LATE RAMESH CHAND GOYAL,NEW DELHI vs. ITO, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘F’ NEW DELHI BEFORE SH. S.K. YADAV, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER ITA No. 1187/Del/2014 Assessment Year: 2009-10 Vs. Income Tax Officer, Ward-24(4), Late Ramesh Chand Goyal Through L/H Smt. Manorma New Delhi Goyal, A-15/5, Vasant Vihar, New Delhi PAN : AAGPG7119L (Appellant) (Respondent) Appellant by Sh. M.L. Dua, Adv. Respondent by Sh. F.R. Meena, Sr.DR Date of hearing 11.01.2017 Date of pronouncement 15.02.2017 ORDER PER O.P. KANT, A.M.:

This appeal by the legal heir of the assessee is directed against order dated 31/12/2013 of the learned Commissioner of Income-tax (Appeals)-XXIII, New Delhi for assessment year 2009-10, raising following grounds: “1. That the learned CIT (appeals) erred in holding that reassessment under Section 147 and within jurisdiction of the ITO. 2. That learned CIT (A) erred in holding that the ITO was not bound to follow the instructions contained in CBDT's Circular No. 495 dated 22.9.1987 to the effect that deemed dividend in cases where loans/advances were made to other concerns/firms etc. would be taxed in the hands of such concerns and not in the hands of their

2 ITA No.1187/del/2014 AY:2009-10 partners/members, who were registered share holders of the concerned companies, if the relevant conditions were fulfilled. 3. That on facts and in law, the learned CIT (A) erred in upholding addition of Rs. 50,67,980/- to assessee’s income on wrong assumption that the loan to firm in question was given to the appellant. 4. That the learned CIT (A) erred in holding that the provisions of Section 2(22) (e) and other provisions applied to the case of the appellant. 5. That in allowing the appeal of the appellant on the issue of quantum of accumulated profits the learned CIT (A) erred in not incorporating in his order the written submissions of the appellant that the amount standing in share premium account did not form part of accumulated profits and consequently passed a non-speaking order on this issue, and hence CIT appeals order on this issue needs to be modified/amended so as to explicitly ailow the appeal on this issue. 6. That the appellant craves leave to add/delete/amend any of the above grounds on or before hearing the appeal.”

“1. That the learned Commissioner of Income Tax (Appeals) erred in not considering the contention of the appellant that out of the deemed dividend finally determined, if any, only 20% thereof should be assessed in the hands of the appellant who had only 20% shareholding in the concerned firm which was the recipient of the loan amount in question.” 3. Briefly stated facts of the case are that the assessee filed return of income on 29/09/2009 declaring income of Rs.9,87,709/-, which was processed under section 143(1) of the income tax Act, 1961 (for short the Act). The assessee is a partner having 20% share of profit in a firm namely M/s Ess Ell Cables Company. The Assessing Officer received an information from the Joint Commissioner of income-tax Range- 24, New

3 ITA No.1187/del/2014 AY:2009-10 Delhi to the effect that during the assessment in the case of M/s Ess Ell Cable Company for assessment year 2009-10, it was found that M/s Alliance Copper Concept Private Limited had advanced an aggregate loan of Rs.50,67,980/- to the aforesaid firm. The assessee was having substantial interest of 20% in the firm. The assessee was also having 33.33% shareholding in company M/s Alliance copper concept private limited, who had given loan to the above firm. In view of the Assessing Officer, the loan advanced by the company to the firm, was deemed dividend under section 2(22)(e) of the Act in the hands of the assessee. The Assessing Officer recorded the reasons on 27/02/2012 and reopened the assessment by way of issuing notice under section 148 of the Act. Subsequently, notice under section 143(2) of the Act was issued and complied with. Before the Assessing Officer, the assessee contended that provision of section 2(22)(e) of the Act were not applicable due to the reason that the said firm did not have a investment in this company under reference and hence being neither a shareholder nor a beneficial holder of the shares and no individual benefit was derived by any of the shareholders of the company. The Assessing Officer, however, was of the view that assessee fulfilled all the conditions of section 2(22)(e) of the Act, and relying on the decision of the Tribunal, Mumbai Special Bench, in the case of Commissioner of Income Tax Vs. Bhumik Colour Private Limited (2009) reported in 313 ITR (AT) 146, held the loan/advance of Rs.50,67,980/-as deemed dividend in the hand of the assessee. Being aggrieved, the assessee filed an appeal before the learned Commissioner of Income Tax (Appeals), who upheld the liability of deemed dividend but directed the Assessing Officer to check the books of account of the company to find out the amount of accumulated profits available with the company at the beginning of the year or at the time of giving the said advance to the firm, M/s. Ess Ell Cables Co., and

