UNDERSTANDING DEEMED DIVIDEND WITH LATEST CASE LAWS PART- II:

We had earlier discuss in detail about the concepts of deemed dividend along with various case laws earlier in part –I. In case you want to refer, the part –I, please click on the link below:

http://taxbymanish.blogspot.in/2011/09/understanding-deemed-dividend-with.html

Over a period of time, there are number of judgements comes from various levels of courts from different locations of India and hence it is very important to know the same for the correct treatment of deemed dividend.

• In the case of ITO v. Direct Information P. Ltd, 18 ITR 562 (Mum.)(Trib.), The Hon,ble Mumbai ITAT held that when no material placed on record by the department to show that the entries recorded in the books of accounts are false, untrue and without any basis, section 2(22)(e) was not applicable .

• In the case of ITL Fabrics P. Ltd. v. Assistant CIT (Mumbai), Vol 19 Pg 499, it had been decided that where property let to group concerns in preceding year against deposit and no additional letting in year in question, then no deposit taken and sum received from group concerns for setting up new project. Is not deposit but loan and no material to show money-lending was business of creditor company. Loan not given in course of its business. Sum received is deemed dividend and Taxable only to extent of accumulated profits on last day of preceding year.

• Chennai ITAT in the case of Farida Holding P. Ltd v. Dy. CIT, 51 SOT 452, held that Assessee company, a holding company of 11 subsidiary companies. The assessee company managed the financial affairs of its subsidiary companies in its ordinary course of its business. The assessee as a part of its role arranged short term and long term funds for its subsidiaries. Thus, it was held that the activity to taking loan from the subsidiaries and advancing it to other subsidiaries in ordinary course of its business cannot be treated as deemed dividend.

• Delhi High Court in the case of CIT v. Bharati Overseas Trading Co, 249 CTR 554, held that The Assessing Officer has held that loan received by partnership firm from Bharti Enterprises (P) Ltd should be treated as deemed dividend as two partners hold more than 10 percentage shares in Bharti Enterprises (P) Ltd . CIT (A) and Tribunal decided the issue in favour of assessee. On appeal, the High Court following the Judgment in National Travel services (2012) 249 CTR 540 (Delhi ) held the issue in favour of revenue holding that partnership firm is to be treated as the share holder and it is not necessary that it has to be “registered shareholder”. The question was answered in favour of revenue. As regards the accumulated profits the matter is set aside to the Tribunal by giving a reasonable opportunity to both the parties.  

• In the case of CIT v. Gopal Clothing Co. Ltd., 71 DTR 358, it was held that S. 2(22)(e) cannot be invoked in respect of the unsecured loans taken by the assessee from the other company if the assessee does not possess the prescribed voting rights in that company; shareholding of the common shareholder or director cannot be taken into consideration for the purpose.

• In case when amount advance by one company to another who is not a shareholder, but have common director is not a case of deemed divided.   Refer, CIT v. MCC Marketing Pvt. Ltd, 343 ITR 350.  Similar decision was also given in the case of CIT v. Ankitech P. Ltd, 340 ITR 14

• Journal entries could not be said to be credit entries hence can be assessed as deemed dividend. Refer, Asst.CIT v. Gurbinder Singh, 50 SOT 263.

• The assessee has availed interest free loans from two companies. Assessing Officer taxed the alleged interest as deemed benefit under section 2 (24)(iv) of the Act, which was confirmed by the Commissioner (Appeals). Tribunal deleted the addition. On appeal by revenue the court held that the interest on interest free loans availed by assessee from two companies in which she was a director could not be treated as her deemed income in terms of section 2 (24)(iv) of the Act.  Refer, CIT v. Madhu Gupta, 205 Taxman 303. 

• Assessee has filed the confirmation and copies of accounts showing that the amountsrepresenting in the accounts were receipts due to the appellant, in the normal course of business dealings with these companies. The Court held that receipts from these companies cannot be treated as deemed dividend.  Refer, CIT v. Francies Waczirag, 66 DTR 453

• In the case of CIT v. Navyug Promoters (P) Ltd, 203 Taxmann 618, it  was held that, Assessee company took certain loan from two companies. Assessing Officer was of view that said loan was to be added to assessee’s income as deemed dividend under section 2(22)(e). The Court held that an assessee who is not a share holder of company, from which he received a loan or advance, cannot be treated as being covered by definition of word ‘dividend’ as provided in section 2(22)(e).

• Assessee company not being a shareholder in the company HEBPL, unsecured loan received by the assessee from that company can not be taxed as deemed dividend under section 2(22)(e) in the hands of the assessee company because a common share holder being more than 20 percent shares in both companies. Refer, ACIT v. Bombay Real Estate Development Company (P) Ltd., 64 DTR 137.

