Interest Free Loans cannot be treated as Deemed Dividends u/s 2(22)(e): ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), New Delhi comprising Shri Saktijit Dey, JM and DR. B.R.R. Kumar, AM has held that the interest-free loans cannot be treated as deemed dividends u/s2(22)(e) and upholds the order of CIT(A).

The assessee as a resident company engaged in the business of development of software and rendered software development services to customers in the USA and earned Revenue. In the return of income filed for the impugned assessment year in India, the assessee declared nil income after claiming deduction under section 10A of the Act. The assessee declared a book profit of Rs.4,94,18,810/- under section 115JB of the Act and paid tax. The assessee claimed relief from double taxation under Article 25 of India – USA Double Taxation Avoidance Agreement (DTAA), insofar as the tax paid in the USA.

It was observed that the assessee could not have claimed the relief in the original return of income as the assessee had filed its return of income in the USA and paid tax. CIT(A) noticed that the tax has paid on the same income in USA and India and held the assessee as entitled to relief.

The revenue contended that the assessee has not paid any tax on the income which is exempt under section 10A and stated that there cannot be any double taxation as the assessee’s tax has been computed under section 115JB and the assessee is eligible to claim credit of such tax in future. The revenue contended against the deletion of addition made under section 2(22)(e) of the Act allegedly representing deemed dividend.  

The Assessing Officer noticed interest-free unsecured loans received by the assessee and invoked section 2(22)(e) of the Act by treating the interest-free loan of Rs.11,05,240/- as the deemed dividend and added back to the income of the assessee. CIT(A) observed that the assessee was not a shareholder in the company from which the interest-free loan was received and deleted the addition. 

The Tribunal observed that the assessee, as well as the lender entity, having a common shareholder can’t be treated the amount received as deemed dividend. The Tribunal held that the provisions of section 2(22)(e) of the Act can be invoked in respect of shareholders and dismissed the appeal filed by the revenue. Sh. Vishal Kalra appeared on behalf of the assessee and Sh. Umesh Takyar appeared on behalf of the revenue.

To Read the full text of the Order CLICK HERE

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