The Income Tax Appellate Tribunal (ITAT), Chennai bench has held that deemed dividend under section 2(22)(e) applies only to persons who are recipients of loan and shareholders of the Payer Company.
During the reassessment of the appellant, M/s. Pallava Resorts Private Limited, the Assessing Officer treated the Loan received from QNEI as ‘deemed dividend’ and assessed to tax u/s.2(22)(e) of the Act. Aggrieved, the appellant preferred an appeal before the Commissioner of Income Tax (Appeals) which confirms the addition.
Before the ITAT the counsel for the appellant submitted that the provisions of Section 2(22)(e) of the Act cannot be invoked in case of the amount is advanced by one company to another, who is not a shareholder of the company and the shareholding of the common Directors cannot be taken into consideration to attract provisions of Section 2(22)(e) of the Act relating to the deemed dividend.
The Tribunal observed that the transactions between the assessee along with its holding company were like the current account and not like loans and hence do not fall under the scope of the deemed dividend u/s.2(22)(e) of the Act. The Tribunal by relying on the decision of the Jurisdictional High Court in the case of PCIT Vs. Ennore Cargo Container Terminal Private Limited further observed that even if common shareholders are there in both the companies, the deemed dividend can be taxed only in the hands of the registered shareholder of the company and not in the hands of the company which has received the loan.
The Coram of Mr. Mahavir Singh, Vice President, and Mr. Manoj Kumar Aggarwal, Accountant Member while deleting the addition has held that “the assessee is not a shareholder of QNEI, the amount received from QNEI will not be taxable in the hands of the assessee as deemed dividend u/s.2(22)(e) of the Act and common shareholding in two companies would not attract the provisions of Section 2(22)(e) of the Act”.
Mr. S. Sundraraman, CA, and Mr. P. Sajit Kumar appeared on behalf of the appellant and respondent respectively.
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