Loan To Non-Shareholder Company Not Taxable As Deemed Dividend Under Section 2(22)(e): ITAT Kolkata

On 22 June, the Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) held that a loan received by a company cannot be taxed as deemed dividend under Section 2(22)(e) of the Income Tax Act merely because it has a common shareholder with the lending company, where the borrowing company itself is not a shareholder.

Judicial Member George Mathan and Accountant Member Rakesh Mishra partly allowed JHV Steels Ltd.'s appeal against an order passed under Section 263 of the Income Tax Act and set aside the Principal Commissioner's revision on the deemed dividend issue. The Bench held:

"the deemed dividend could have been said to have been received/arisen in the case of Shri Hira Lal Jaiswal who was the shareholder and not in the case of the assessee company, which was not a shareholder in the other concern."

The Principal Commissioner revised the assessment after holding that the Assessing Officer had failed to examine whether an unsecured loan of Rs. 6.07 crore received by JHV Steels Ltd. from Welcome Distilleries Pvt. Ltd. constituted a deemed dividend under Section 2(22)(e). The revision order also directed examination of an alleged bogus liability of Rs. 1.22 crore.

The Tribunal relied on its earlier decision in JHV Construction Co. Pvt. Ltd., which involved identical facts, and held that any deemed dividend, if attracted, would arise only in the hands of the common shareholder and not the borrowing company, which was not a shareholder of the lending company.

The Bench also accepted the taxpayer's contention that a part of the loan had been received in the preceding financial year and observed that "no addition could have been made in the impugned assessment year."

It held that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue on the deemed dividend issue and set aside the Principal Commissioner's findings to that extent.

However, the Bench upheld the revision relating to the alleged bogus liability of Rs. 1.22 crore, observing that the taxpayer had not challenged the issue and that the Assessing Officer had also failed to examine it.

Accordingly, the ITAT partly allowed the appeal.