4 ITA No.1187/del/2014 AY:2009-10 to restrict the disallowance u/s. 2(22)(e) of the Act to the extent of accumulated profits available with M/s. Alliance Cooper Concepts Pvt. Ltd. Again being aggrieved, the assessee is before the Tribunal in the appeal. 4. Before us, the learned counsel for the assessee supporting the application for admission of additional ground submitted that the additional ground raised is legal one, which needs no fresh facts to be investigated. He further submitted that in the written submission before the learned Commissioner of Income-tax (Appeals), the assessee contended that out of deemed dividend finally determined, only a proportionate share should be taxed in the hands of the assessee. The learned counsel in support of his claim relied on the decision of the Tribunal, Delhi Bench in the case of Sh. Puneet Bhagat Vs. Income Tax Officer, Ward-1(2), Delhi, in ITA No. 3025-3026/Del/2015. Since the shareholding of the assessee in the concerned firm was only 20%, the 20 % part of the finally determined deemed dividend should have been assessed in the hands of the assessee, however, the learned Commissioner of Income Tax (Appeals) made no mention of it in the impugned order and passed a nonspeaking order on the issue. He further submitted that at the time of filing appeal, the assessee inadvertently omitted to include the above grounds and thus prayed to admit the same as additional ground of appeal. 5. The Ld. Sr. Departmental Representative, on the other hand, opposed the admission of the additional ground and submitted that no such ground was taken before the learned Commissioner of Income-tax (Appeals) and, therefore, learned Commissioner of Income Tax (Appeals) has not decided the issue . He said that it was raised for the first time by the assessee before the Tribunal, therefore, the additional grounds cannot be admitted at the stage of the Tribunal.

5 ITA No.1187/del/2014 AY:2009-10 6. We have heard the rival submissions on the issue of admissibility of additional ground of appeal raised by the assessee. The Ld. counsel submitted that the ground raised is purely legal in nature which needs no fresh facts to be investigated. The learned counsel submitted that the assessee was having 20% share of profit in the concerned firm and, therefore, out of the deemed dividend finally determined only 20% share should be taxed in the hands of the assessee. It is settled law that adjudication of legal ground, if no fresh facts are to be investigated , may be admitted as additional ground in appellate proceedings at any stage as held by the Hon’ble Supreme Court in NTPC vs CIT 229 ITR 383. In our opinion the issue raised in additional ground before us is legal in nature. We also find that the learned Sr. Departmental Representative has not disputed that investigation of fresh facts is not required. In view of the above discussion, we admit the additional ground. 7. In ground no. 1, the assessee has raised the issue of legality of reassessment proceedings under Section 147 of the Act upheld by the learned Commissioner of Income Tax (Appeals). This ground was not argued before us and, therefore, we dismiss it as infructuous. 8. In grounds no. 2 to 4, the assessee has challenged the addition of deemed dividend under Section 2(22)(e) of the Act in the hands of the assessee. Supporting the grounds, learned counsel for the assessee submitted that the Assessing Officer has not followed instruction contained in CBDT Circular No. 495, dated 29th September, 1987. According to the learned counsel, the CBDT Circular has specified that deemed dividend in cases where loans/advances were made to other concerns/firms would be taxed in the hands of such concern/firm and not in the hands of other partners who are registered share holders of the concerned company. The learned counsel submitted that according to the circular, the deemed dividend was taxable in the hands of the firm

