Late Ramasamy Pongianna Gounder Desamani Vs ITO (ITAT Chennai)
Assessee filed his return declaring income of ₹4,16,100. The case was reopened u/s 147 on 27.03.2018 & return was again filed declaring the same income. AO noticed that M/s Cheran Spinners Ltd. had advanced ₹10.38 crore as loan to M/s Best Cheran Spintex India Ltd. in which Assessee was a significant shareholder. AO held that since Assessee held 23.69% shares in the lending company (Cheran Spinners Ltd.) & 17.28% shares in the borrowing company (Best Cheran Spintex India Ltd.), the proportionate amount of loan of ₹1,79,52,270 was to be taxed as deemed dividend u/s 2(22)(e) in the hands of Assessee. Assessment was completed u/s 147 r.w.s 143(3).
CIT(A) confirmed the addition stating that Assessee did not file any explanation or documentary evidence during appeal proceedings & upheld the application of 2(22)(e).
Before Tribunal, Assessee argued that:
- He never received any loan or benefit personally.
- For deemed dividend u/s 2(22)(e), the loan must be given to a concern in which the shareholder has substantial interest.
- As per Sec. 2(32), “substantial interest” means beneficial ownership of ≥20% of voting power or income.
- Assessee held only 17.28% in the borrowing company, which is below the 20% threshold, hence condition of substantial interest is NOT satisfied.
- Therefore, 2(22)(e) cannot be invoked at all.
- Relied on Delhi HC in Ankitech Pvt. Ltd. (340 ITR 14) & ITAT Kolkata in S.M. Gupta HUF.
Tribunal analysed Sec. 2(22)(e) & clarified that there are three possible situations where deemed dividend can apply:
- Loan to shareholder (holding ≥10% in lending company)
- Loan to concern in which such shareholder has substantial interest (≥20%)
- Payment for benefit of shareholder.
In this case, second limb was relevant because the loan was to a company (concern). For this limb, two conditions must be satisfied:
- Shareholder must hold ≥10% in lending company – Yes its 23.69%
- Shareholder must hold ≥20% in borrowing company –No its only 17.28%
Since the 20% condition was not met, the deeming fiction fails. Tribunal held that both conditions are cumulative, & if any fails, 2(22)(e) cannot apply. Therefore, Assessee cannot be taxed on this loan.
