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Income Tax Appellate Tribunal, DELHI BENCH: ‘A’ NEW DELHI
Before: SHRI S.V. MEHROTRA & SHRI K.N. CHARRY
This is an appeal by the assessee challenging the order dated 29.06.2011 in appeal no. 156/2008-09 by the Commissioner of Income Tax (Appeals)-XXII, New Delhi.
Briefly stated facts are that the assessee is a firm deriving its income from Management Consultancy Services. One Smt. Neeta Mohla is a partner of the assessee firm with 50% share therein and one Shri Deepak Mohla is having the other 50% of the same.
Those two persons are equal shareholders in one M/s TMI Associates (P) Ltd. in which the public are not subsequently interested. For the AY 2006-07 the assessee firm filed the return of income on 31.10.2006 declaring a total income of Rs. 10,97,233/-. During the course of assessment proceedings, the AO found that the assessee firm had shown a loan of Rs. 3 lakhs from M/s TMI Associates Pvt. Ltd. and the accumulated reserves of M/s TMI Associates P. Ltd. was Rs. 43,89,616/- as per its balance sheet as on 31.03.2006. After affording an opportunity of being heard to the assessee, the AO treated such loan amount of Rs. 3 lacs as deemed dividend u/s 2(22)(e). Assessee challenged the same before the Ld. CIT (A) and the Ld. CIT (A) by the impugned order dismissed the ground relating to this issue of deemed dividend and confirmed the same. The assessee is therefore, before us in this appeal challenging the impugned order stating that the Ld. CIT (A) failed to appreciate that Section 2(22)(e) has no application to the amounts received from a Company by the non shareholder, and in as much as the assessee firm is not a shareholder in the TMI Associates P. Ltd. the said loan cannot be assessed to tax in the hands of the assessee. He further submitted that Smt. Neeta Mohla never withdrew any amount from the partnership firm. Per contra Ld. DR vehemently relied upon the orders of the authorities below.
At the outset it must be stated that one Neeta Mohla and Deepak Mohla are partners with 50% share to each in assessee firm and they are the equal shareholders in TMI Associates P. Ltd. Only the persons are common in both the entities but the assessee firm is admittedly not a shareholder of the TMI Associates P. Ltd. On the aspect of the taxability of the loan obtained by the assessee firm from the Private Limited Company, in the hands of the assessee firm, the ratio laid down in ASSISTANT COMMISSIONER OF INCOME TAX vs. BHAUMIK COLOUR (P) LTD.118 ITD 0001 is applicable on all force. It is held in the said decision as follows:
“Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. The provisions of s. 2(22)(e) do not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern (non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of s.
2(22)(e). The intention behind enacting provisions of s. 2(22)(e) is that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions, such payment by the company is treated as dividend. The intention behind the provisions of s. 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provision as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern. The basis of bringing in the amendment to s. 2(22)(e) by the Finance Act, 1987, w.e.f 1st April, 1988 is to ensure that persons who control the affairs of a company as well as that of a firm can have the payment made to a concern from the company and the person who can control the affairs of the concern can draw the same from the concern instead of the company directly making payment to the shareholder as dividend. The source of power to control the affairs of the company and the concern is the basis on which these provisions have been made. It is therefore proper to construe those provisions as contemplating a charge to tax in the hands of the shareholder and not in the hands of a non-shareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words there is a deemed accrual of income even under s. 5(1)(b) in the hands of the shareholder only and not in the hands of the payee viz., non- shareholder (concern). Sec. 5(1)(a) contemplates that the receipt or deemed receipt should be in the nature of income. Therefore, the deeming fiction can be applied only in the hands of the shareholder and not the non-shareholder viz., the concern. CBDT Circular No. 495, dt. 22nd Sept., 1987, to the extent not benevolent is not binding. In the event of the payment of loan or advance by a company to a concern being treated as dividend and taxed in the hands of the concern then, the benefit of set off as per s. 2(22)(e)(iii) cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial interest in the concern. The provisions of sub-cl. (iii) of s. 2(22)(e) also therefore contemplate deemed dividend being taxed in the hands of a shareholder only.”
Respectfully following the above decision, we hold that so long as the assessee firm is not a shareholder, any loan obtained by the assessee firm from the Private Limited Company, wherein the partners of the assessee firm are the shareholders, is not taxable in the hands of the assessee. We, therefore, find that the orders of the authorities below cannot be sustained and the appeal has to be allowed deleting the addition made by the AO treating the loan as a deemed dividend u/s 2(22)(e) of the Act.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 21.04.2017