6 ITA No.1187/del/2014 AY:2009-10 M/s. Ess Ell Cables Company Ltd. and not in the hands of the assessee. In support of his contention that the Circular issued by the CBDT was binding on the Income Tax Authorities, he relied on the following decisions. i. Paper Products Ltd. Vs. Commissioner of Central Excise, 247 ITR 128 (SC) ii. Collector of Central Excise Vs. Dhiren Chemical Industries Ltd., 254 ITR 554 (SC) iii. CIT Vs. Punalur Paper Millsts. Ltd., 170 ITR 37 (Kerala) iv. Mathew M. Thomas & Others, 236 ITR 691 (SC). 8.1 On the other hand, the learned Sr. Departmental Representative submitted that the issue in dispute has already been discussed in detail by the Hon’ble Jurisdictional High Court in the case of CIT Vs. Ankitech (P) Ltd. & Others., reported in (2012) 340 ITR 0014, wherein it is held that in case of loan or advance by the company to concern/firm, the addition has to be made for deemed dividend in the hands of the shareholder(s) only. Accordingly, he prayed that the order of the learned Commissioner of Income Tax (Appeals) might be upheld. 8.2 We have heard the rival submissions and perused the relevant material on record. In the instant case, M/s. Alliance Copper Concept Pvt. Ltd. which is a closely held company had advanced a loan of Rs.50,67,981/- to M/s. Ess Ell Cables Co. The assessee is shareholder of the said company having 33.33 % shareholding. The assessee is also partner in the firm having 20% share of profit. In the case of Ankitech (P) Ltd. & Ors. (supra), the Hon’ble Jurisdictional High Court after discussing the decisions of the Special Bench of the Tribunal, Mumbai in the case of Asstt. Commissioner of Income Tax Vs. Bhaumik Colour (P) Ltd. (2009), 120 TTJ (Mumbai) (SB) 865, which has been approved by the Hon’ble Bombay High Court in the case of CIT Vs. Universal Medicare (P) Ltd.,

7 ITA No.1187/del/2014 AY:2009-10 (2011) 237 CTR (Bom) 147, held that where a loan or advance has been given by the company to the concern, addition for deemed dividend can be made in the case of shareholders only who satisfy the conditions of Section 2(22)(e) of the Act and not in the case of concern, who is not share holder of the closely held company, who has given loan. The relevant finding of the Hon’ble High Court is reproduced as under:

“22. Insofar as the provisions of Section 2(22)(e) are concerned, we have already extracted this provision and taken note of the conditions/requisites which are to be established for making provision applicable. In Commissioner of Income Tax Vs. C.P. Sarathy Mudaliar [1972] 83 ITR 170, the Supreme Court had traced out the assessee of this provision in the following manner: ―Any payment by a company, not being a company in which the public are substantially interest, of any sum (whether as representing a part of the assets of the company or otherwise) made after 31.05.19987 by way of advance or loan. First limb a) to a shareholder, being a person who is the beneficial of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power, Second limb b) or to my concern in which, such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) Third limb c) or any payment by any such company on behalf, or for the individual benefit, or any such shareholder, to the extent to which the company in either case possesses accumulated profits.‖ 23. It is rightly pointed out by the Bombay High Court in Universal Medicare (P) Ltd. (supra) that Section 2(22)(e) of the Act is not artistically worded. Be as it may, we may reiterate that as per this provision, the following conditions are to be satisfied: (1) The payer company must be a closely held company. (2) It applies to any sum paid by way of loan or advance during the year to the following persons: (a) A shareholder holding at least 10 of voting power in the payer company.

8 ITA No.1187/del/2014 AY:2009-10 (b) A company in which such shareholder has at least 20% of the voting power. (c) A concern (other than company) in which such shareholder has at least 20% interest. (3) The payer company has accumulated profits on the date of any such payment and the payment is out of accumulated profits. (4) The payment of loan or advance is not in course of ordinary business activities. 24. The intention behind enacting provisions of Section 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 Section 2(22)(e) of the Act is to tax dividend in the hands of shareholders. The deeming provisions 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 loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance. 25. Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under Section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to ―dividendǁ. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to ―shareholderǁ. When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under Section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend

9 ITA No.1187/del/2014 AY:2009-10 to its shareholders/members and such dividend cannot be given to non-members. The second category specified under Section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of ―deeming shareholderǁ, then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspective. 26. In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the Revenue to argue that if this position is taken, then the income ―is not taxed at the hands of the recipient‖. Such an argument based on the scheme of the Act as projected by the learned counsels for the Revenue on the basis of Sections 4, 5, 8, 14 and 56 of the Act would be of no avail. Simple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance. 27. Precisely, for this very reason, the Courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under Section 2(22)(e) of the Act. 28. Insofar as reliance upon Circular No. 495 dated 22.09.1997 issued by Central Board of Direct Taxes is concerned, we are inclined to agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P) Ltd. (supra) that such observations are not binding on the Courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that according to us is the correct legal position, such a circular would be of no avail. 29. No doubt, the legal fiction/deemed provision created by the Legislature has to be taken to ‗logical conclusion' as held in Andaleeb Sehgal (supra). The Revenue wants the deeming provision to be extended which is illogical and attempt is to create a real legal fiction, which is not created by the Legislature. We say at

