Mere Repayment of loan not escape substantial shareholder from Section 2(22) (e)

Brief of the case

ITAT Mumbai has In the case of CIT  Vs. Sh. Chandrakant V. Gosalia held that  Loan given by Company to its substantial shareholder  will attracts provisions of section 2 (22)(e) of Income Tax Act,1961 if the same were not lent in ordinary course of business and mere payment of loan amount would not escape assesse from provision of Section 2 (22)(e).

Facts of the case

• The assesse was the director of M/S Gemstar , received a sum of 80.10 lacs from said company .
• The amount received by assesse consisted certain amount of security deposit in respect of premises let out by assesse. The remaining amount received was for subscribing to IPO i.e. Initial Public Offer of shares issued by ‘RPL’ .
• However, the assesse was allotted shares only to the tune of Rs. 1.04 lacs and balance amount was refunded to him.
• The A.O. assessed total sum received by assesse as ‘deemed dividend’ u/s 2(22)(e) .

Contention of Assesse

• It was submitted that assesse applied for public issue of ‘RPL’ in his name and behalf of his closely held company ‘M/S Gemstar’, same was supported by resolution passed by its BOD.
• The refund amount was duly returned back by the assessee to the above said company. Accordingly, it was contended before the AO that the assessee has not borrowed any funds as contemplated under section 2(22(e) of the Act and hence the amount of Rs.62 lakhs cannot be taxed as deemed dividend.

Contention of the Revenue-

Revenue Contended  that the amount of Rs.62.00 lakhs was not given to the assessee during the course of normal business for the purpose of carrying out any business transaction, hence the amount of Rs.62 lakhs can be taxed as deemed dividend.

Held by CIT (A)

However, the CIT(A) accepted the dividend amount to the tune of Rs. 1.04 lacs i.e. allotted share amount and deleted remaining balance balance amount of Rs.60,95,840/-. Aggrieved with which revenue preferred Appeal before ITAT.

Held by ITAT

A careful analysis of chronology of events, does not support the case of the assessee.  First of all, it is not shown that M/s Gemstar Constructions P Ltd was not barred from applying for IPO of M/s RPL.  Secondly, it was not shown that the above said company is involved in dealing in shares, i.e., it was not part of business transactions. Thirdly, the assessee was allowed to retain the shares allotted in the IPO, which militates against the explanation given by the above said company and also the resolution passed by the Board of Director.

It is in the common knowledge of everyone that the allotment is done  on proportionate basis in case of over subscription of public issue.  When the IPO is made by reputed business houses, the IPO is usually subscribed several times and hence the allotment of shares tends to be very much lower than that applied for.  Hence, the explanation of the assessee that M/s Gemstar Constructions P Ltd has decided to apply for shares of M/s RPL in his name with the expectation that more number of shares shall be allotted does not appeal to common sense.  But the very fact that the shares so allotted by M/s RPL were not taken by M/s Gemstar Constructions P Ltd would only show that it did not intend to apply for the shares, though the said view was against resolution passed by the Board of Directors.   But, as contended by the revenue, the resolutions so passed are within the control of the Board of directors, who again happened to be the assessee and his son.  Under these set of facts, we are of the view that one should take holistic view of the matter by duly considering surrounding circumstances.

In view of the foregoing discussions, it was the considered view that the explanation of the assessee that the IPO of M/s RPL was applied by the assessee for and on behalf of M/s Germstar Constructions P Ltd is hard to believe.  It is well established principle of law that mere repayment of money borrowed by the share holder will not escape him from the provisions of sec. 2(22)(e) of the Act.  Hence the fact that the assessee has paid back the excess share application money refunded by M/s RPL will not be of any help to the assessee.

Accordingly, it was viewed that the AO was justified in assessing the amount of Rs.62.00 lakhs as deemed dividend in the hands of the assessee.  Accordingly, the order of Ld CIT(A) was set aside on this issue and restore that of the AO.