• Assessee company leased out its property to ‘M’ Ltd. for 22 years against an advance of Rs. 320 crores to be adjusted against rent payable by the lessee. A dispute arose between the assessee and M Ltd. and for amicable settlement, a new agreement was entered into between them agreeing thereby, that “M Ltd.” would pay security deposit of Rs. 3.80 crores to the assessee to be refunded at the end of lease period and after handing over the possession of the property to the assessee. Assessing Officer treated the security deposit as deemed dividend under section 2(22)(e) on the basis that two of the beneficial shareholders of the lease company i.e. M Ltd were also shareholders and had substantial interest in the assessee company. The assessee submitted that it neither held any share in” M Ltd. nor had any beneficial interest in the said company and that deemed dividend in terms of section 2(22)(e) can be assessed only in hands of a person who is a shareholder of the lender-company and not in the hands of a person other than a shareholder. The Tribunal accepted the contention of assessee and held that deemed dividend can be assessed only in the hands of a person who is a shareholder of lender company and not in hands of a person other than a share holder. Expression “share holder being person who is beneficial owner of shares” referred in first limb of section 2(22)(e), refers to both a registered share holder and beneficial share holder. If a person is a registered share holder but not beneficial then provision of section 2(22)(e) will not apply, similarly, if a person is a beneficial share holder but not registered shareholder then also provision of section 2(22)(e) will not apply. Accordingly the order of Commissioner (Appeals) who has deleted the addition was confirmed. Refer, Dy. CIT v. Madusudan Investment & Trading Co. Ltd., 48 SOT 360. 

• Amount received from a company having been misappropriated by shareholder, there was no loan or advance, even assuming to be dividend it would have to be taxed in the hands of shareholder and not in the hands of assessee. Refer, CIT vs. Universal Medicare (P) Ltd, 37 DTR 409.

• Receipts which are in the ordinary course of business cannot be treated as deemed dividend. Refer, ACIT vs. Sunil Chopra, 2 ITR 469 (Trib.)(Delhi).

• Calcutta High Court in the case of Pradip Kumar Malhotra v CIT, held that Advance given by company to assessee shareholder by way of compensation for keeping his property as mortgage on behalf of company to reap benefit of loan could not be treated as deemed dividend within the meaning of section 2(22)(e). Phrase ‘ by way of advance or loan’ appearing in section 2(22)(e) must be construed to mean those advances or loans which a shareholder enjoys for simply on account of being a person who is beneficial owner of shareholding not less than 10 percent of voting power , but if such loan or advance is given to such share holder as a consequence of any further consideration which is beneficial to company received from such a share holder , such advances or loan cannot be treated to be deemed dividend with in the meaning of section 2(22)(e). (A.Y 1999-2000)
   

• Delhi High Court in the case of CIT vs. Arvind Kumar Jain held that the assessee held 50% of the shares of a closely held company. The assessee’s books showed that he had taken an “unsecured loan” of Rs. 47 lakhs from the company. The AO assessed the said amount as “deemed dividend” u/s 2(22)(e) though the CIT (A) & Tribunal deleted it on the ground that there was a running business relationship between the assessee and the company and the said amount was not a loan but was the result of those business transactions. The department filed an appeal before the High Court. HELD dismissing the appeal: 

• In the case of CIT v National travel Service, Delhi High Court held that It was held that for s. 2(22)(e), a firm has to be treated as the “shareholder” even though it is not the “registered shareholder”. The first limb of s. 2(22)(e) is attracted if the payment is made by a company by way of advance or loan “to a shareholder, being a person who is the beneficial owner of shares”. While it is correct that the person to whom the payment is made should not only be a registered shareholder but a beneficial share holder, the argument that a firm cannot be treated as a “shareholder” only because the shares are held in the names of its partners is not acceptable. If this contention is accepted, in no case a partnership firm can come within the mischief of s. 2 (22)(e) because the shares would always be held in the names of the partners and never in the name of the firm. This would frustrate the object of s. 2(22)(e) and lead to absurd results.

• Circuitous transaction where money initially belonged to assessee returned to company on very same day does not attract section 2(22)(e). Refer, Pravin Bhimshi Chheda Shivsadan v. Deputy CIT, Part 11 Pg 705.

• The assessee was a partnership firm consisting of three partners being Naresh Goyal, Surinder Goyal and Jet Enterprises Pvt. Ltd. The assessee was the “beneficial owner” of 48.18% of the share capital of Jetair Pvt. Ltd which were held in the name of its partners Naresh Goyal and Surinder Goyal. The assessee took a loan of Rs. 28.52 crores from Jetair Pvt. Ltd. The AO held that the said loan was assessable as “deemed dividend” u/s 2(22)(e) in the hands of the assessee which was reversed by the Tribunal. Before the High Court, the assessee argued, relying on Ankitech Pvt. Ltd, Universal Medicare 324 ITR 363 (Bom) and Bhaumik Colour 118 ITD 1 (Mum) (SB), that s. 2(22) could only apply in the hands of the “shareholder” and as the assessee was not a “shareholder” (its partners were), s. 2(22)(e) could not apply. HELD rejecting the assessee’s plea. Refer, CIT vs. M/s National Travel Services (Delhi High Court).

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