both companies. Exceptions to this rule are available for business transactions, which were not present in this case.

Issue 2:
The appellant contended that since they were not a registered shareholder of the lending company, the provision of deemed dividend u/s 2(22)(e) cannot be applied. The Tribunal agreed, citing a similar case where it was held that the provision applies only when the shareholder has substantial interest. The Tribunal referred to the judgment in the case of Amit Intertrade Pvt. Ltd. vs. DCIT and emphasized that the provision does not tax entities/companies not holding shares but having substantial shareholding in the lending company. The Tribunal also referred to the judgment in the case of PCIT vs. Mahavir Inductomelt Pvt Ltd, where it was held that the provision does not apply when the company is not a shareholder of the lending company.

The Tribunal distinguished the case of Gopal and Sons (HUF) v. CIT, where the Supreme Court held that a loan to an HUF was taxable as deemed dividend due to substantial interest. However, the Tribunal referred to a case where the Madras High Court held that the provision does not apply when the recipient is a partnership firm and not a shareholder in the lending company. The Tribunal dismissed the Revenue's appeal, holding that the provisions of section 2(22)(e) cannot be applied as the assessee was not a registered shareholder of the lending company.

In conclusion, the appeal filed by the assessee was allowed, and the provisions of section 2(22)(e) were not applicable due to the assessee not being a registered shareholder of the lending company.

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