Section 2(22)(e) – No addition can be made u/s 2(22)(e) since as per annual return filed by the assessee, he had transferred his shareholding in borrower company before the advancement of loan by the lender company to the borrowing company

19. [(2020) 117 taxmann.com 451 (Chd.)(Trib.) ACIT vs. Gurdeep Singh ITA No. 170 (Chd.) of 2018 A.Y.: 2013-2014 Date of order: 26^th June, 2020

Section 2(22)(e) – No addition can be made u/s 2(22)(e) since as per annual return filed by the assessee, he had transferred his shareholding in borrower company before the advancement of loan by the lender company to the borrowing company

FACTS

The assessee was a shareholder in two companies, namely, C Ltd. and J Ltd. During the previous year relevant to the assessment year under consideration, C Ltd. gave loans and advances to J Ltd. out of its surplus funds. The A.O. took a view that since the assessee was holding shares in both companies in excess of ten percent of total shareholding, the amount of loan is to be taxed as dividend u/s 2(22)(e) of the Act.

The annual return filed with the Registrar of Companies (ROC) revealed that the assessee held only one share of C Ltd., whereas the other shares were transferred to J Ltd. The annual return was belatedly filed with the ROC, along with payment of late fee, which was accepted by the ROC. Based on the belatedly filed annual return, the assessee contended that the shares were transferred prior to the advancement of loan and, therefore, the provisions of section 2(22)(e) were not applicable. The A.O. did not agree with the submissions made by the assessee and held the plea of share transfer to be an afterthought since the return with the Registrar was filed late.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal since the transfer of shares was accepted by the A.O. while framing assessments of subsequent years, and also held that the transfer of shares had to be considered. He also held that the transaction was commercially expedient with no personal benefit involved.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

HELD

The Revenue could not establish beyond doubt that the assessee was having substantial interest in C Ltd. on the date of advancement of loan by C Ltd. to J Ltd. Even though the annual return was filed belatedly, once accepted by the ROC, it was a legal and valid document as per law and the effective date for transfer of shares should be considered as that mentioned in the return filed. To apply a deeming fiction, the first set of facts is to be proved beyond doubt and the deeming fiction cannot be applied on the basis of assumption, presumption or suspicion about the first set of facts. The Tribunal observed that it was the A.O.’s suspicion that the assessee was holding substantial shares in C Ltd. on the date of advancement of loan. The Revenue could not rebut the facts beyond reasonable doubt. The Tribunal upheld the order passed by the CIT(A) and confirmed the deletion of the addition made u/s 2(22)(e).

The appeal filed by the Revenue was dismissed.