Facts of the Case

  • Assessment Year: 1998-99
  • Assessee: Late Shri C.R. Dass, Director of Pearey Lall & Sons (EP) Ltd.
  • Assessee filed return declaring income of Rs. 1,14,000.
  • The assessee leased property (No. 27, Aurangezed Road, New Delhi) to the Company on 16th March 1998, at monthly rent of Rs. 12,000.
  • An interest-free security deposit of Rs. 75 lakhs was credited in the assessee’s account but not actually paid; shares were later issued, debiting the account with Rs. 74,56,000.
  • Shareholding increased to 44.57% post share issuance.
  • Assessing Officer treated the security deposit as deemed dividend under Section 2(22)(e) and reopened assessment under Section 148, beyond six years.

 

Issues Involved

  1. Whether the security deposit of Rs. 75 lakhs could be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act.
  2. Whether the reassessment notice under Section 148 issued after six years was valid or barred by limitation.
  3. Applicability and strict interpretation of legal fiction under Section 2(22)(e).

 

Petitioner’s Arguments (Revenue)

  • The addition of Rs. 75 lakhs should be treated as deemed dividend.
  • Reassessment was valid even beyond six years based on directions of CIT(A), Rohtak, under Section 150(1).
  • Challenged deletion of addition by CIT(A) and ITAT’s dismissal on merit grounds.

 

Respondent’s Arguments (Assessee)

  • Shareholding at the time of lease (16th March 1998) was less than 10%, so Section 2(22)(e) not attracted.
  • Security deposit never actually received, instead shares were allotted later.
  • Reassessment notice under Section 148 issued after six years is time-barred; directions by CIT(A), Rohtak, cannot extend limitation.
  • Section 2(22)(e) must be strictly construed as it creates a legal fiction.

 

Court Order / Findings

  • High Court upheld CIT(A) and ITAT decisions dismissing Revenue’s appeal.
  • Rs. 75 lakhs cannot be treated as deemed dividend, as shareholding was less than 10% at transaction date.
  • Section 2(22)(e) requires strict compliance; legal fiction not applicable in this case.
  • Court did not decide limitation issue; assessment dismissed on merits of addition.
  • Appeal dismissed; no substantial question of law arises.

 

Important Clarifications

  • Section 2(22)(e) creates legal fiction, applicable only if shareholding >10% at the relevant date.
  • Security deposits credited but not received cannot constitute deemed dividend.
  • Reopening assessments beyond six years requires strict adherence to Sections 149 and 150; directions in unrelated appeals are ineffective.

 

Sections Involved

  • Section 2(22)(e) – Deemed Dividend
  • Section 148 – Reassessment
  • Section 149 – Limitation period for reassessment
  • Section 150(1) – Directions by Appellate Authority

Link to download the order –

https://delhihighcourt.nic.in/app/case_number_pdf/2011:DHC:1620-DB/MLM17032011ITA6102009.pdf

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