By TIOL News Service

MUMBAI, FEB 21, 2019: THE issue is - Whether second limb of Section 2(22)(e) gets attracted, if creditor company gives loan not directly to its shareholder but to any concern in which such shareholder has substantial interest. YES is the verdict.

Facts of the case

The assessee company is engaged in the manufacturing and export of studded jewelry, and used to claim exemption of its profits earned in the new units established in the SEZ u/s 10AA. During the course of audit of the income declared by the assessee company for the A.Y 2009-10, the AO noted that the assessee had obtained unsecured loans from two related companies, namely, NSN Jewelers Pvt. Ltd. and KSN Trading Pvt. Ltd. On calling for the details of shareholding pattern of the creditor companies, it was noted by the AO that a company called "Sunjewels India Pvt. Ltd." was a substantial shareholder in both the creditor companies as well as the assessee company. He further noted that these creditors had reserves and surplus in excess of the amounts advanced to the assessee company. In these circumstances, the AO came to the conclusion that the conditions for invoking of Section 2(22)(e) were complied with and which deal with the concept of 'deemed dividend'. Accordingly, he held that the loans given by the creditor companies were to be taxed as 'deemed dividend' in the hands of assessee company.

On appeal, the CIT(A) held that the assessee company not being a shareholder in the lender/creditor companies, the provisions of section 2(22)(e) were not applicable. He therefore, deleted the additions made by AO. On further appeal, the Tribunal confirmed the findings of CIT(A).

On appeal, the HC held that,

++ what Section 2(22)(e) stipulates is that any payment by a company, not being a company in which the public are substantially interested, of any sum, by way of an advance or loan to a shareholder, being a person who is the beneficial owner of shares, holding not less than ten per cent voting power, shall be deemed as dividend in the hands of such shareholder. Section 2(22)(e) further stipulates that if monies are paid by a company by way of an advance or loan to any concern in which such shareholder is a member or partner in which he has a substantial interest. In the facts of the present case, admittedly the assessee company is not a beneficial owner of any shares in the creditor companies which have advanced the loans. The common shareholder having a substantial interest in the assessee company as well as in the creditor companies is one "Sunjewels India Pvt. Ltd." As mentioned earlier "Sunjewels India Pvt. Ltd." holds 86 per cent of the shareholding in assessee company and 99 per cent shareholding in the creditor companies. It is also an admitted fact that the loans given by the creditor companies was not to "Sunjewels India Pvt. Ltd." but was to the assessee company. This being the factual position, the CIT(A) as well as ITAT were fully justified in holding that this case did not fall within the provisions of Section 2(22)(e);

++ for the second limb of Section 2(22)(e) to come into play, the condition that has to be fulfilled is that the creditor companies ought to have given monies by way of an advance or loan to a concern in which the assessee company is a member or partner and in which it has a substantial interest. In other words, what the second limb of section 2(22)(e) contemplates is that, the creditor companies give a loan not directly to its shareholder but to any concern in which such shareholder has a substantial interest. It is then that the same would attract the second limb of Section 2(22)(e). That is certainly not the factual situation. In these circumstances, there is no fault with the findings given by the CIT (A) as well as the ITAT.

(See 2019-TIOL-393-HC-MUM-IT)