A deemed dividend could only have been assessed in the hands of a person who is shareholder of the lender company and not in the hands of the borrowing concern in which such shareholder is a member or partner having substantial interest. Admittedly, in the present case the assessee-company was not a shareholder of the lender company. But, in this case both the lender and the borrower have common shareholders.
FULL TEXT OF THE HIGH COURT ORDER / JUDGEMENT
Heard Sri Shubham Agrawal, learned Counsel for the appellant.
As the controversy involved in both these appeals is identical, therefore, both the appeals are being heard and decided by a common judgement and order treating this appeal as a leading case.
This is an appeal filed by the revenue under Section 260-A of the Income Tax Act, 1961 against an order of the Income Tax Appellate Tribunal dated 24.05.2012 for the assessment year 2007-08. The question of law sought to be answered are hereunder:-
“1. Whether the ITAT was correct in law in deleting the addition made on account of deemed dividend u/s 2 (22) (e) of I.T. Act, 1961 by treating the transaction between the assessee company and M/s Treadstone Ltd as Commercial/Trade transaction and not loan and advances, particularly when such a transaction is defined as deemed dividend u/s 2(22) (e).”
The Tribunal has taken a view rightly that a deemed dividend could only have been assessed in the hands of a person who is shareholder of the lender company and not in the hands of the borrowing concern in which such shareholder is a member or partner having substantial interest. Admittedly, in the present case the assessee-company was not a shareholder of the lender company. But, in this case both the lender and the borrower have common shareholders.
This view has recently been taken by Delhi High Court in the case of CIT v. Ankitech (P) Ltd. & Ors reported in (2011) 242 CTR. For ready reference we quote paragraph nos. 25 and 28 of the said judgement :-
“25. Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under Section 2 (22) (e) of the Act. We have to keep in mind that this legal provision relates to Їdividend‖. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to Їshareholder‖. When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under Section 2(22) (e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non-members. The second category specified under Section 2(22) (e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of Їdeeming shareholder‖, then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspective.
28. Insofar as reliance upon Circular No. 495 dated 22.09.1997 issued by Central Board of Direct Taxes is concerned, we are inclined to agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P) Ltd. (supra) that such observations are not binding on the Courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that according to us is the correct legal position, such a circular would be of no avail.”
The question of law is, therefore, answered against the revenue and infavour of the assessee.
The appeal is dismissed as above. No costs.