The Kolkata Bench of Income Tax Appellate Tribunal (ITAT) has held that the addition for deemed dividend under Section 2(22) of the Income Tax Act,1961 could only be made in the hands of shareholders.
The assessee, Apeejay Pvt. Ltd was a private limited company engaged in the business of operating business centres and letting out. It e-filed its return for AY 2013-14 on 28/09/2013 declaring income. Case selected for scrutiny through CASS followed by issuance of notice under Section 143(2) and 142(1) of the Income Tax Act.
The AO observed that during the year the assessee company had received a sum from another group concerned Apeejay Tea Limited.
The AO further noticed that both the companies, namely, assessee company Apeejay Pvt. Ltd and Apeejay Tea Limited, had a common shareholder, namely, Kathua Steel Works Pvt. Ltd., holding shares at 58.64% in Apeejay Tea Limited and 99.96% in the assessee company. Since accumulated profits for distribution in the books of Apeejay Tea Limited, were to the tune of Rs. 239.33 Crores, the Assessing Officer invoked the provisions of Section 2(22)(e) of the Income Tax Act.
The basis for making the impugned addition by the revenue authorities was that both the assessee company as well as Apeejay Tea Limited had a common shareholder having substantial interest and since Apeejay Tea Limited had substantial accumulated reserves and surplus available for distribution, the sum received by the assessee in the impugned assessment years had been added as deemed dividend under Section 2(22)(e) of the Income Tax Act.
Manish Tiwari, on behalf of the assessee referring to the relevant provisions of Section 2(22)(e) of the Income Tax Act and the three limbs provided therein and then stated that in the case of ACIT vs. Bhaumik Colour Pvt. Ltd it had been held that deemed dividend could be assessed only in the hands of the person who was a shareholder of the lender company and not in the hands of any other person.
He further submitted that the assessee was not a shareholder in Apeejay Tea Ltd., and, therefore, addition under Section 2(22)(e) of the Income Tax Act was uncalled for in the hands of the assessee.
Subhrajyoti Bhattacharjee, on behalf of the revenue argued supporting the order of the lower authorities and stated that Kathua Steel Works Pvt. Ltd., was a common substantial shareholder in both the companies, in the company giving the loan and in the assessee company receiving the loan and, therefore, was directly hit by the provisions of Section 2(22)(e) of the Income Tax Act.
The two-memeber Bench of Manish Borad, (Accountant Member) and Sonjoy Sarma, (Judicial Member) observed that, “Addition for deemed dividend can be made only in the hands of the shareholder of the lending company and since assessee is not a shareholder being a beneficial owner of shares holding not less than 10% of the voting power in the lending company, namely, Apeejay Tea Limited., Section 2(22)(e) of the Act cannot be invoked in the case of assessee in appeal before us.”
The Bench further referred to the decisions and judgments rendered in cases of Bhaumik Colour Pvt. Ltd , Mumbai Vs Gilbarco Veeder Root India (P) Ltd and CIT Vs. Vatika Township (P) Ltd held that the assessee was not a shareholder in Apeejay Tea Ltd., which had given loan/advance to assessee, therefore, the assessee would not fall under any of the limbs provided under Section 2(22)(e) of the Income Tax Act, and the same could not be invoked in the hands of the assessee.
The Bench setaside the impugned order and deleted the addition of made under Section 2(22)(e) of the Income Tax Act.
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