Income Tax Appellate Tribunal Delhi has held that that the loan/ advance obtained from the company by assessee till the date of sale of shares, when he ceased to be beneficial owner of shares not less than 10% of voting powers, was liable for the deemed dividend as per provisions of section 2(22)(e) of the Act and any loan or a advance received thereafter will not qualify as deemed dividend

Case Details:
ITA No.4945/Del./2011
Assessment Year :2008-09
Naresh Sharma (appellant) vs Income Tax Officer (Respondent)
Date of order: 30-09-2015

Facts of the Case:
The assessee’s return of income was selected for scrutiny under Computerised Assisted Selection of Scrutiny (CASS). The assessee was director of the Company i.e. M/s. CASCO Electronics Pvt. Ltd. (the company) at the beginning of the year i.e. on 1st April 2007 and was holding 50.81% of the total paid up share capital of the company.  However, the assessee sold the shares of the company owned by him and also resigned from the post of director during the concerned previous year on 24-09-2007. Assessing Officer noticed that the assessee had received loan/advances from the company from June, 2007 upto 24.09.2007. AO noticed the fact of assessee being beneficial owner of more than 10 % shares having voting power, so he was of view that the whole loan/ advance received from the company was liable for the deemed dividend in the hands of the assessee as per provisions of section 2(22)(e) of the Act.

The assessee submitted that he resigned from the post of director as also sold shares during the concerned financial year i.e. 2007-08, therefore, he was not liable for deemed dividend. Alternatively ,the assessee claimed that in case he was liable for the deemed dividend , then same should be only the amount of loan/advances received from July, 2007 to September, 2007, subject to the limit of accumulated profit of the company , which according to the assessee, was Rs. 81,000/-only.

AO on verification of the ledger account of the assessee in the books of the Company, found that the assessee received total advance of Rs.9.83 lakhs from the company upto 24.09.2007, which remained up to the end of the previous year, hence, he held that same was liable for considering as deemed dividend. Further, the ld AO computed the accumulated profit of the company till 24.09.2007 to Rs.6,36,117/- and therefore , he restricted the addition of deemed dividend to Rs.6,36,117/- u/s 2(22)(e).

On appeal CIT(A) upheld the order of AO.

Held:
Remitted back to the file of the AO and direct the AO to compute the loan/ advances given by the company till the date of sale of shares by the assessee as deemed dividend, subject the availability of accumulated profit of the company.

Excerpts from the ITAT Order:

The assessee has challenged addition of deemed dividend. From the provisions of section 2(22)(e) of the Act , it can be derived that in order to examine whether the advance received by the assessee from the company is liable for treating as deemed dividends in the hands of the assessee, the following three conditions must be fulfilled:

1. Whether M/s. CASCO Electronics Pvt. Ltd. (CEPL) was not a company in which public was not substantially interested?

2. Whether, the assessee was a beneficial owner of shares ( other than shares entitled to fixed rate of dividend) holding not less than 10% of the voting power

3. Whether the company i.e. M/s. CASCO Electronics Pvt. Ltd. (CEPL) was having accumulated profit at the time of advance.

But the AO has overlooked the fact that in this case the assessee has sold his share holding during the year, so the question arises for our consideration is whether the advance received after the sale of shares will continued to be considered as deemed dividend ?

From the plane reading of the section, we find that any payment whether it is loan or advance falls into the category of deemed dividend must fulfill the three conditions mentioned above. If any loan or advance by the company to the assessee fails to fulfill any one of conditions, it can‟t be held as deemed dividend. The section being a deeming provision has to be construed strictly as held in the by the Hon‟ble Kerela High Court in the case of CIT Vs. PV John (1990) 181 ITR 1. The Hon‟ble High Court of Allahabad in the case of CIT Vs. HK Mittal (1996) 219 ITR 420 has held that the chief ingredient is that one should be a share holder on the date the loan is advanced to the him and where such ingredient is not established, the advance could not be taken as deemed dividend under section 2(22)(e) of the Act.

it is ample clear that, for qualifying any loan or advance as deemed dividend, it must fulfill all the advance received by that person. Therefore, in view of above, we hold that the loan/ advance obtained from the company by assessee till the date of sale of shares, when he ceased to be beneficial owner of shares not less than 10% of voting powers, was liable for the deemed dividend as per provisions of section 2(22)(e) of the Act and any loan or a advance received thereafter will not qualify as deemed dividend.

….the issue to be decided is, as to what was the date of sale of shares in the case of the assessee……. On perusal of the share transfer form, it is evident that the assessee has applied for transfer of share on 27.07.2007…………….. The said share transfer form is filed in the office of the Registrar of Companies on 27.07.2007, so the date of transfer should be taken as 27.07.2007…..

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