Deemed Dividend Cannot Be Taxed In The Hands Of Non-Shareholders: ITAT

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that deemed dividends cannot be taxed in the hands of non-shareholders.

The bench of Annapurna Gupta (Accountant Member) has observed that the deeming fiction envisaged in Section 2(22)(e) of the Income Tax Act is only with respect to dividends, and its scope, therefore, cannot be enlarged to extend to shareholders also. The deemed dividend could not be taxed in the hands of non-shareholders.

The additions in respect of unsecured loans, labor charges, transportation charges, and short-term capital gains were made by the AO in the absence of proper and sufficient evidence being filed by the assessee to substantiate its claim. With respect to the addition made on account of the deemed dividend, the AO applied the provision of law and made an addition to the income of the assessee.

While adjudicating the issue of deemed dividends, the CIT (A) held that the loans and advances given to the assessee by related parties could be treated as deemed dividends only to the extent of the reserves and surplus available with them. Accordingly, taking note of the reserves and surplus with the said party, he held that the addition in any case could not have exceeded Rs. 37,78,000. However, taking note of the legal position of the law with respect to the issue of taxability of a deemed dividend in the hands of the shareholder alone the CIT (A) deleted the entire addition made on account of a deemed dividend as per Section 2(22)(e) of the Income Tax Act, noting the fact that the assessee was not a shareholder of the concern making the loans or advances.

The issue raised was whether deemed dividends treated as such in terms of Section 2(22)(e) are taxable in the hands of persons who are not shareholders of the company that has given loans and advances treated as deemed dividends.

The tribunal, while ruling in favor of the assessee, has held that it could not be subjected to tax in the hands of the concerns, which are not shareholders of the company making the loans and advances, which qualify as "deemed dividends.".

The ITAT has held that the assessee, who had received advances from the two concerns, was not a shareholder of these concerns; therefore, even though the advances qualified as deemed dividends in terms of Section 2(22)(e), they cannot be taxed in the hands of the assessee.

Case Title: DCIT Versus Aaryavart Infrastructure P. Ltd.

Case No.: ITA No.2105/Ahd/2015

Date: 05/06/2023

Counsel For Appellant: Aseem L. Thakkar

Counsel For Respondent: Sudhendu Das

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