By TIOL News Service

AHMEDABAD, JAN 30, 2017: THE ISSUE IS - Whether advances made to an assessee can be added as deemed dividend u/s 2(22)(e) in his hand, if he is not a shareholder having substantial voting rights in the lender company. NO is the verdict.

Facts of the case:

The assessee is engaged in the business of Ship Breaking. It had filed its return declaring total income at Rs. 47,11,510/- and the scrutiny assessment was completed after making addition of Rs. 14,02,522/- on account of excess interest claimed to be paid to a party covered u/s 40A(2) (b) and addition of Rs. 85,21,606/-on account of deemed dividend income. On appeal, the CIT(A) sustained the addition made u/s 40A(2)(b) and deleted the addition made on account of deemed dividend. On further appeal, the ITAT confirmed the order of CIT(A) deleting the addition made on account of deemed dividend.

On appeal, the HC held that,

++ it is seen that identical question came to be considered by the Division Bench of this Court in Tax Appeal No. 253 of 2015, after considering the decision of the Bombay High Court in the case of CIT vs. Impact Containers Private Limited & ors and the decision of the Delhi High Court in the case of CIT vs. Ankitech Pvt Ltd. This court has held therein, that: "....What is provided u/s 2(22)(e) seems to be that the assessee-Company must be a shareholder in the Company from whom the loan or advance has been taken and should be holding not less than 10% of the voting power. It does not provide that any shareholder in the assessee-Company who had taken any loan or advance from another Company in which such shareholder is also a shareholder having substantial interest, Section 2(22)(e) of the act may be applicable....";

++ therefore, considering the aforesaid decision of the Division Bench of this Court and the facts narrated herein, more particularly, considering the fact that the assessee was not share holder of Mahavir Rolling Mills Pvt Ltd to whom loan was given, it cannot be said that the Tribunal has committed any error in deleting the addition made by AO on deemed dividend.

(See 2017-TIOL-196-HC-AHM-IT)