Case Law Details
ACIT Vs Kiran Ship Breaking Company (ITAT Ahmedabad)
ITAT Ahmedabad held that addition of amount received as advances as deemed dividend in terms of section 2(22)(e) of the Income Tax Act unsustainable as assessee firm is neither registered shareholder nor beneficial shareholder. Concluded that deemed dividend is taxable only in the hands of the shareholder.
Facts- AO had noted that the assessee had received various sums during the year from one Shree Electromelts Ltd. (“SEL”) both from its steel and coke division; that one of the directors of SEL, Shri Ram Krishan Jain, held more than 10% share in the company and 50% partnership in the assessee-firm. AO, therefore held that the firm had substantial interest in the company and amount of advance outstanding at the end of the year from two divisions, amounting to Rs. 1,89,08,942/- from coke division and 39,44,984/- from steel division, were treated as deemed dividend in terms of section 2(22)(e) of the Act, liable to be taxed in the hands of the assessee firm.
CIT(A) deleted the addition. Being aggrieved, revenue has preferred the present appeal.
Conclusion- Jurisdictional High Court in the case of CIT Vs. Daisy Packers P.Ltd., and the Hon’ble Delhi High Court in the case of CIT Vs. AnkitechP.Ltd. has held that deemed dividend is taxable only in the hands of the shareholder.
Held that the assessee firm in the present case, neither being registered shareholder nor beneficial shareholder as per the factual finding of the ld.CIT(A) which has remained uncontroverted before us, there is no reason to tax the amount received by it by way of advance from SEL amounting to Rs.2,28,53,926/- as deemed dividend in terms of section 2(22)(e) of the Act. Thus, the order of the ld.CIT(A) is, therefore upheld, and ground of appeal of the Revenue is rejected.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The present appeal has been filed by the Revenue against the order passed by the Commissioner of Income Tax (Appeals)-6, Ahmedabad (in short referred to as CIT(A)), dated 12.5.2015passed under section 250(6) of the Income Tax Act, 1961 (“the Act” for short) pertaining to Assessment Year 2009-10.
2. The grounds raised are as under:
“1. The Ld. CIT(A) has erred in deleting the addition of Rs. 2,28,53,926/- on account of deemed dividend u/s. 2(22)(e) of the IT Act and disallowance of an interest expenses amounting to Rs.86.829/- by not considering the contents of the deeming provision which clearly states that “any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder being a person who is the beneficial owner of shares holding not less than ten percent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case posses accumulated profits”.
2. The Ld. CIT(A) has erred in not appreciating the fact that the assessee is a firm and the partner is a shareholder of the company and has substantial interest in the firm.
3. Solitary issue in the present appeal relates to the addition made of deemed dividend in the hands of the assessee in terms of section 2(22)(e) of the Act, which was deleted by the ld.CIT(A).
4. The AO had noted that the assessee had received various sums during the year from one Shree Electromelts Ltd. (“SEL” for short) both from its steel and coke division; that one of the directors of SEL, Shri Ram Krishan Jain, held more than 10% share in the company and 50% partnership in the assessee-firm. He, therefore held that the firm had substantial interest in the company and amount of advance outstanding at the end of the year from two divisions, amounting to Rs. 1,89,08,942/- from coke division and 39,44,984/- from steel division, were treated as deemed dividend in terms of section 2(22)(e) of the Act, liable to be taxed in the hands of the assessee firm. The AO relied on the decision of Hon’ble Delhi High Court in the case of CIT Vs. National Travel Services, 202 taxman 327 (Del) in this regard.
The ld.CIT(A) however deleted the addition noting that Shri R.K.Jain had invested in the company SEL in his individual capacity out of his funds and not as and on behalf of the partnership firm. He noted from the balance sheet of Shri R.K. Jain that he had sufficient funds to make the investment and from the balance sheet of the assessee-firm, he noted that there was no investment recorded in the books of the firm pertaining to that made in the shares of SEL. He, therefore, concluded that the investment in shares by Shri R.K. Jain in SEL was his own individual account and not on behalf of the firm. From the same, he deduced that the firm was neither registered shareholder nor in any way beneficial owner of the shares in SEL, and therefore, he held that the provisions of section 2(22)(e) of the Act were not attracted in the hands of the assessee-firm. He distinguished the decisions relied upon by the AO in the case of National Travel Services (supra) pointing out that in the said case, the investment by partners in the company was found to be on behalf of the firm, and therefore, the Court had held that it was the firm which was the beneficial owner of the shares, and accordingly provisions of section 2(22)(e) were attracted in the hands of the assessee. The finding the ld.CIT(A) at para 4.5 of his order are as under:
5. The ld.DR was unable to controvert the factual finding of the ld.CIT(A) that the investment made by Shri R.K. Jain in SEL was in his own individual capacity and not on behalf of the firm. Therefore we do not find any infirmity in the findings of the Ld.CIT(A) that the assessee firm was neither the registered shareholder nor beneficial shareholder of SEL so as to invoke section 2(22)(e) of the Act in its hands on receipt of advances from SEL.
He was also unable to point out any infirmity in the distinction made by the ld.CIT(A) of the decision of Delhi High Court in the case of National Travel Services (supra), where the facts of the case as noted by the Ld.CIT(A) was that the partners had invested in the company on behalf of the partnership from the funds of the partnership , and accordingly the firm was held by the Hon’ble court to be beneficial owner of the shares in the company.
Therefore the order of the Ld.CIT(A) holding that the decision of the Hon’ble Delhi High Court in the case of National Travel Services(supra) will not apply in the facts of the present case, we find, remains uncontroverted before us.
6. The law as to in whose hands deemed dividend as per section 2(22)(e) of the Act, is to be taxed, has been laid down by the Hon’ble Apex court in the case of CIT Vs. Madhur Housing & Development Company (2018) 93 taxmann.com 502 (SC) wherein they agreed with the order of the Hon’ble High court of Delhi holding that deemed dividend is taxable only in the hands of shareholder. The Hon’ble court agreed with the interpretation of the section by hon’ble High Court that section 2(22)(e ) of the Act only enlarges the definition of dividend and cannot be extended further for broadening concept of shareholder. That where conditions for treating loans and advances as deemed dividend is established by the Revenue, Revenue can treat dividend income in the hands of shareholders.
Even the jurisdictional High Court in the case of CIT Vs. Daisy Packers P.Ltd., and the Hon’ble Delhi High Court in the case of CIT Vs. AnkitechP.Ltd. (2012) 340 ITR 14 held that deemed dividend is taxable only in the hands of the shareholder.
7. The assessee firm in the present case, neither being registered shareholder nor beneficial shareholder as per the factual finding of the ld.CIT(A) which has remained uncontroverted before us, there is no reason to tax the amount received by it by way of advance from SEL amounting to Rs.2,28,53,926/- as deemed dividend in terms of section 2(22)(e) of the Act.
The order of the ld.CIT(A) is, therefore upheld, and ground of appeal of the Revenue is rejected.
8. In the result, appeal of the Revenue is dismissed.
Order pronounced in the Court on 27th October, 2023 at Ahmedabad.
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