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I-T - Addition of deemed dividend u/s 2(22)(e) not sustainable if recipient assessee is not shareholder of lender company: ITAT

 

By TIOL News Service

BANGALORE, JAN 08, 2019: THE ISSUE IS - Whether addition of deemed dividend u/s 2(22)(e) of the Act is sustainable if recipient assessee is not a shareholder of the lender company. NO IS THE VERDICT.

Facts of the case

The assessee company engaged in the business of manufacture of valves, had filed return for relevant AY. The assessee borrowed a sum of Rs. 4 crores from M/s. Micofinish Pumps Pvt. Ltd. (MPPL). The AO noticed that there were common directors in both the assessee company and MPPL and therefore the sum of Rs. 4 crores received as advance from MPPL was liable to be added as deemed dividend u/s. 2(22)(e) of the Act in the hands of the assessee company. Aggrieved assessee filed appeal before the CIT(A) and submitted that the first condition to be satisfied for invoking the provisions of section 2(22)(e) of the Act was that the assessee should be a shareholder in the company which had given loan. But it was not a shareholder. However, CIT(A) confirmed the order of the AO. The assessee preferred appeal before the Tribunal.

Tribunal held that,

++ Special Bench of ITAT, Mumbai, in the case of Bhaumik Color Labs, considered the question Whether deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender? The Special Bench held that deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. This view has since been approved in several decisions rendered by High Court of Bombay and Delhi in the case of CIT Vs. Universal Medicare Pvt. Ltd., CIT Vs. Ankitech Pvt.Ltd. & others and by Supreme Court in the case of CIT Vs. Madhur Housing and Development Co. Since the Assessee in the present case is not a shareholder in the lender company, the view is squarely applicable to the facts of the Assessee's case. It was noted that the action of the revenue authorities in bring to tax a sum of Rs. 4 Crores as deemed dividend u/s. 2(22)(e) of the Act cannot be sustained and the addition is directed to be deleted. The relevant ground of appeal of the Assessee is allowed.

(See 2019-TIOL-69-ITAT-BANG)


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