Case Law Details
Pawa International Pvt Ltd Vs ACIT (ITAT Delhi)
The appeal filed by Pawa International Pvt Ltd (the assessee) is against the order dated 13.09.2023 by NFAC, Delhi. The primary contention of the assessee is that the CIT(A) erred in confirming the addition of Rs. 53,80,84,475 on account of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The key argument is that the assessee company is not a shareholder, and therefore, the provisions of Section 2(22)(e) should not apply.
Facts of the Case:
- The return of income filed on 27.10.2015 was selected for scrutiny through CASS (Computer Assisted Scrutiny Selection).
- The Assessing Officer (AO) considered the shareholding pattern and accumulated profits of various companies.
- The AO treated the loans provided by closely held companies as deemed dividends under Section 2(22)(e) to the extent of accumulated profits.
Arguments Before the Authorities:
- The assessee contended that it is not a shareholder in the impugned company, and hence, Section 2(22)(e) should not apply.
- The AO believed that all companies providing funds were closely held, and therefore, the loans should be treated as dividends to the extent of accumulated profits.
- The CIT(A) upheld the AO’s decision.
Legal Interpretation:
- The counsel for the assessee argued that the legal fiction created under Section 2(22)(e) enlarges the definition of dividend but should not be extended further to broaden the concept of shareholders.
- Citing the decision of the Hon’ble Jurisdictional High Court of Delhi in Ankitech Private Limited (340 ITR 14), it was emphasized that the legal fiction should not be stretched beyond its intended purpose.
- The Hon’ble Supreme Court’s decision in Madhur Housing and Development Company (401 ITR 152) affirmed this principle.
Decision of the Income Tax Appellate Tribunal (ITAT):
- The ITAT carefully considered the shareholding pattern, noting that the assessee is not a shareholder in the impugned company.
- Referring to the legal fiction created by Section 2(22)(e), the ITAT followed the precedent set by the Hon’ble Jurisdictional High Court and the Hon’ble Supreme Court.
- The ITAT directed the AO to delete the impugned addition, stating that the assessee, not being a shareholder, is not covered under Section 2(22)(e).
- The appeal of the assessee was allowed.
Conclusion:
The case of Pawa International Pvt Ltd Vs ACIT exemplifies the importance of a nuanced understanding of legal fictions in tax law. The ITAT’s decision aligns with the principle that legal fictions should not be extended beyond their specified purpose. This case underscores the significance of a precise interpretation of statutory provisions to ensure a fair and just application of tax laws.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal by the assessee is preferred against the order dated 13.09.2023 by NFAC, Delhi.
2. The sum and substance of the grievance of the assessee is that the CIT(A) erred in confirming the addition of Rs.53808475/- on account of deemed dividend u/s.2 (22)(e) of the Act by ignoring the fact that the assessee company is not a share holder.
3. Briefly stated the facts of the case are that the return of income filed on 27. 10.2015 was selected for scrutiny through CASS and accordingly statutory notices were issued and served upon the assessee.
4. While scrutinizing the return the AO considered the following :-
| Name of shareh Older | Assessee Company | Designer Apartments | Pawa Infrastructure | Pawa Knowledge city | Shiela Hotels | |||||
| 31/10 | 31/10 | 31/0 | 31/0 | 31/10 | 31/10 | 31/10 | 31/10 | 31/10 | 31/10 | |
| 3/14 | 3/15 | 3/14 | 3/15 | 3/14 | 3/15 | 3/14 | 3/15 | 3/14 | 3/15 | |
| Satish Kumar | 29.90 | 29.90 | 46.52 | 46.52 | 50.00 | 50.00 | 50.00 | 50.00 | 41.30 | 41.30 |
| Pahwah | % | % | % | % | % | % | % | % | % | % |
| SheeIP | 23.45 | 23.45 | 53.45 | 53.45 | 50.00 | 50.00 | 50.00 | 50.00 | 40.00 | 40.00 |
| Awha | % | % | % | % | % | % | % | % | % | % |
–
| Name of company | Accumulated profits | Security against Rent | Dividend u/s. 2 (22) (e) (lowest of the three) | |
| 31/03/2014 | 31/03/2015 | |||
| Designer Apartments | 7,30,56,067 | 7,29,98,176 | 2,74,00,000 | 2,74,00,000 |
| Pawa Infrastructure | 8,82,18,258 | 9,85,93,853 | 65,00,000 | 65,00,000 |
| Pawa Knowledge City | 6,53,963 | 6,08,475 | 70,00,000 | 6,08,475 |
| Shiela Hotels | 2,12,16,444 | 2,11,47,811 | 1,93,00,000 | 1,93,00,000 |
| Total | 5,38,08,475 | |||
5. The AO was of the firm belief that all companies providing fund are closely held companies, therefore, loan shall be treated as dividend to the extent of accumulated profits and invoking the provisions of section 2(22)(e) of the Act, the AO made the addition of Rs.53808475/-.
6. Assessee carried the matter before the CIT(A) but without any success.
7. Before us the Counsel for the assessee vehemently stated that the assessee is not even a share holder in the impugned company, therefore, there is no question of invoking the provisions of section 2 (22)(e) of the Act.
8. The DR placed strong reliance on the orders of the authorities below.
9. We have carefully considered the orders of the authorities On perusal of the chart explaining the share holding pattern as exhibited elsewhere it can be seen that the assessee is not a share holder in the impugned company. The Hon’ble Jurisdictional High Court of Delhi in the case of Ankitech Private Limited 340 ITR 14 has clearly held that legal fiction created u/s. 2 (22)(e) enlarges definition of dividend only and legal fiction is not to be extended further for broadening concept of share holders. This has been affirmed by the Hon’ble Supreme Court in the case of Madhur Housing and Development Company 401 ITR 152.
10. Respectfully following the ratio laiddown by the Hon’ble High Court and the Hon’ble Supreme court (supra) we direct the AO to delete the impugned The appeal of the assessee is accordingly allowed.
11. Decision announced in the open court on 04. 12.2023.
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