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I-T - If assessee is substantial shareholder, holding more than 10% of shares of lending as well as borrowing companies, advance involved can be treated as deemed dividend u/s 2(22)(e): HC

 

By TIOL News Service

MUMBAI, OCT 09, 2018: THE ISSUE IS - Whether if the assessee is substantial shareholder, holding more than 10% of the shares of the lending as well as borrowing companies, the advance involved can be treated as deemed dividend u/s 2(22)(e) of the Act in the hands of assessee. YES IS THE VERDICT.

Facts of the case

The assessee an Individual, was shareholder in a company known as M/s Medley Laboratories Pvt. Ltd. (MLPL) and M/s Oryx Fisheries Pvt. Ltd. (OFPL). The assessee held 15% equity shares in M/s MLPL and 45% equity shares in M/s OFPL. During the AY 2007-08, M/s MLPL (lender) had given a loan of Rs. 91,85,874/- to its sister concern M/s OFPL (borrower). The assessee had filed his return of income for relevant AY 2007-08. Considering that the assessee was a registered as well as a beneficial shareholder of both M/s MLPL and M/s OFPL, the AO treated this loan (along with interest) of Rs. 99,86,874/- as a deemed dividend u/s 2(22)(e) of Act, in the hands of the assessee on a protective basis. Aggrieved assessee preferred an appeal before the CIT(A) who deleted the addition made u/s 2(22)(e) of the Act. The revenue filed appeal before the Tribunal, which was allowed. Aggrieved assessee filed appeal before the High Court.

High Court held that,

++ assessee is a 15% shareholder in M/s MLPL and a 45% shareholder in M/s OFPL. Similarly, it is also not in dispute that the appellant in Income Tax Appeal No. 724 of 2015 is a 15% shareholder in M/s MLPL and a 99% shareholder in M/s SHCPL. In both these appeals, it was found that M/s MLPL had given a loan and advances to M/s OFPL and M/s SHCPL respectively. The assessee in both the appeals, is not only holding more than 10% in M/s MLPL but also having a substantial interest in M/s OFPL as well as M/s SHCPL. It, therefore, can hardly be disputed that both the assessees have a substantial interest in the borrowing companies. It is, in these facts, that the ITAT, after examining the definition of the word 'dividend' in Section 2(22)(e) of the I. T. Act, 1961 as well as the ratio of Court in the case of Universal Medicare Pvt. Ltd came to a finding that since the assessees were shareholders holding more than 10% of the equity shares of the lending company (M/s. MLPL) and also having a substantial interest in the borrowing companies (45% in OFPL and 99% in SHCPL), the conditions as prescribed under Section 2(22)(e) of the I. T. Act, 1961 were satisfied to include the assessee within the ambit of deemed dividend to be taxed in the hands of the assessee. All that the ITAT has done is, come to a conclusion that the assessee who is the shareholder in both the lending company as well as borrowing company and having substantial interest therein, the deemed dividend would have to be taxed in the assessee's hand;

++ there is only one shareholder that has a shareholding in the lending company as well as in the borrowing company. This being the case and purely factual in nature, the ITAT was not in any event incorrect in rejecting this argument of the assessee. The impugned orders passed by the ITAT give rise to any substantial question of law. Both the appeals are accordingly dismissed.

(See 2018-TIOL-2095-HC-MUM-IT)


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