S.RAMU,CHENNAI vs. ACIT CORPORATE CIRCLE 1(3), CHENNAI

These appeals by the assessees are directed against the orders passed by the Ld. Commissioner of Income Tax (Appeals)-1, Chennai, both dated 27.09.2017 in respect of Shri V. Ramesh and Shri S. Ramu in ITA No.05/CIT(A)-1/2017-18 & respectively for the assessment year 2006-07 passed U/s. 250(6) r.w.s. 143(3) & 147 of the Act. Since in both the assessee’s case the issue is interrelated and identical, they are heard together and disposed off by this common order.

The assessees have raised several grounds in their appeal however the lone issue argued before us is that the Ld.AO as well as the Ld.CIT(A) has erred in making addition of Rs.53,69,803/-, in the hands of each of the assessees U/s.2(22)(e) of the Act individually, when the total extent of loan advanced by M/s. Chennai Micro Prints Pvt. Ltd., to M/s. Tallboy Stationery Pvt. Ltd. was only Rs.53,69,803/-, wherein both the assessees hold 50% of equity shares of both the companies.

The brief facts of the case are that, both the assessees are holding 50% equity shares in M/s. Microprints Pvt. Ltd., and M/s. Tallboy Stationeries Pvt. Ltd., and are also Directors in both these Companies, filed their return of income and thereafter the assessment was reopened U/s.147 of the Act and finally assessment order U/s.143(3) r.w.s. 147 of the Act was passed on 17.01.2014 wherein the Ld.AO made addition of Rs.53,69,803/- in the hands of each of the assessees invoking the provisions of Section 2(22)(e) of the Act because M/s. Chennai Micro Finance Pvt. Ltd., had extended an advance of Rs.53,69,803/- to M/s. Tallboy Stationaries Pvt. Ltd., and the accumulated reserves & surplus of M/s. Chennai Micro Finance Pvt. Ltd., was over and above the loan extended.

At the outset the Ld.AR submitted before us that when the total amount of loan extended by M/s. Chennai Micro Finance Ltd., to M/s. Tallboy Stationaries Pvt. Ltd., was Rs.53,69,803/- the entire amount cannot be added to the income of both the shareholders having 50% stakes in those companies by invoking the provisions of Section 2(22)(e) of the Act, which would amount to double taxation. The Ld.AR pleaded that, since both the shareholders are having 50% stake in both the companies, the amount of Rs.53,69,803/- may be proportionately added in the hands of both the assessees viz., Rs.26,84,902/- in the case of Shri V. Ramesh and Rs.26,84,901/- in the case of Shri S. Ramu. The Ld.DR could not controvert to the submission of the Ld.AR.

We have heard the rival submissions and carefully perused the materials on record. We find merit in the contention of the Ld.AR. Adding the amount of Rs.53,69,803/- in the hands of each of the assessees would amount to double taxation and that is not permissible. Moreover with respect to the transaction of extending loan by M/s. Chennai Micro Finance Ltd., to M/s. Tallboy Stationaries Pvt. Ltd., the provisions of Section 2(22)(e) of the Act attracts the amount of deemed dividend only to the extent of the loan amount which is further restricted to the extended of reserves and surplus of the Company advancing loan. Therefore in the relevant cases before us the aggregate additions in the hands of the shareholders who are the assessees cannot be made more than Rs.53,69,803/-. Hence it would be an appropriate analogy that the entire amount which is liable to be treated as deemed dividend has to be apportioned between both the shareholders in whose cases the conditions stipulated for attracting the provisions of Section 2(22)(e) of the Act are satisfied. Therefore as pleaded by the Ld.AR, it would be judicious to make addition in the hands of Shri V. Ramesh an amount of Rs.26,84,902/- and Shri S. Ramu - Rs.26,84,901/-. It is ordered accordingly.

In the result the appeals of both the assessees are partly allowed as indicated herein above.