10 ITA No.1187/del/2014 AY:2009-10 the cost of repetition that the definition of shareholder is not enlarged by any fiction. 30. Before we part with, some comments are to be necessarily made by us. As pointed out above, it is not in dispute that the conditions stipulated in Section 2(22)(e) of the Act treating the loan and advance as deemed dividend are established in these cases. Therefore, it would always be open to the Revenue to take corrective measure by treating this dividend income at the hands of the shareholders and tax them accordingly. As otherwise, it would amount to escapement of income at the hands of those shareholders. 8.3 We find that the Hon’ble High court has already taken into consideration the Circular (supra) issued by the CBDT and the Hon’ble High court has held that as per the correct legal position, the loan or advance cannot be treated as deemed dividend at the hands of the concern, which is not the shareholder and thus the circular has been held to be of no avail. 8.4 Respectfully following the above finding of the Hon’ble High Court on the issue in dispute, we reject the contention of the learned counsel for direction to the authorities below for following the CBDT Circular (supra) and we uphold the order of the learned Commissioner of Income Tax (Appeals) that the said loan or advance is liable to be taxed as deemed dividend in the hands of the assessee. Accordingly, grounds no. 2 to 4 of the appeal are dismissed. 9. In ground no. 5, the assessee has raised the issue of exclusion of share premium from the accumulated profit for the purpose of deemed dividend. The learned counsel for the assessee contended that the amount standing in the share premium cannot form part of the accumulated profit and the learned Commissioner of Income Tax (Appeals) has not given any finding on this issue, which rendered the order non-speaking and accordingly he prayed that the learned

11 ITA No.1187/del/2014 AY:2009-10 Commissioner of Income Tax (Appeals) might be directed to allow the appeal of the assessee on this grounds. In support of the contention, the learned counsel relied on the following decisions: I. Deputy Commissioner of Income Tax Vs. Maipo India Ltd., (ITAT, Delhi), 24 SOT 42 II. Deputy Commissioner of Income Tax Vs. Radhe Sham Jain (ITAT, Chandigarh), ITA No. 728(CHD.) of 2011, dated September 28, 2012. 9.1 We have heard the rival submission and perused the relevant material on record. We find that in the case of Deputy Commissioner of Income Tax Vs. Radheshyam Jain (supra), the Tribunal has decided the issue that the share premium cannot be stated to be a commercial profit to apply for deemed dividend provision. The relevant finding of the Tribunal is reproduced as under:

“8 We have heard the rival submissions carefully in the light of the material on record as well as the decisions cited by the parties. Section 2(22)(e) reads as under:- "any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent 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 (hereafter in this clause referred to as the said concern)] 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 possesses accumulated profits." The plain reading of above provision clearly shows that the payment by the company in which public is not substantially interested by way

12 ITA No.1187/del/2014 AY:2009-10 of advance or loan to a shareholder who is holding shares not less than 10%, is to be treated as deemed dividend. It is further noted that such deemed dividend can be there only to the extent of accumulated profits. 9 In case before us, there is no doubt that M/s Radhe Sham Jain Diamond Jewellers (P) Ltd is a company in which public is not substantially interested and the assessee i.e. Shri Radhe Sham Jain is holding more than 10% shares. However, the question is whether the said company has given any advance or loan to the assessee or not? The company was incorporated by way of conversion of proprietorship business of Jain Diamond Jewellers on 9.2.2008. Perusal of the balance sheet of the proprietorship concern on 9.2.2008 (See paper book page 1). Clearly shows that there was a capital balance of Rs. 12,34,430/-. There was also a liability on account of cheque issued - OBC to the extent of Rs. 1.50 crores. Perusal of the copy of the capital account of the assessee in the proprietary concern at page 11 to 13 clearly shows that there was opening capital balance of Rs. 1,64,34,402/-. There are various transactions done in the capital account till 8.2.2008 and there was a credit balance of Rs. 1,59,39,810/- on that date. Against which payment of Rs. 1.50 crores was made by the proprietorship concern to the assessee i.e. Shri Radhe Sham Jain on 8.2.2008. This cheque was not encashed and shown as liability in the balance sheet. Because of the conversion of proprietary concern into a Private Limited company the cheque could not be encashed later on and the same was returned to the Private Limited Company which has been credited by the company to the assessee's account on 15.3.2008. Thus it is clear that this amount belonged to the assessee on account of capital in the proprietorship concern and because the cheque could not be encashed, therefore, the money belonged to the assessee which has credited by the company. The so called cheque on account of loan or advance which have been issued by the Company have been issued only after 15.3.2008. The AO has mainly stressed on the fact that this seems to be adjustment entry. W e are of the opinion that the AO has failed to appreciate that because of the conversion of the proprietorship concern, the cheque could only be encashed by the assessee. The cheque has been shown as liability in the balance sheet of proprietorship concern and was later on returned by the assessee to the Private Limited company. Since all the assets have been taken over by the Private Limited company, the said company owned assessee this amount of Rs. 1.50 crores which was credited to his account on 15.3.2008. Because of non encashment of the cheque the same is

