Loans/advances made to a non-shareholder taxable at the hands of the members of the concern, and not at the hands of the concern itself: Delhi HC

Commissioner of Income Tax vs Ankitech Pvt Ltd. decided on 11 May, 2011

Lead matter: ITA No.462 of 2009

Assessment Year: 1986-87

Relevant Facts:

1. The assessee filed a nil return for the relevant period but filed a return for Rs. 1.45 Crores u/s 115JB of the Income Tax Act, 1961.

2. The assessee had received an amount of Rs. 6,32,72,265/- as loans and advances from a company named M/s. Jackson Generators (P) Ltd. (“JGPL”)

3. The directors and shareholders of JGPL the assessee were the same.

4. The AO was of the view that for the purpose of Section 2(22)(e) of the Act the amount received by the assessee from JGPL which constituted advances and loans' would be treated as deemed dividend within the meaning of Section 2(22)(e) of the Act and added the aforesaid amount to the income of the assessee. The CIT (A) upheld the view of the AO. The Tribunal reversed the finding of the CIT (A) and granted relief to the assessee.

Questions of law:

1. Whether the assessee, who was not the shareholder of M/s. JGPL could be treated as covered by the definition of ‘dividend’ and could receive divided as contained in Section 2(22)(e) of the Income Tax Act, 1961?

Upholding the appeal of the assessee, the Hon’ble Court held that:

(i) Only the definition of ‘dividend’ has been enlarged by section 2(22)(e) and not of a shareholder. This implies that a shareholder would not include the concern which has such shareholder is a member or a partner and in which he has a substantial interest.

(ii) It would be open for the revenue to treat the said amount in the hands of the shareholders and tax the same in their hands rather than in the hands of the concern to which such loan has been advanced.

The decision is available here.