No Deemed Dividend if Company Doesn't Hold Shares in Depositor

Case Name**

Commissioner of Income Tax vs. Daisy Packers (P.) Ltd.

**Key Takeaways**

1. Inter-corporate deposits are not automatically deemed dividends under Section 2(22)(e) (of Income Tax Act, 1961).

2. The receiving company must be a shareholder in the depositing company for the deposit to be considered a deemed dividend.

3. This ruling clarifies the application of Section 2(22)(e) (of Income Tax Act, 1961), potentially affecting how companies handle inter-corporate deposits.

**Issue**

Can a deposit received by a company from another company in which it doesn't hold shares be treated as a deemed dividend under Section 2(22)(e) (of Income Tax Act, 1961)?

**Facts**

Let's break down the key facts of this case:

1. The assessee company, Daisy Packers (P.) Ltd., filed a tax return for the Assessment Year 2000-01, declaring a loss of Rs. 4,22,792. 

2. The case was reopened under Section 147 (of Income Tax Act, 1961). 

3. Amigo Brushes Pvt. Ltd. had advanced Rs. 25 lacs to the assessee company. 

4. The assessee claimed this was a deposit, not a loan, and that they were not a shareholder in Amigo Brushes Pvt. Ltd. 

5. The Assessing Officer rejected the assessee's claim and treated the deposit as a deemed dividend under Section 2(22)(e) (of Income Tax Act, 1961). 

**Arguments**

Assessee's Argument:

- The amount received from Amigo Brushes Pvt. Ltd. was a deposit, not a loan.

- Daisy Packers Pvt. Ltd. was not a shareholder in Amigo Brushes Pvt. Ltd.

- Therefore, the deposit should not be treated as a deemed dividend under Section 2(22)(e) (of Income Tax Act, 1961).

Revenue's Argument:

- The amount advanced by Amigo Brushes Pvt. Ltd. should be treated as a loan.

- As per Section 2(22)(e) (of Income Tax Act, 1961), this loan should be considered a deemed dividend.

**Key Legal Precedents**

The court relied on the case of Commissioner of Income Tax vs. Ankitach(P) Ltd. [(2012) 340 ITR 14]. This case established that if an assessee company does not hold shares in the company from which it received a deposit, the deposit cannot be treated as a deemed dividend under Section 2(22)(e) (of Income Tax Act, 1961). 

**Judgement**

The court ruled in favor of the assessee, Daisy Packers (P.) Ltd. The key points of the judgment are:

1. The Tribunal correctly held that the amount received was an inter-corporate deposit, not a loan. 

2. The assessee company was not a shareholder in Amigo Brushes Pvt. Ltd. 

3. Based on the precedent set in Commissioner of Income Tax vs. Ankitach(P) Ltd., the deposit cannot be treated as a deemed dividend under Section 2(22)(e) (of Income Tax Act, 1961). 

4. The court affirmed the Tribunal's decision to delete the addition made on account of deemed dividend under Section 2(22)(e) (of Income Tax Act, 1961). 

**FAQs**

Q1: What is a deemed dividend under Section 2(22)(e) (of Income Tax Act, 1961)?

A1: A deemed dividend is a concept in tax law where certain payments or loans from a company to its shareholders are treated as dividends for tax purposes, even if they're not formally declared as dividends.

Q2: Why is shareholding important in this case?

A2: The court ruled that for a deposit to be treated as a deemed dividend under Section 2(22)(e) (of Income Tax Act, 1961), the receiving company must be a shareholder in the company providing the deposit.

Q3: How might this ruling affect companies in the future?

A3: This ruling provides clarity on the treatment of inter-corporate deposits. Companies that receive deposits from other companies in which they don't hold shares can now argue that these deposits should not be treated as deemed dividends for tax purposes.

Q4: Does this mean all inter-corporate deposits are safe from being treated as deemed dividends?

A4: Not necessarily. This ruling specifically applies to cases where the receiving company doesn't hold shares in the depositing company. Other factors may still come into play in different scenarios.

Q5: Can the tax authorities appeal this decision?

A5: While the judgment doesn't mention further appeals, it's generally possible for decisions to be appealed to higher courts if there are grounds to do so.

This tax appeal has been filed by Revenue challenging the order of the Tribunal and this Court had admitted the appeal on the following question of law.

“ Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in reversing the order of CIT(A) and thereby deleting the addition made on account of deemed dividend u/s.2(22)(e) (of Income Tax Act, 1961) on inter­corporate deposits?”

2.0 The brief facts are that the assessee filed return of income for the Assessment Year 2000­01 declaring a loss of Rs.4,22,792/­. The return was processed under Section 143(1)(a) (of Income Tax Act, 1961) (for short 'the Act') and income of the assessee was declared under Section 115JA (of Income Tax Act, 1961). Thereafter the case was reopened under Section 147 (of Income Tax Act, 1961) which was served on the assessee. The case of the department was that the Amigo Brushes Pvt. Ltd. had a total surplus of Rs.70 lacs as

on 31st March 1999 and it has advanced a loan to the assessee to the tune of Rs.25 lacs. Whereas the assessee contended that he received deposit from Amigo Brushes Pvt. Ltd. and Daisy Packers Pvt. Ltd. was not a shareholder in Amigo Brushes Pvt. Ltd. The Assessing Officer by his order dated 30th September 2004 rejected the claim of the assessee and treated the deposits as loan and consequently deemed to be a deemed dividend under Section 2(22)(e) (of Income Tax Act, 1961) and accordingly computed the tax. The assessee filed appeal which was dismissed by CIT(A) on 11th May 2006. The assessee filed Second Appeal which has been allowed by the Tribunal on 5th June 2009 and the Tribunal has hold that it was not the case of the deemed dividend and it was the case of the deposits. The Tribunal further recorded finding that it was not a loan given by Amigo Brushes Pvt Ltd. to the assessee company and it was inter­corporate deposits. However, we need not go into various questions raised by learned counsel for the parties as admittedly the assessee was not shareholder in the Amigo Brushes Pvt. Ltd. The Division Bench of this Court in Commissioner of Income Tax vs. Ankitach(P) Ltd. [(2012) 340 ITR 14]. The Delhi High Court has held that if the assessee company does not hold a share in other company from which it had received deposit then it cannot be treated tobe a deemed dividend under Section 2(22)(e) (of Income Tax Act, 1961). In view of this admitted position that assessee is not a shareholder in Amigo Brushes Pvt. Ltd. and therefore, the deposit received by the assessee of Rs.25 lacs from Amigo Brushes Pvt Ltd. was an inter­corporate deposit and not a deemed dividend and, therefore, though this aspect has not been considered by the Tribunal but since the order of the Tribunal can be supported by another legal reason on the admitted facts, we need not send the matter back.

3.0 For the aforesaid reasons, we are of the considered opinion that substantial question of law formulated by the Division Bench is to be answered in affirmative against the assessee in favour of the department.

[V. M. SAHAI, J.]

[N. V. ANJARIA, J.]