2024 (10) TMI 353 - AT - Income Tax

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 ... Addition of deemed dividend u/s 2(22)(e) - as argued assessee is not a registered shareholder - HELD THAT:- It is the admitted position as arising from the order of the learned CIT(A) that the assessee is not a registered shareholder in the company named Nikunjam Constructions Pvt. Ltd. This fact could also be verified from the findings of the CIT(A) reproduced in the preceding paragraph. Thus, the assessee is not a shareholder and therefore the provisions of section 2(22)(e) of the Act cannot be applied. See M/S. AMIT INTERTRADE PVT. LTD [2022 (2) TMI 1397 - ITAT AHMEDABAD] as held the assessee in the case on hand was neither the beneficial owner of the shares nor registered owners of the shares, thus no addition u/s 2(22)(e) required. Thus provisions of section 2(22)(e) cannot be applied in the given set of facts as the assessee on hand is not a registered shareholder of the company - Decided in favour of assessee. 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.