Case Note & Summary
The appeal was filed by the Principal Commissioner of Income Tax (Revenue) against the order of the Income Tax Appellate Tribunal (ITAT) dated 20th February 2015 for Assessment Year 2009-10. The Revenue challenged the ITAT's decision upholding the Commissioner of Income Tax (Appeals) order which deleted the disallowance made by the Assessing Officer under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer had treated loans advanced to the assessee, M/s Sunjewels International Ltd., by two companies, M/s NSN Jewellers Pvt. Ltd. and M/s KSN Trading Pvt. Ltd., as deemed dividend. The Revenue argued that the Reserve and Surplus of the lending companies exceeded the amount advanced, thus falling within the ambit of Section 2(22)(e). The ITAT, however, found that the lending companies did not have accumulated profits as required under the provision. The High Court, after hearing both sides, held that the ITAT's finding was a pure finding of fact based on the material on record. The court noted that the Revenue failed to demonstrate that the lending companies had accumulated profits from which the loans were made. The court also observed that the questions of law raised by the Revenue did not arise as the ITAT's decision was based on factual appreciation. Consequently, the appeal was dismissed with no order as to costs.
Headnote
A) Income Tax - Deemed Dividend - Section 2(22)(e) - Accumulated Profits - The issue was whether loans advanced to the assessee by two companies could be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The court held that for a loan to be deemed dividend, the lending company must have accumulated profits, and the loan must be from such profits. The revenue failed to establish that the lending companies had accumulated profits exceeding the loan amount. (Paras 1-10) B) Income Tax - Burden of Proof - Section 2(22)(e) - The burden lies on the revenue to show that the lending company had accumulated profits and that the loan was paid out of such profits. In the absence of such proof, the loan cannot be treated as deemed dividend. (Paras 5-8)
Issue of Consideration
Whether the ITAT was justified in upholding the deletion of disallowance under Section 2(22)(e) of the Income Tax Act, 1961, on the ground that the lending companies did not have accumulated profits exceeding the loan amount.
Final Decision
Appeal dismissed with no order as to costs.
Law Points
- Deemed dividend under Section 2(22)(e) requires accumulated profits in the lending company
- Loan to a shareholder or concern must be from accumulated profits
- Burden on revenue to prove accumulated profits exceed loan
