The Chennai bench of the Income Tax Appellate Tribunal ( ITAT ) has deleted an addition made under Section 2(22)(e) of the Income Tax Act, 1961 ruling that shareholding prerequisite is essential to qualify for deemed dividend status.
The Assessing Officer (AO) held that the provisions of Section 2 (22)(e) of Income Tax Act would apply and the advance so received to the extent of accumulated profits of PRTPL would be deemed dividend in the hands of the assessee. It was on the reasoning that there were common shareholders holding more than 20% of shares in both the entities. Accordingly, the amount of Rs.85.78 Lacks was held to be deemed dividend in the hands of the assessee company.
The Commissioner of Income Tax (Appeals) [CIT (A)] noted that the assessee was not a shareholder of PRTPL. The issue was covered by the decision of High Court of Madras in the case of Printware Services (P) Ltd. wherein it was held that since the assessee was not beneficial or registered owner of shares of the payer entity, no dividend could have been received by the assessee company. Therefore, the provisions of Sec.2 (22)(e) would not apply.
The two member bench of the tribunal comprising V.Durga Rao (Judicial member) and Manoj Kumar Agarwal (Accountant member) found that the provisions of Section 2(22)(e) of the Income Tax Act, covered within its sweep three categories of payments. The first category of payment included payment by way of loan or advance to a shareholder which was not the case here. The second category of payment include any payment made on behalf of or for the individual benefit of any shareholder.
The last category included payment to any concern in which such shareholder is a member or a partner which is the case of AO. However, quite clearly, the assessee-recipient is not a shareholder in the payer company. Therefore, even if the said advance amount to deemed dividend under this category, nevertheless, the same could not be added in the hands of the assessee recipient since the assessee was not registered or beneficial shareholder of the payer company. It could only be assessed in the hands of such registered shareholder only and not in the hands of the assesse-company.
Consequently, the decision of Commissioner of Income Tax (Appeals) does not justify further consideration, leading to the dismissal of the revenue’s appeal.
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