13 ITA No.1187/del/2014 AY:2009-10 not reflected in the bank statement. This fact has been correctly appreciated by the ld. CIT(A). 10 The ld. CIT(A) has further correctly noted that there was definitely a debit balance amounting to Rs. 11,75,569/- on 29.3.2008 in the name of the assessee in the books of the Private Limited company. However, he has correctly restricted the addition to Rs. 34,858/- i.e. to the extent of accumulated profits. There is no force in the ground of the Revenue that accumulated profits are Rs.11,17,80,000/-. Schedule 'A' at page 17 of the paper book very clearly show that this amount is on account of share premium account and net profit is only Rs. 34,858/-. Delhi Bench of the Tribunal in case of DCIT V. MAIPO INDIA LTD. 116 TTJ (Del) 791 has clearly observed that share premium account could not be taken into consideration as part of the accumulated profits. Head note reads as under:- "Dividend - Deemed dividend u/s 2(22)(e) - Accumulated Profits - Assessee company received a sum of Rs. 25,42,772/- in the nature of loans and advances from company GCPL, in which assessee- company held 40 per cent shares - Assessee repaid a sum of Rs. 14,31,000/- towards the end of the year and the balance of Rs. 11,11,772/- was treated by AO as deemed dividend - CIT(A) on appeal, found that out of reserves and surplus account of GCPL, Rs. 1.90 crores represented share premium and Rs. 1,85,821/- was on account of balance in profit and loss account which was treated as deemed dividend - Justified - There being a statutory bar u/s 78 of the Companies Act, 1956 on the share premium account being used for distribution of dividend, the deeming provisions of section 2(22)(e) cannot apply - Section 78(1) of the Companies Act, 1956 says that any payment out of the share premium account, except for purposes authorized by sub-section (2) will be treated as reduction of share capital attracting the provisions of the Companies Act in relation thereto - The expression "whether capitalized or not" can have application only where the profits are capable of being capitalized and not where the receipt in question forms part of the share capital of the company under the provisions of the Companies Act - In view of the provisions of the Companies Act, share premium cannot be stated to be commercial profits -Amount of Rs. 1,85,821/- alone out of the amount of Rs.25,42,772/- can be assessed as deemed dividend u/s 2(22)(e)." The above view has been taken particularly following the decision of Hon'ble Supreme Court in case of P.K. Badiani V CIT, 105 ITR 642.

