Shareholder Tax Liability: Deemed Dividend Case Dismissed

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Case Name:

Commissioner of Income Tax vs. Narmina Trade Investment P. Ltd. (High Court of Bombay)

Income Tax Appeal No. 2311 of 2013

Date: 16th February 2016

Key Takeaways:

• The court reaffirmed that only shareholders of a company can be taxed on deemed dividends.
• The decision was based on precedents set by previous cases, including ACIT v/s Bhaumik Colour Pvt. Ltd. and CIT v/s Aniktech Pvt. Ltd.
• The ruling clarifies the application of Section 2(22)(e) of the Income Tax Act, 1961, emphasizing the importance of shareholder status in tax liability for deemed dividends.

Issue:

Is a company that is not a shareholder of another company liable to pay tax on a loan received as a deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961?

Facts:

• The Respondent-Assessee, Narmina Trade Investment P. Ltd., received a loan of Rs. 2.24 crores from M/s Arco Electro Technologies Pvt. Ltd.
• The Respondent-Assessee was not a shareholder of the lending company, M/s Arco Electro Technologies Pvt. Ltd.
• However, two shareholders of the Respondent-Assessee held more than 10% shares in the lending company.
• The Revenue sought to tax the loan as a deemed dividend under Section 2(22)(e).

Arguments:

• Revenue’s Argument: The Revenue argued that the loan should be taxed as a deemed dividend under Section 2(22)(e) because the provisions apply to the case, as clarified in CBDT’s circular No.495 dated 22.09.1987.
• Respondent-Assessee’s Argument: The Respondent-Assessee contended that since it was not a shareholder of the lending company, the loan could not be taxed as a deemed dividend.

Key Legal Precedents:

• ACIT v/s Bhaumik Colour Pvt. Ltd. (2009) 27 SOT 270 (Mum-SB): This case established that deemed dividends are taxable only in the hands of shareholders.
• CIT v/s Aniktech Pvt. Ltd. 340 ITR 14 (Delhi): The Delhi High Court approved the Bhaumik Colour decision, reinforcing the principle that only shareholders are liable for tax on deemed dividends.
• CIT v/s Impact Containers Pvt. Ltd. 367 ITR 346 and CIT v/s Universal Medicare Pvt. Ltd. 2010(324) ITR 263 (Bom): These cases further supported the position that only shareholders are liable for deemed dividend tax.

Judgement:

The court dismissed the Revenue’s appeal, upholding the Tribunal’s decision that the Respondent-Assessee was not liable for tax on the loan as a deemed dividend because it was not a shareholder of the lending company. The court found no substantial question of law for consideration, affirming the principle that only shareholders can be taxed on deemed dividends.

FAQs:

What is a deemed dividend?

A deemed dividend is a loan or advance given by a company to its shareholders, which is treated as a dividend for tax purposes under certain conditions.

Why was the Respondent-Assessee not liable for tax on the deemed dividend?

The Respondent-Assessee was not a shareholder of the lending company, and the law specifies that only shareholders are liable for tax on deemed dividends.

What is the significance of this case?

This case reinforces the legal principle that only shareholders can be taxed on deemed dividends, providing clarity on the application of Section 2(22)(e) of the Income Tax Act, 1961.

1. This Appeal challenges the order dated 16th April 2013 passed by the Income Tax Appellate Tribunal (Tribunal) confirming the deletion of addition under section 2(22)(e) of the Income Tax Act 1961 (the Act). The Assessment Year is 2007-08.

2. Mr Pinto, learned counsel for the Revenue urges the following questions of law for our consideration :-

“(A) Whether on the facts and in the circumstances of the case and in law, the Tribunal is justified in upholding the decision of the CIT in deleting the addition of Rs.2,24,45,000/- being loan received by the assessee Company from M/s Arco Eletro Technologies Pvt.Ltd. taxable, as deemed dividend u/s 2(22)(e) of the Income Tax Act 1961, ignoring the fact that the provisions of section 2(22) (e) are squarely applicable to the assessee's case as also clarified in CBDT's circular No.495 dated 22.09.1987 ?”

(B) Whether on the facts and in the circumstances of the case and in law, the Tribunal is correct in holding that deemed dividend is taxable only in the hands of shareholders and not in the hands of non-shareholders relying on the decision of the special Bench in the case of ACIT v/s Bhaumik Colour Pvt.Ltd. (2009) 27 SOT 270 (Mum-SB) as approved by the Delhi High Court in the case of CIT v/s Aniktech Pvt.Ltd. 340 ITR 14 (Delhi) without appreciating that the ratio of the decisino in the above cited cases has not been accepted by the Revenue and has been contested before the Hon'ble Supreme Court ?”

3. The Respondent – Assessee had taken a loan of Rs.2.24 crores from M/s Arco Electro Technologies Pvt.Ltd. The Respondent – Assessee was not a shareholder of M/s Arco Electro Technologies Pvt.Ltd. However, two of its shareholders held shares in excess of 10 % in M/s Arco Electro Technologies Pvt.Ltd. The Revenue has sought to tax the amount of Rs.2.24 crores taken as a loan by the Respondent – Assessee as deemed dividend under section 2(22)(e) of the Act.

4. By the impugned order, the Tribunal dismissed the Revenue's Appeal by its impugned order under challenge. It relied on case of the Special Bench of the Tribunal in ACIT v/s Bhaumik Colours Pvt.Ltd., reported in (2009) 27 SOT 270.

5. Mr Pinto, learned counsel for the Revenue, very fairly states that the issue raised in the present case is no longer res integra as this Court in the case of CIT v/s Impact Containers Pvt.Ltd., reported in 367 ITR 346 and in the case of CIT v/s Universal Medicare Pvt.Ltd., reported in 2010(324) ITR 263 (Bom) has held that a person liable to pay tax on deemed dividend is the person who is the shareholder of the Company advancing the loan.

6. Admittedly, the Respondent – Assessee was not a shareholder of M/s Arco Electro Technologies Pvt.Ltd. at the relevant time. In the above view, no fault can be found with the order of the Tribunal. Moreover, as the issue stands concluded by the two decisions of this Court, no substantial question of law arises for consideration.

7. Accordingly, Appeal is dismissed. No order as to costs.

(B.P.COLABAWALLA, J.) (M.S. SANKLECHA, J.)