Tribunal Rules: No Deemed Dividend for Non-Shareholder Company

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Case Name:

Commissioner of Income Tax vs. Alfa Sai Mineral Pvt. Ltd. (High Court of Bombay)

Income Tax Appeal No. 2255 of 2013

Date: 28th March 2016

Key Takeaways:

• The Tribunal’s decision clarifies that deemed dividends under Section 2(22)(e) (of Income Tax Act, 1961) can only be taxed in the hands of the shareholder, not the recipient company if it is not a shareholder.
• This case reinforces the principle that common shareholding alone does not trigger deemed dividend taxation unless the recipient is a shareholder.
• The decision aligns with previous rulings in “Commissioner of Income Tax Vs. Universal Medicare Pvt. Ltd.” and “Commissioner of Income Tax Vs. Impact Containers § Ltd.”

Issue:

Does the receipt of loans by a company from other companies with common shareholders constitute a deemed dividend under Section 2(22)(e) (of Income Tax Act, 1961), if the recipient company is not a shareholder?

Facts:

• Alfa Sai Mineral Pvt. Ltd. received loans from M/s. Alfa Distilleries P. Ltd. and M/s. Vulcan Distilleries P. Ltd.
• Captain Pramod Salvi, a director of Alfa Sai Mineral, held significant shares in all three companies.
• The Assessing Officer initially considered these loans as deemed dividends under Section 2(22)(e) (of Income Tax Act, 1961) due to the common shareholding.

Arguments:

• For the Revenue: The loans should be treated as deemed dividends because of the common shareholding between the companies.
• For the Respondent (Alfa Sai Mineral): The company is not a shareholder in the lending companies, and thus, the loans cannot be taxed as deemed dividends.

Key Legal Precedents:

• Commissioner of Income Tax Vs. Universal Medicare Pvt. Ltd.: Established that deemed dividends are taxable in the hands of the shareholder.
• Commissioner of Income Tax Vs. Impact Containers § Ltd.: Reinforced the principle that only shareholders can be taxed for deemed dividends.

Judgement:

The Tribunal ruled in favor of Alfa Sai Mineral, stating that since the company was not a shareholder in the lending companies, the loans could not be taxed as deemed dividends. The appeal was dismissed, and no substantial question of law was found to entertain the Revenue’s appeal.

FAQs:

Why was Alfa Sai Mineral not taxed for the loans as deemed dividends?

Because Alfa Sai Mineral was not a shareholder in the companies that provided the loans, the loans could not be taxed as deemed dividends under Section 2(22)(e) (of Income Tax Act, 1961).

What is the significance of this ruling?

It clarifies that only shareholders can be taxed for deemed dividends, not companies that merely receive loans from companies with common shareholders.

How does this case impact future tax assessments?

It sets a precedent that common shareholding alone does not suffice for taxing loans as deemed dividends unless the recipient is a shareholder.

1. This Appeal under Section 260 (of Income Tax Act, 1961)­A of the Income Tax Act, 1961 (the Act) challenges the order dated 3rd May, 2013 passed by the Income Tax Appellate Tribunal (the Tribunal). The impugned order is in respect of Assessment Year 2005-­06.

2. This appeal raises following question of law for our consideration:­

“(i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in holding that the amount received by the assessee company from Alfa Distilleries P. Ltd. and Vulcan Distilleries P. Ltd. did not attract the provisions of Section 2(22)(e) (of Income Tax Act, 1961)?

2. The respondent assessee during the subject assessment year obtained loans and advances from M/s. Alfa Distilleries P. Ltd. and M/s. Vulcan Distilleries P. Ltd. One Captain Pramod Salvi, who was the Director of the respondent assessee and had 79.92% shareholding in it. Further, Capt. Salvi also had 77.11% shareholding in M/s. Alfa Distilleries P. Ltd. and 63.39% shareholding in M/s. Vulcan Distilleries P.Ltd. The Assessing Officer held that the funds received by the respondent assessee from the above two companies were required to be added to the income of the respondent assessee as deemed dividend under Section 2(22)(e) (of Income Tax Act, 1961).

3. It is not the case of the Revenue that the respondent assessee company is a mere shell and Capt. Salvi and company are one and the same. In fact, the Assessing Officer proceeds on the basis that as the assessee company and M/s. Alfa Distilleries P. Ltd. and M/s. Vulcan Distilleries P. Ltd. had common shareholders, therefore, the amounts received by the respondent assessee as loans and advances from the two companies are to be considered as deemed dividend under Section 2(22)(e) (of Income Tax Act, 1961).

4. The Tribunal in the impugned order has held that as the respondent assessee is not shareholder of M/s. Alfa Distilleries P. Ltd. and M/s. Vulcan Distilleries P. Ltd. who had advanced loans to the respondent assessee. Therefore, the amount of loans made to the respondent assessee cannot be taxed in the hands of the respondent assessee as it is not a shareholder of M/s. Alfa Distilleries P. Ltd. and M/s. Vulcan Distilleries P. Ltd. It is an undisputed position as fairly submitted by Mr. Suresh Kumar that the question raised herein is concluded against the Revenue and in favour of the respondent assessee by the decisions of this Court in Commissioner of Income Tax Vs. Universal Medicare Pvt. Ltd. 324 ITR 263 and Commissioner of Income Tax Vs. Vs. Impact Containers (P) Ltd. 367 ITR 346 that deemed dividend has to be taxed in the hands of the shareholder of the company giving the loans and / or advance. In this case, admittedly, the respondent assessee is not a shareholder of the two companies i.e. M/s. Alfa Distilleries P. Ltd. and M/s. Vulcan Distilleries P. Ltd.

5. In the above view, the question as formulated does not give rise to any substantial question of law. Thus, not entertained.

6. The appeal is dismissed. No order as to costs.

(A.K. MENON, J.) (M.S. SANKLECHA, J.)