Case Note & Summary
The appeal before the Division Bench of the Bombay High Court arose from an order of the Income Tax Appellate Tribunal (ITAT), which had confirmed the Commissioner of Income Tax (Appeals)'s deletion of an addition made by the Assessing Officer under Section 2(22)(e) of the Income Tax Act, 1961 as deemed dividend. The matter pertained to Assessment Year 2009-10. The assessee, a company engaged in manufacturing and export of studded jewellery, had obtained unsecured loans of Rs.1.51 Crores from M/s NSN Jewelers Pvt. Ltd. and Rs.86.51 Lacs from M/s KSN Trading Pvt. Ltd. The Assessing Officer, during audit, observed that the shareholding pattern of the assessee and the creditor companies showed a common substantial shareholder, M/s Sunjewels India Pvt. Ltd., which held 86.96% in the assessee and 99% in the creditors. Since the creditors had accumulated reserves exceeding the loan amounts, the Assessing Officer invoked Section 2(22)(e) and brought the loans to tax as deemed dividend in the hands of the assessee. On appeal, the CIT(A) deleted the addition, relying on Universal Medicare (2010) 190 Taxman 144 (Bom), holding that the provision was inapplicable because the assessee was not a registered or beneficial shareholder of the creditor companies. The ITAT affirmed that order. Aggrieved, the revenue filed the present appeal under Section 260A, framing two substantial questions of law: whether the ITAT erred in upholding the deletion despite the reserves exceeding the advances, and whether the transaction fell within the second limb of Section 2(22)(e) as payment to a concern in which the shareholder is a member. The revenue contended that ‘any concern’ included the assessee company and that since the common shareholder held more than 10% voting power in the creditors, the loans to the assessee—a concern in which that shareholder had substantial interest—attracted deemed dividend. The assessee countered that it was not a shareholder, and the second limb required the loan to be given to a concern of the shareholder, not to the shareholder itself or an unrelated entity; the assessee was the direct recipient, not a concern of Sunjewels India Pvt. Ltd. in the statutory sense. The High Court examined the text of Section 2(22)(e) and noted that its first limb covers loans to a beneficial shareholder holding at least 10% voting power, and the second limb covers loans to any concern in which such shareholder is a member or partner and has a substantial interest. On the admitted facts, the assessee had no shareholding in the creditor companies, so the first limb was inapplicable. Under the second limb, the payment must be made to a concern in which the shareholder (i.e., the beneficial owner in the creditor company) has a substantial interest, not to a concern in which the recipient-assessee has an interest. The facts showed that the loans were given directly to the assessee, not to a concern of Sunjewels India Pvt. Ltd. The court distinguished the pending reference in National Travel Services v. CIT, finding that it dealt with a partnership firm that was a beneficial shareholder in the lender through its partners, a scenario absent here. Consequently, no legal infirmity was found in the concurrent findings of the CIT(A) and ITAT. The two questions of law were answered in favour of the assessee and against the revenue, and the appeal was dismissed.
Headnote
A) Income Tax - Deemed Dividend - Section 2(22)(e) of the Income Tax Act, 1961 - The loans advanced by the creditor companies to the assessee company did not fall within the ambit of Section 2(22)(e) because the assessee was not a beneficial shareholder in the creditor companies, and the loans were not given to a concern in which the common shareholder (Sunjewels India Pvt Ltd) had a substantial interest, but directly to the assessee; the pending reference to the larger bench in National Travel Services v. CIT was factually distinguishable. Held, no substantial question of law arose; the orders of the CIT(A) and ITAT deleting the deemed dividend addition were upheld and the revenue's appeal dismissed. (Paras 9-13)
Issue of Consideration
Whether loans given by two creditor companies to the assessee company could be taxed as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961 when the assessee was not a shareholder in the creditor companies but a common shareholder held substantial interest in both entities; and whether the transaction fell within the second limb of the provision concerning payment to a concern in which the shareholder is a member.
Final Decision
The appeal was dismissed. The substantial questions of law were answered in favour of the assessee and against the revenue. The orders of the CIT(A) and ITAT deleting the addition under Section 2(22)(e) of the Income Tax Act, 1961 were upheld.
Law Points
- Payment by a company to a shareholder holding at least 10% voting power or to any concern in which such shareholder has substantial interest is deemed dividend under Section 2(22)(e)
- if the recipient is not a shareholder and the payment is not to a concern of the shareholder
- provision does not apply
- common shareholding does not automatically attract deemed dividend unless conditions of the section are expressly satisfied
