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Facts
The Revenue appealed against the CIT(A)'s order deleting additions made by the AO. The additions pertained to deemed dividend under Section 2(22)(e) and deemed interest under Section 56(1). The assessee company had received interest-free loans from entities where a common shareholder, Shri Udai Karan Singh Dalal, held substantial interest in both the assessee and the loan-giving companies.
Held
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision. It held that deemed dividend under Section 2(22)(e) is taxable in the hands of the shareholder, not the loan recipient company, citing Delhi High Court and Supreme Court precedents. For deemed interest under Section 56(1), the Tribunal ruled that there is no statutory provision to tax notional interest savings on interest-free loans as income in the borrower's hands.
Key Issues
1. Whether deemed dividend under Section 2(22)(e) can be taxed in the hands of a loan-recipient company that is not a shareholder of the loan-giving company. 2. Whether notional interest savings on interest-free loans received by the assessee can be taxed as deemed interest under Section 56(1) of the Income Tax Act.
Sections Cited
Section 2(22)(e), Section 56(1), Section 4, Section 5, Section 8, Section 14, Section 56, Section 37
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘H’, NEW DELHI
Before: Dr. B. R. R. Kumar, Sh. Sudhir Kumar
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘H’, NEW DELHI Before Dr. B. R. R. Kumar, Accountant Member, Sh. Sudhir Kumar, Judicial Member ITA No. 3467/Del/2023 : Asstt. Year: 2014-15 DCIT, Vs Yellow Sapphire International Pvt. Ltd., New Delhi-110055 A-7, Upasana Apartment, 1 Hailey Road, Malviya Nagar, New Delhi-110017 (APPELLANT) (RESPONDENT) PAN No. AAACY6066B Assessee by : None Revenue by : Sh. Amit Katoch, Sr. DR Date of Hearing: 31.07.2024 Date of Pronouncement: 29.08.2024
ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeal has been filed by the Revenue against the order of ld. CIT(A)-30, New Delhi dated 25.09.2023.
Following grounds have been raised by the Revenue:
“1. Whether in the facts and circumstances of the case, the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 70,74,625/- as deemed dividend u/s 2(22)(e) of the Act to the extent of accumulated profits in the companies at the time of advancement of loans to the assessee company. 2. Ld. CIT(A) has deleted the addition made in the hands of the assessee, ignoring the fact that Sh. Uday Karan Singh Dalal is a common share holder in both the entities i.e. the present assessee and the entities which are extending the loans therefore the conditions specified in section 2(22) (e) are satisfied and the alleged loans are nothing but the deemed dividend. 3. Whether in the facts and circumstances of the case, the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 1,80,75,939/- as deemed interest u/s 56(1) of the Act.
2 ITA No. 3467/Del/2023 Yellow Sapphire International Pvt. Ltd. 4. Whether in the facts and circumstances of the case, the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 1,80,75,939/- as deemed interest u/s 56(1) of the Act. The assessee has enjoyed the benefits of interest free loans. Since, in market practice, the interest expenditure is an essential component, hence non- payment of this is an additional benefit enjoyed by the assessee and it reasonably satisfies the conditions u/s 56 of the Act i.e. income from other sources. 5. The order of Ld. CIT(A) is erroneous and is not tenable on facts and in law. 6. The grounds of appeal are without prejudice to each other.” 3. Heard the arguments of both the parties and perused the material available on record. Addition on account of deemed dividend u/s. 21221(e): 4. The assessee has taken loans from the below mentioned entities as under:
Name of the party from which loans taken Amount of loan Angad & Sons Realcon Private Ltd. 1,27,97,348 Rachaita Infrastructure Private Ltd. 6,62,76,625 Udai Karan Singh Dalal 5,05,02,652
The assessee submitted that Shri Udai Karan Singh Dalal holds 99.44% share in the assessee company and 43.06% share in M/s Angad & Sons Realcon Pvt. Ltd. and 50% in M/s Rachaita Infrastructures Pvt. Ltd. Therefore, Shri Udai Karan Singh Dalal is a common share holder in the loan giving companies and the assessee company holding more than 10% voting rights in each of them. Accordingly, the loans and advances extended by the lending companies to the assessee company is covered u/s 2(22)(e). However, as per the assessee, the chargeability of the
3 ITA No. 3467/Del/2023 Yellow Sapphire International Pvt. Ltd. deemed dividend is not on the assessee company but on the common share holder of the lending and recipient companies i.e. Shri Udai Karan Singh Dalal. The assessee submitted that the decision of Hon’ble High Court of Delhi in the case CIT vs. Ankitech (P) Ltd. is squarely applicable in its case, therefore, the Assessing Officer was legally incorrect to assess the loans and advances received by the assessee company in the hands of the assessee company. The assessee further submitted that the CBDT Circular No.495 dated 22.09.1987 which was relied upon by the Assessing Officer in the Assessment Order has been considered by Hon’ble High Court of Delhi in the case of CIT vs. Ankitech (P) Ltd. referred above. Therefore, the interpretation of the circular by the Assessing Officer is also legally not correct and he was dutibound to follow the law laid down by Jurisdictional High Court.
