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Chennai Tribunal rules that deemed dividend provision [1] is not attracted on current account transactions, where the Taxpayer was not a shareholder of the lending company but merely had common director-shareholders
In Pallava Resorts Pvt. Ltd. (Taxpayer) vs. ITO[2] , the issue before the Chennai Tribunal was on applicability of deemed dividend provisions of section (s.) 2(22)(e) in the case of the Taxpayer which had common director-shareholders with its holding company, H Co. According to the tax authority, during tax year 2010-11, the Taxpayer had availed loan from H Co 5had huge accumulated profits as on 31 March 2011 and treated the said loan as “deemed dividend” by invoking s. 2(22)(e).
The Tribunal noted that H Co made regular payments for the expenses of the Taxpayer. However, the tax authority had considered these payments as loans and taxed the same as deemed dividend. The Tribunal held these transactions were in the nature of current account and not in the nature of loans, and hence, were out of the scope of deemed dividend provisions. The Tribunal noted that a similar view was taken by it in the case of Fairmacs Shipstores Pvt. Ltd. vs. DCIT[3] .
The Tribunal also observed that the Taxpayer does not hold any shares in H Co and under the Companies Act, 2013, it is illegal for a subsidiary company to have shares in its holding company. The Tribunal relied on the ruling of jurisdictional (Madras) High Court in the case of CIT vs. Ennore Cargo Container Terminal Pvt. Ltd.[4] wherein it was held that even if common shareholders are there in both the companies, deemed dividend can be taxed only in the hands of a registered shareholder of the company and not in the hands of the company which had received the loan. The Tribunal also noted other rulings[5] wherein it was held that s. 2(22)(e) is not attracted if the recipient of loan is not a shareholder. Based on this, the Tribunal ruled that since the Taxpayer was not a shareholder of H Co (lending company), the amount received from H Co will not be taxed as deemed divided and common shareholding in two companies would not attract deemed dividend provisions s.2(22)(e).