14 ITA No.1187/del/2014 AY:2009-10 In that decision it was clearly observed that accumulated profits would mean profit in the commercial sense and not assessable taxable profits. In that case development rebate reserve created by the company by charging profit and loss account was held to be accumulated profits though the same was liable to be deducted as rebate. Following this ratio it is clear that share premium account would not partake the nature of commercial profits and therefore, by no stretch of imagination, this can be called accumulated profits. Therefore, in case before us accumulated profits can be taken only at Rs. 34,858/- and the ld. CIT(A) has correctly confirmed the addition deemed dividend u/s 2(22)(e) of the Act to the extent of Rs. 34,858/- which has not been challenged by the assessee. In these circumstances we find nothing wrong in the order of the ld. CIT(A) and the same is confirmed.” 9.2 Thus, the Tribunal in above case has clearly held that the share premium account cannot partake the nature of commercial profit and, therefore, it cannot be called as accumulated profits. Respectfully following the above decision of the Tribunal, we uphold that the share premium amount appearing in the financial statement of the assessee cannot be included while computing the accumulated profit of the assessee company as on the date of loan or advance to the concerned firm. Since the learned Commissioner of Income Tax (Appeals) has already directed the Assessing Officer to restrict the deemed dividend to the extent of accumulated profit, we feel it appropriate to direct the Assessing Officer to compute the accumulated profit keeping in view our finding above. Needless to mention that the assessee shall be afforded sufficient opportunity of hearing. Accordingly, the ground no. 5 is allowed for statistical purposes. Additional ground: 7. We have heard the rival contention of the parties on the issue of additional ground raised, reproduced above. 7.1 On perusal of section 2(22)(e) of the Act, we find that where a loan/advance has been given by a closely held company to a firm, the

15 ITA No.1187/del/2014 AY:2009-10 deemed dividend has to be taxed in the hands of person who satisfies the following two conditions: “(i) he is beneficial owners of shares holding not less than 10% of the voting power; (ii) he is partner of the firm and having substantial interest i.e. beneficially entitled to not less than 20% of the income of the firm.

7.2 According to section 2(22)(e) of the Act, the deemed dividend is taxed in the hands of the shareholders who satisfy the above two conditions. In a situation, if there are more than one shareholder who satisfy the above conditions, then the issue of proportionate distribution of deemed dividend in their hands may arise. 7.4 In the case of Sh. Puneet Bhagat Vs. Income Tax Officer (supra) also the two persons satisfied the above two conditions and accordingly the deemed dividend was confirmed by the Tribunal in their hands in the ratio of their share of profit in firm. The relevant finding is extracted as under:

“8. I have considered the submissions of both the parties and perused the record of the case. The short point for consideration is whether the computation of Rs. 5 lacs each treated as deemed dividend in the hands of the two directors, is as per law or not. There is no dispute that cumulative reserves of M/s Aesthete Exim Pvt. Ltd. as on 31-3-2007 were Rs.14,51,212/- and, therefore, the amount of Rs. 10 lacs given as loan to M/s International Ltd. was taxable as deemed dividend in the hands of two directors as both the directors were common shareholders in the two companies holding more than 20% shares of these companies. The contention of ld. counsel is that had the loan was given to one shareholder, the same could be computed as per law but when the loan is given to a concern in which such shareholder is a partner or member, then for allocation of loan between the shareholders no mechanism is provided in the Act. In first blush the argument appears to be quite convincing but a little analysis of relevant provision makes it clear that this argument cannot be accepted.

16 ITA No.1187/del/2014 AY:2009-10 9. Section 2(22)(e) reads as under: "2(22)(e): dividend includes - ..... (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent 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 (herein in this clause referred to as the said concern)] 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 possesses accumulated profits." 10. The ingredients of the section are as under:- I. Payment to individual shareholder:- (A) The payment should be by a company (not being company in which public is substantially interested). (B) The payment can be in cash or representing a part of the assets of the company. (C) The payment should be in the nature of avance or loan to a shareholder who is holding at lest 10% shares beneficially. (D) The above payment to the extent of accumulated profits of the lender company would be treated as deemed dividend in the hands of shareholder qualifying the criteria of holding 10% beneficial holding of shares. II. Payment to concerns: In this case all the conditions of payments in case of individual shareholder noted above have to be fulfilled. Thus, even if payment is made to a concern still the payment to concern will be taxed as deemed dividend in the hands of such shareholder.

17 ITA No.1187/del/2014 AY:2009-10 III. Payment is by such company on behalf or for individual benefit of such shareholder. Here also all the conditions contemplated in (I) above have to be fulfilled.

7.5 But we find that in the present case, no information in respect of other shareholders who satisfy the above two conditions, is available before us, we feel it appropriate to restore the issue to the file of the Assessing Officer, who after verification of facts from record, adjudicate the issue following the decision of the Tribunal in case cited above. The ground is accordingly, allowed for statistical purposes. 8. In the result, the appeal is allowed in part for statistical purposes.

The decision is pronounced in the open court on 15th February, 2017.

Sd/- Sd/- (S.K. YADAV) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 15th February, 2017. RK/-(D.T.D) Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi