Case summary, Income Tax

Loan advanced to a group company which is neither a registered shareholder nor a beneficial owner: Applicability of provisions of ‘deemed dividend’ under section 2(22)(e)

Khorakiwala Holdings and Investments Pvt Ltd vs. ACIT

Outcome: In favour of Assessee

Facts

  • The Assessee was a holding company owning 90.31% of equity shares of the capital of M/s. CISPL and M/s. CISPL further held 99% of the equity share capital of M/s. BTPL. All these companies were a group company of M/s. Wockhardt Ltd.
  • During the year, the Assessee received preference share application money of Rs 90 crores from M/s. BTPL. Out of this money, Rs 71 crores was received from M/s CISPL as a loan to M/s. BTPL. This money was used for repayment of loan taken by the Assessee from M/s. CISPL in earlier years. Later, the Assessee had repaid the entire loan taken from M/s. CISPL.
  • The Assessing Officer treated the preference share application money received by the Assessee of Rs 90 crores as deemed dividend under section 2(22)(e) of the Act on the ground that the said money was in fact received from M/s. CISPL in which the Assessee held 90.31% equity shares through intermediary company M/s. BTPL in which M/s. CISPL held 99% equity share capital.

Key Points

  • An Assessee has to be registered as well as beneficial shareholder of the lender company in order to attract the provisions of section 2(22)(e) of the Act as held by the Hon’ble Apex Court in the case of CIT vs. Madhur Housing and Development Company.
  • In the present facts of the case, the Assessee was neither a registered shareholder nor a beneficial shareholder of M/s. BTPL. Therefore, the condition as envisaged in the provisions of section 2(22)(e) of the Act could not be satisfied.
  • Therefore, the preference share application money received by the Assessee could not be treated as deemed dividend in the hands of the Assessee as the primary condition as envisaged by section 2(22)(e) of the Act was not satisfied.

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