2012 (8) TMI 1052 - AT - Income Tax

Issues Involved:

1. Deletion of addition of Rs. 3,85,39,213/- u/s 2(22)(e) of the IT Act.
2. Deletion of addition of Rs. 2,00,000/- u/s 2(22)(e) of the IT Act.
3. Deletion of addition of deemed dividend for payments by way of advance or loan by M/s New Era Exports (P) Ltd. and M/s Gee Key Real Estate (P) Ltd.
4. Reliance on judicial decisions and interpretation of section 2(22)(e) of the IT Act.
5. Erroneous order of CIT(A) and restoration of AO's order.

Summary:

1. Deletion of Addition of Rs. 3,85,39,213/- u/s 2(22)(e) of the IT Act:
The brief facts of the case are that the assessee, a partnership firm, had transactions with its sister concern M/s. New Era Exports Pvt. Ltd. The AO invoked provisions of section 2(22)(e) of the IT Act on the ground that one of the partners, Shri Ajay Kumar Agarwal, held substantial shares in both the assessee firm and M/s. New Era Exports Pvt. Ltd., resulting in an addition of Rs. 3,85,39,213/-. The CIT(A) deleted the addition, relying on the ITAT Agra Bench decision in M/s Nirmala Realtors Pvt. Ltd., which held that deemed dividend u/s 2(22)(e) can only be taxed in the hands of the registered shareholder, not the concern.

2. Deletion of Addition of Rs. 2,00,000/- u/s 2(22)(e) of the IT Act:
Similarly, an addition of Rs. 2,00,000/- was made by the AO for the loan received from M/s. Gee Kay Real Estate Pvt. Ltd., where another partner, G.K. Agarwal, held substantial shares. The CIT(A) deleted this addition as well, following the same rationale that deemed dividend should be taxed in the hands of the shareholder, not the concern.

3. Deletion of Addition of Deemed Dividend for Payments by Way of Advance or Loan:
The AO argued that the payments made by M/s New Era Exports (P) Ltd. and M/s Gee Key Real Estate (P) Ltd. to the assessee firm were for the individual benefit of the partners, who were substantial shareholders in these companies. The CIT(A) rejected this view, stating that the deemed dividend should be taxed in the hands of the shareholder, not the concern.

4. Reliance on Judicial Decisions and Interpretation of Section 2(22)(e) of the IT Act:
The CIT(A) relied on various judicial decisions, including the ITAT Agra Bench's decision in M/s Nirmala Realtors Pvt. Ltd., the Rajasthan High Court's decision in CIT vs. Hotel Hilltop, and the ITAT Special Bench Mumbai's decision in ACIT vs. Bhaumik Colour P. Ltd., which all held that deemed dividend should be taxed in the hands of the shareholder. The CIT(A) also noted that the term "concern" was added to section 2(22)(e) with effect from 01.04.1998, but this did not alter the position that deemed dividend should be taxed in the hands of the shareholder.

5. Erroneous Order of CIT(A) and Restoration of AO's Order:
The Revenue argued that the CIT(A)'s order was erroneous and should be quashed, with the AO's order being restored. However, the CIT(A) followed the judicial precedents favoring the assessee, leading to the dismissal of the Revenue's appeal.

Conclusion:
The ITAT Agra upheld the CIT(A)'s order, confirming that the deemed dividend u/s 2(22)(e) should be taxed in the hands of the shareholder, not the concern. The appeal of the Revenue was dismissed.

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