I-T - Addition of deemed dividend not sustainable if recipient assessee is not shareholder of lender company but is one of beneficiaries: ITAT
By TIOL News Service
AGRA, JAN 10, 2019: THE ISSUE IS - Whether addition of deemed dividend u/s 2(22)(e) can be made when assessee is not registered shareholder in lender company though it can be one of the beneficiaries. NO IS THE VERDICT.
Facts of the case
THE assessee company had filed return for relevant AY. During assessment, the AO made addition on account of deemed dividend since he found that the assessee company had received certain amounts from M/s. Euro Safety Footwear (P) Ltd. and the same attracted the provisions contained in section 2(22)(e) of the Act. Shri Kulbir Singh was a shareholder having substantial interest in both the companies. A tripartite collaboration agreement was entered between M/S Roger Industries Ltd., M/S Euro Safety Footwear (P) Ltd and Shri Kulbir Singh. As per the terms of agreement, M/S Euro Safety Footwear (P) Ltd. raised funds from the Bank on the basis of bank guarantee of M/S Roger Industries Ltd. and Shri Kulbir Singh. The advance made by M/S Euro Safety Footwear (P) Ltd. was out of contractual obligation. The assessee company has entered into a collaboration agreement with M/S Euro Safety Footwear (P) Ltd. and Shri Kulbir Singh. It had been mentioned in the collaboration agreement that as result of giving of bank guarantee the financial resources of M/S Roger Industries Ltd. and Shri Kulbir Singh had squeezed out and they could not raise further finance from bank and in consideration of the same it was agreed that M/S Euro Safety Footwear (P) Ltd. shall provide from time to time interest free advance to M/S Roger Industries Ltd. to meet out its financial obligations as and when required by them in the ordinary course of business. On appeal, the CIT(A) deleted the addition holding that the assessee company had received the amount from M/S Euro Safety Footwear (P) Ltd. on account of commercial transaction and business expediency and it was also not registered shareholder of the payer company. Aggrieved Revenue filed appeal before the Tribunal.
Tribunal held that,
++ it has also been brought on record that the transactions were on account of commercial expediency and the same are outside the ambit of Section 2(22)(e) of the Income Tax Act, 1961. During the course of assessment proceedings, the assessee company was required to explain as to why the transactions of receipt of money by the assessee company may not be treated as deemed dividend u/s 2(22)(e). To which the assessee replied that since the assessee company has purchased shoes from M/S Euro Safety Footwear (P) Ltd., these are commercial transactions and the provisions of Section 2(22)(e) are not attracted. The assessee believed that the reply would be convincing and did not file any other evidence at that point of time. However, after the additions were made, the assessee during the course of appellate proceedings placed on record the evidences in the form of collaboration agreement, sanction letter of bank etc. These evidences alongwith the submissions of the assessee were forwarded to the AO for comments. The AO made inquiries from the Bank and has confirmed the genuineness of the documentary evidences in the form of bank letter, collaboration agreement and bank sanction letter;
++ it is also evident that M/S Roger Industries Ltd. is neither a registered share holder nor a beneficial shareholder in M/S Euro Safety Footwear (P) Ltd. No advance has been made to Shri Kulbir Singh by M/S Euro Safety Footwear (P) Ltd. In the case of 'Raj Kumar Singh & Co. vs. DCIT', the Tribunal held that Sec 2(22)(e) can be invoked only in case of registered shareholder and not a beneficial shareholder. Shares, though belonging to the firm but registered in the name of partners, the firm cannot be made liable under Sec 2(22)(e) in respect of loans obtained from the company. Similarly, In the case of 'Income Tax Officer vs. S. S. Shetty' 14 TTJ 71 (Bom), the Tribunal held that the loan advanced by a private company to HUF of which the members were directors in the company cannot be deemed as 'dividend' in the hands of HUF as HUF was not a registered shareholder. In the case of assessee since the assessee is not the shareholder of the company, the advanced received from M/S Euro Safety Footwear (P) Ltd., cannot be regarded to be deemed dividend within the provisions of sec 2(22)(e) of the Income Tax Act, 1961. It is seen that the CIT(A) was well justified in holding that deemed dividend can be taxed only in the hands of the recipient, either being individual shareholder, or the concern in which the individual has a substantial interest, or if any payment is made on behalf of, or for the individual benefit of the individual shareholder, which is not the case herein. In the result, the appeal is dismissed.
(See 2019-TIOL-93-ITAT-AGRA)
