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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D.S. SUNDER SINGH
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the Revenue is directed against the order of the Commissioner of Income Tax (Appeals) -14, Chennai, dated 29.01.2016 and pertains to assessment year 2010-11.
The only issue arises for consideration is addition made under Section 2(22)(e) of the Income-tax Act, 1961 (in short 'the Act').
Shri A.V. Sreekanth, the Ld. Departmental Representative, submitted that the assessee is a partnership firm. The assessee- firm received `2.55 Crores from M/s VKC Forex Services Pvt. Ltd. The partnership firm of the assessee consisted of one Shri Venkatasubramani and Shri Nageswaran, both having 50% shares.
Shri Venkatasubramani and Shri Nageswaran are also Directors in M/s VKC Forex Services Pvt. Ltd. The Assessing Officer found that the payment of `2.55 Crores to the assessee by M/s VKC Forex Services Pvt. Ltd. was for the benefit of partners. The partners are also shareholders of the company. The amount received by the assessee was shown as unsecured loan in the accounts of the firm.
The partnership firm being the beneficial owner, the Assessing Officer found that the amount of `2.55 Crores to the assessee-firm is deemed dividend under Section 2(22)(e) of the Act, hence, according to the Ld. D.R., the same has to be added to the income of the assessee.
On the contrary, Sh. Philip George, the Ld.counsel for the assessee, submitted that the assessee-firm received `2.55 Crores from M/s VKC Forex Services Pvt. Ltd. as advance. The partnership firm is not a shareholder in M/s VKC Forex Services Pvt. Ltd. Referring to the order of the CIT(Appeals), the Ld.counsel submitted that deemed dividend can be assessed only in the hands of the shareholder of the company and not in the hands of third party. Referring to the judgment of Madras High Court in Printwave Services (P) Ltd. v. CIT (373 ITR 665), the Ld.counsel submitted that deemed dividend can be assessed only in the hands of the registered or owner of the shares and not in the hands of the third party. Therefore, according to the Ld. counsel, the CIT(Appeals) has rightly deleted the addition made by the Assessing Officer.
We have considered the rival submissions on either side and perused the relevant material available on record. We have carefully gone through the provisions of Section 2(22)(e) of the Act which reads as follows:-
“2(22) “dividend” includes- (a) ….. ….. …… …… …… …… …… …… (b) ….. ….. ….. ….. ….. ….. ….. ….. (c) ….. ….. ….. …… ….. ….. ….. ….. (d) ….. ….. ….. ….. ….. ….. …… …..
(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 (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 ; but “dividend” does not include— (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ; (ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965 ; (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off ;
(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956) ; (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). Explanation 1.— The expression “accumulated profits”, wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956 ; Explanation 2.— The expression “accumulated profits”, in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place ; Explanation 3.— For the purposes of this clause,— (a) “concern” means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent. of the income of such concern ;”
A bare reading of above provisions shows that if any payment was made by way of advance or loan to a shareholder or to any concern in which the shareholder has a substantial interest, or the payment for the individual benefit of such shareholder, the same shall be treated as deemed dividend to the extent of the accumulated profit of the company. The payment of advance by M/s VKC Forex Services Pvt. Ltd. to the assessee-firm is not in dispute. The only contention of the assessee is that if at all there was any deemed dividend, it has to be assessed only in the hands of registered shareholder and the beneficial shareholder and not in the hands of the assessee-firm.
We have carefully gone through the judgment of Delhi High Court in CIT v. National Travel Services in of 2010, The Delhi High Court has observed as follows at para 21 of its judgment:-
“21. No doubt, when Section 2(22)(e) of the Act enacts a deeming provision, it has to be strictly construed. At the same time, it is also trite that such a deeming provision has to be taken to its logical conclusion. If the partnership firm which has purchased the shares is not treated as shareholder merely because the shares were purchased in the name of the partners, that too because of the legal compulsion that shares could not be allotted to the said partnership firm which is a non legal entity, it would be impossible for such a condition to be ITA 223/2010, 219/2010, 1204/2010, 309/2011 fulfilled. That is not the purpose of law. The partnership firm is synonym of the partners. As per the Circular issued by the SEBI dated
13th March, 1975 interpreting Section 187(c) of the Companies Act, relied by the Ld.counsel for the assessee himself, a partnership firm is a not a person capable of being a member within the meaning of Section 47 of the Companies Act. It is further explained that since a partnership firm is not a legal entity by itself but only a compendious way of describing the partners constituting the firm, it is necessary that the names of all the members of the partnership firm should be entered in the Register of Members. Obviously then, with the purchase of shares by the firm in the name of its partners, it is the firm which is to be treated as shareholder for the purposes of Section 2(22)(e) of the Act.”
In view of the above observation of the Delhi High Court, in case a partnership firm purchases shares by investing its own funds, then merely because the shares would stand in the name of the partners, it can be safely rendered that the firm is to be treated as shareholder. However, the facts are not clear from the material available on record whether the assessee-firm purchased the shares by investing its own funds in the name of partners or the partners themselves purchased the shares of M/s VKC Forex Services Pvt. Ltd. by investing their own funds. Therefore, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer and bring on record whether the assessee-firm is the shareholder as held by Delhi High Court in National Travel Services (supra) or the individual partners of the firm are the shareholders.
We have carefully gone through the judgment of Madras High Court in Printwave Services (P) Ltd. (supra). The Madras High Court found that the deemed dividend under Section 2(22)(e) of the Act has to be assessed only in the hands of the registered or beneficial owner of the shares of the company. In view of above, it needs to be found out whether the individual partners of the assessee-company are the shareholders or the assessee-firm is the shareholder. Accordingly, the orders of the authorities below are set aside. The entire issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter and find out whether the partnership firm purchased the shares in the name of individuals or the individual partners have purchased the shares by investing their own funds. Thereafter the Assessing Officer shall decide the issue afresh in accordance with law, after giving a reasonable opportunity to the assessee.
In the result, the appeal filed by the Revenue is allowed for statistical purposes.
Order pronounced on 31st May, 2017 at Chennai.