We find that the observations of the Assessing Officer in the Assessment Order as well as the submission of the assessee have been carefully perused by the ld. CIT(A). It is noted that the issue of chargeability of deemed dividend has been decided by jurisdictional High Court of Delhi in the case of Ankitech (P) Ltd. The relevant portion of the decision is reproduced as under: “25. Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under Section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to dividend. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction
4 ITA No. 3467/Del/2023 Yellow Sapphire International Pvt. Ltd. does not extend to shareholder. When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under Section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non-members. The second category specified under Section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of deeming shareholder, then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspective.
In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the Revenue to argue that if this position is taken, then the income is not taxed at the hands of the recipient. Such an argument based on the scheme of the Act as projected by the learned counsels for the Revenue on the basis of Sections 4, 5, 8, 14 and 56 of the Act would be of no avail. Simple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance.
Precisely, for this very reason, the Courts have held that if the amounts advanced are for business transactions
5 ITA No. 3467/Del/2023 Yellow Sapphire International Pvt. Ltd. between the parties, such payment would not fall within the deeming dividend under Section 2(22)(e) of the Act.
Insofar as reliance upon Circular No. 495 dated 22.09.1997 issued by Central Board of Direct Taxes is concerned, we are inclined to agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P) Ltd. (supra) that such observations are not binding on the Courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that according to us is the correct legal position, such a circular would be of no avail.
No doubt, the legal fiction/deemed provision created by the Legislature has to be taken to logical conclusion as held in Andaleeb Sehgal (supra). The Revenue wants the deeming provision to be extended which is illogical and attempt is to create a real legal fiction, which is not created by the Legislature. We say at the cost of repetition that the definition of shareholder is not enlarged by any fiction.
Before we part with, some comments are to be necessarily made by us. As pointed out above, it is not in dispute that the conditions stipulated in Section 2(22)(e) of the Act treating the loan and advance as deemed dividend are established in these cases. Therefore, it would always be open to the Revenue to take corrective measure by treating this dividend income at the hands of the shareholders and tax them accordingly. As otherwise, it would amount to escapement of income at the hands of those shareholders.”
The decision of Hon’ble High Court of Delhi referred above was affirmed by Hon’ble Supreme Court in the case of CIT Vs. Madhur Housing and Development Co. 93 Taxmann.com 502 (SC) as under:
6 ITA No. 3467/Del/2023 Yellow Sapphire International Pvt. Ltd. “The impugned judgment and order dated 11.05.2011 has relied upon a judgment of the same date by a Division Bench of the High Court in ITA No. 462 of 2009. Having perused the judgment and having heard arguments, we are of the view that the judgment is a detailed judgment going into Section 2(22)(e) of the Income-tax Act which arises at the correct construction of the said Section. We do not wish to add anything to the judgment except to say that we agree therewith.” 8. In a recent decision, Hon’ble High Court of Orissa in the case of [2023] Mahimananda Mishra Vs. ACIT (147 taxmann.com 521), held that the deemed dividend paid by a company is chargeable to tax in the hands of individual who held the shares in the said company and not in the hands of loan recipient in which the said shareholder was a partner. Further, the ITAT in the case of [2022] Rainbow Promoters (P) Ltd. Vs. ACIT [139 taxmann.com 332 (Delhi)] has held that the deemed dividend shall be taxed in the hands of share holder not in the hands of loan receiving entity which is not a share holder. The relevant para is reproduced as under:
“36. We have gone through submission of Id. AR as well as Id. CIT DR on this issue. As the assessee is not share holder of payer group companies who paid loan / advance to the assessee and considering the legal position that dividend is to be received by shareholder only, the amount received by the assessee is not to be treated as deemed dividend in the hands of assessee. Moreover, this view is fully supported by decision of the Hon’ble Delhi High Court in case of Ankitech (P) Ltd. (supra).”
7 ITA No. 3467/Del/2023 Yellow Sapphire International Pvt. Ltd. 9. In the instant case, it is observed that the assessee company is not a share holder in the companies which have extended loan to it. Shri Udai Karan Singh Dalai is the common share holder having substantial interest in the assessee company as well as in the loan giving companies. 10. In view of the facts of the case and judgments of Jurisdictional High Court and Tribunal, we find that the deemed dividend is not taxable in the hands of the assessee and hence decline to interfere with the reasoned order of the ld. CIT(A) on this issue. Deemed Interest Income: 11. The Assessing Officer has observed that M/s. Angad & Sons Realcon Pvt. Ltd., M/s. Rachaita Infrastructures Pvt. Ltd. and Shri Udai Karan Singh Dalal have extended interest free loan to the assessee company amounting to Rs. 1,27,97,348/-, 6,62,76,625/- and 5,05,02,652/- respectively, which was sourced from the interest bearing loans taken by them from different entities. 12. The Assessing Officer further observed “Had the assessee borrowed funds amounting to Rs. 12,95,76,625/- from non related parties, it would have paid interest at the market rate (which is estimated @ 13.95%)”. Accordingly, the Assessing Officer held that deemed income to the extent of saving of interest expenditure is taxable in the hands of the assessee. 13. The assessee submitted that during the assessment proceedings, the Assessing Officer has duly verified the source of loan taken from the promoter and the sister concerns and the
8 ITA No. 3467/Del/2023 Yellow Sapphire International Pvt. Ltd. loan given by these entities to the assessee company are not interest bearing. Therefore, there was no reason for making addition in the hands of the assessee on account of notional saving of interest on the borrowed funds. 14. The facts of the case have been carefully perused by the ld. CIT(A). The ld. CIT(A) held that it is not in dispute that the entities mentioned above have given loan to the assessee company without any interest. There is no provision to tax the saving of interest on notional basis in the hands of borrower in case loan taken by it is without interest or below the market rate. It is a case where sister concerns have taken interest bearing loan in its books and have given loan to the assessee company without interest for acquisition of property. In such case the claim of interest expenditure by the sister entities if any, against their income may be disallowable in terms of Section 37. The ld. CIT(A) rightly held that the saving of interest on borrowed funds cannot be taxed as deemed income in the hands of the assessee company. Accordingly, the addition made by the Assessing Officer amounting to Rs.1,80,75,939/-on account of deemed interest income is deleted. We find that the order of the ld. CIT(A) is reasonable and in accordance with the statute and hence, decline to interfere with the order of the ld. CIT(A).
9 ITA No. 3467/Del/2023 Yellow Sapphire International Pvt. Ltd. 15. In the result, the appeal of the Revenue is dismissed. Order Pronounced in the Open Court on 29/08/2024.
Sd/- Sd/- (Sudhir Kumar) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated:29/08/2024 *Subodh Kumar, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR