ACIT, CIRCLE-2(1), CUTTACK vs. M/S. MAHIMANANDA MISHRA, CUTTACK

आयकर अपीलीय अधधकरण, कटक न्यायपीठ,कटक IN THE INCOME TAX APPELLATE TRIBUNAL CUTTACK BENCH CUTTACK BEFORE SHRI N.S.SAINI, AM & SHRI PAVAN KUMAR GADALE, JM आयकर अपील सं./ITA No.52/CTK/2016 (धनधाारण वषा / Assessment Year :2011-2012) ACIT, Circle-2(1), Cuttack Vs. M/s Mahimananda Mishra Oriya Bazar, P.O.Buxi Bazar, Cuttack स्थायी लेखा सं./जीआइआर सं./ PAN/GIR No. : AAFFM 2518 J (अपीलाथी /Appellant) (प्रत्यथी / Respondent) .. राजस्व की ओर से /Revenue by : Shri Kunal Singh, CITDR निर्ााररती की ओर से /Assessee by : Shri Saswat Acharya, AR सुनवाई की तारीख / Date of Hearing : 04/10/2017 घोषणा की तारीख/Date of Pronouncement 10/10/2017 आदेश / O R D E R Per Shri Pavan Kumar Gadale, JM: The revenue has filed an appeal against the order of CIT(A), Cuttack, in Appeal No.147/2014-15, dated 16.11.2015, passed u/s.143(3)/250 of the Income Tax Act, 1961 for the assessment year 2011-2012, wherein the revenue has raised the following grounds :- 01. Whether on the facts and in circumstances of the case, the Ld. CIT(A) is justified in deleting the addition on account of deemed dividend in the hands of the assessee, since the requisite conditions prescribed in the section 2(22)(e) have been fulfilled in this case. 02. Whether in the facts and in circumstance of the case, the Id.CIT(A) is justified in deleting the addition on the basis of observation that no deemed dividend could be assessed in the hands of the assessee since the assessee firm itself was not a shareholder in the payer company, which is not in accordance with the provisions of section 2(22)(e) of the I.T.Act. 03. Any other matter, if any, shall be urged at the time of hearing. 2. Brief facts of the case are that the assessee is a partnership firm engaged in the business of labour contract in the brand name of M/s Mahimananda Mishra and filed the return of income for the assessment

2 ITA No.52/CTK/2016 year 2011-2012 on 10.08.2012 with total income of Rs.4,92,142/- and the return of income was processed u/s.143(1) of the Act and subsequently the case was selected for scrutiny and notice u/s.143(2) & 142(1) along with questionnaire was issued. In compliance to the same, ld. AR of the assessee appeared from time to time and produced the relevant documents as required by the AO. 3. The AO on perusal of the financial statements found that the assessee firm has availed loan from M/s Orissa Stevedores Ltd. Rs.3,75,78,685/- and the assessee firm is represented by four partners in which Shri Mahimananda Mishra who is having 55% share and is also Director of M/s Orissa Stevedores Ltd. with 36.95% shares in the company. The AO verified the audit report of the Orissa Stevedores Ltd. for the assessment year 2011-2012. Since the assessee firm’s partner Shri Mahimananda Mishra who represents the firm and holds substantial interest in the company, hence, the provisions of section 2(22)(e) of the Act are applicable. The unsecured loan is obtained by the assessee firm where the partner of the firm Shri Mahimananda Mishra has substantial interest of 55% and, hence, the ld. AO treated the transaction as deemed dividend u/s.2(22)(e) of the Act in the said financial year along with other additions and assessed the total income of Rs.5,82,45,330/- and passed the order u/s.143(3) of the Act, dated 27.03.2014. 4. Aggrieved by the order of AO, the assessee filed an appeal with the CIT(A). In the appellate proceedings the ld. AR of the assessee appeared and argued the grounds and reiterated the submissions made before the

3 ITA No.52/CTK/2016 lower authorities. Ld. CIT(A) on the disputed issue of deemed dividend has considered the facts that the assessee firm’s major partner Shri Mahimananda Mishra is also director and having substantial interest in the company where he holds 36.95% shares and also holds 55% in the partnership firm, further, ld. CIT(A) has observed that since the assessee firm M/s Mahimannanda Mishra is not a share holder in M/s Orissa Stevedores Limited, the amount disbursed to the assessee firm by the said company should not be treated as deemed dividend in the hands of the assessee firm, but the same should be treated as deemed dividend u/s.2(22)(e) of the Act in the hands of Shri Mahimananda Mishra who is a director in the company M/s Orissa Stevedores Limited having substantial interest and also holds major share as partner with substantial interest in the assessee firm and partly allowed the appeal of the assessee. 5. Aggrieved by the order of CIT(A), the revenue has filed an appeal before the Tribunal. 6. Before us, ld. DR argued that the CIT(A) erred in deleting the addition from the hands of assessee firm and directed the AO to treat the deemed dividend in the hands of individual director. The CIT(A) erred in observing that the deemed dividend cannot be assessee in the hands of the assessee firm as the assessee is not a shareholder in the company and relied on the judicial decisions, whereas ld. AR supported the order of CIT(A) and relied on the judicial decisions in respect of treating the deemed dividend.

4 ITA No.52/CTK/2016 7. We have heard the rival contentions and perused the material on record. The sole disputed issue argued by the ld. DR that the CIT(A) has erred in deleting the deemed dividend in the hands of the assessee firm and directing the AO to tax the partner of the firm Mr. Mahimananda Mishra who is holding substantial shares of 36.95% of the company M/s Orissa Stevedores Limited and also holds 55% of the shares in the partnership firm. The sole contention of the ld. DR that the deemed dividend has to be taxed in the hands of the partnership firm not in the hands of partner as beneficial partner whereas the ld. DR relied on the decision of Hon’ble Supreme Court in the case of Gopal And Sons (HUF), 391 ITR 1 (SC), wherein the Hon’ble Supreme Court in para 15 & 16 held as under :- 15. Explanation 3(a) defines "concern" to mean HUF or a firm or an association of persons or a body of individuals or a company. As per Explanation 3(b), a person shall be deemed to have a substantial interest in a HUF if he is, at any time during the previous year, beneficially entitled to not less than 20% of the income of such HUF. 16. In the instant case, the payment in question is made to the assessee which is a HUF. Shares are held by Shri. Gopal Kumar Sanei, who is Karta of this HUF. The said Karta is, undoubtedly, the member of HUF. He also has substantial interest in the assessee/HUF, being its Karta. It was not disputed that he was entitled to not less than 20% of the income of HUF. In view of the aforesaid position, provisions of Section 2(22)(e) of the Act get attracted and it is not even necessary to determine as to whether HUF can, in law, be beneficial shareholder or registered shareholder in a Company.

Similarly, the ld. AR submitted that provisions of deemed dividend u/s.2(22)(e) of the Act shall apply to the registered shareholder and not to the firm and also supported with arguments with judicial decisions and drew our attention to the decision of the Hon’ble Madras High Court in the

5 ITA No.52/CTK/2016 case of M/s Ennore Cargo Container Terminal Pvt. Ltd., T.C.(A) Nos.105 and 106 of 2017, dated 27.03.2017, wherein the Hon’ble High Court has also considered the decision of Hon’ble Supreme Court in the case of Gopal And Sons (HUF) (supra) in para 5 & 6 of the order which reads as under :- 5.Mr.Senthil Kumar, however, contends to the contrary and relies upon the judgment of the Supreme Court in Gopal and Sons (HUF) vs. Commissioner of Income-tax, Kolkata-XI, (2017) 77 5.1.In our view, the question of law considered by the Supreme Court in the case of Gopal and Sons (supra) was different from the issue which arises in the present matter. The question of law which the Supreme Court was called upon to consider was whether loans and advances received by a HUF could be deemed as a dividend within the meaning of Section 2(22)(e) of the Act. The assessee in that case was the HUF and the payment in question was made to the HUF. The shares were held by the Karta of the HUF. It is in this context that the Supreme Court came to the conclusion that HUF was the beneficial shareholder. 5.2.In the instant case, however, both the registered and beneficial shareholders are two individuals and not the assesseecompany. Therefore, in our view, the judgment of the Supreme Court does not rule on the issue which has come up for consideration in the instant matter. 6.Accordingly, in so far as Questions Nos.3 and 4 are concerned, we find that no interference is called for with the view taken by the Tribunal via the impugned order. In these circumstances, the Revenue's appeal, i.e. T.C. (A) No.105 of 2017, pertaining to AY 2007-08, with regard to the said questions, is dismissed.

We considering the apparent facts, material on record and judicial decisions, are of the substantive view that the provisions of Section 2(22)(e) of the Act are applicable in respect of transaction of unsecured loans and further ld. AR could not substantiate the reasons of obtaining unsecured loan by the assessee firm from the M/s Orissa Stevedores Limited. We find that the CIT(A) has dealt on the disputed issue and also

6 ITA No.52/CTK/2016 the provisions of law applicable and directed the AO to treat the dividend in the hands of partner Shri Mahimananda Mishra. On the query from the bench whether this deemed dividend was taxed in the hands of Shri Mahimananda Mishra, the ld. AR and DR could not substantiate with any convincing answer, which is proved that the transaction comes within the purview of deemed dividend and the question now before us to be taxable in the hands of firm or in the hands of partner. We find the CIT(A) upon dealing on the disputed issue gave finding at para 5 to 6 at page 2 & 3 of the order which reads as under :- 4. The appellant during appeal hearing submitted that the amount of unsecured loan received by the assessee firm from Orissa Stevedores Limited does not fall within the ambit of deemed dividend because the impugned amount shall be deemed to be dividend only when the concern receiving the same is a share holder of the paying company. In the instant case, the appellant firm is not a share holder in the aforesaid paying company M/s Orissa Stevedores Limited. 5. I find prudence with the submission of the appellant that since the appellant firm M/s Mahimannanda Mishra is not a share holder in the paying company M/s Orissa Stevedores Limited, the amount disbursed to the appellant from the said company should not be treated as deemed dividend in the hands of the assessee firm, but the same amount should be treated as deemed dividend u/s.2(22)(e) of the Act in the hands of the individual director, Shri Mahimananda Mishra who is a director in the paying company M/s Orissa Stevedores Limited with substantial interest and is a holder of major share as a partner with substantial interest in the assessee firm. Further, it is not clear as to whether it is taxed in the hands of assessee’s partner and the ld. AR could not substantiate the fact that the shares invested by the director are not out of funds of partnership firm and CIT(A) mistook the fact of taxing in the hands of director, therefore, in the interest of substantial justice, we remit the disputed issue to the file of CIT(A) to verify the fact and decide the issue after providing opportunity of hearing o

7 ITA No.52/CTK/2016 the assessee and grounds of appeal of revenue are allowed for statistical purposes. 8. In the result, appeal of the revenue is allowed for statistical purposes. Order pronounced in the open court on this 10/10/2017. . Sd/- Sd/- (N. S. SAINI) (PAVAN KUMAR GADALE) लेखा सदस्य / ACCOUNTANT MEMBER न्याधयक सदस्य / JUDICIAL MEMBER कटक Cuttack; ददनांक Dated 10/10/2017 प्र.कु.धि/PKM, Senior Private Secretary आदेश की प्रधतधलधप अग्रेधषत/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant- ACIT, Circle-2(1), Cuttack 2. प्रत्यथी / The Respondent- M/s Mahimananda Mishra Oriya Bazar, P.O.Buxi Bazar, Cuttack 3. आयकर आयुक्त(अपील) / The CIT(A), 4. आयकर आयुक्त / CIT निभागीय प्रनतनिनर्, आयकर अपीलीय अनर्करण, कटक / DR, ITAT, Cuttack 5. 6. गाडा फाईल / Guard file. सत्याधपत प्रधत //True Copy// आदेशानुसार/ BY ORDER,

(Senior Private Secretary) आयकर अपीलीय अधधकरण, कटक / ITAT, Cuttack