2011 (10) TMI 177 - AT - Income Tax

Deemed Dividend 2(22)(e) - Assessee has 69% shareholding in a Co. advanced loan to a concern in which he has 25% shares - Held That - Before us it is a case of a partnership firm which is not a shareholder rather Shri Purshottam Makhija who is a partner of assessee firm is shareholder of the company from whom loan was received. - To attract the provisions of Section 2(22)(e) the payment must be to a person who is registered holder of shares. - In the I.T. Act 1961 the word shareholder in Section 2(22)(e) is followed by the words being a person who is a beneficial owner of shares . This expression only qualifies the word shareholder and does not in any way alter the position that the shareholder has to be a registered holder not substitutes the requirement of merely holding a beneficial interest in shares without being a registered holder of shares. If a person is a registered shareholder but not the beneficial shareholder then the provisions of Section 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the first limb of provision of Section 2(22)(e) will not apply. In the present appeal the assessee company is not a registered holder of shares therefore the provisions of Section 2(22)(e) would not be applicable at all to the case of the assessee firm. In view of CIT v. Hotel Hilltop (2008 -TMI - 33813 - RAJASTHAN HIGH COURT), CIT v. Moon Mills Ltd. (1965 -TMI - 49282 - SUPREME Court) the case is decided in favour of assessee.

Summary

Issues involved:
1. Confirmation of order of assessment under section 143(3) of the Income Tax Act, 1961.
2. Addition of Rs. 11,89,050 under section 2(22)(e) of the Income Tax Act, 1961.
3. Disallowance of petrol expenses amounting to Rs. 88,134.

Analysis:

1. The first issue revolved around the confirmation of the order of assessment under section 143(3) of the Income Tax Act, 1961. The appellant challenged the decision made by the ld. CIT(A), alleging errors both on facts and in law. However, during the hearing, the ground was considered general and not argued by the appellant's counsel, leading to its dismissal.

2. The second issue pertained to the addition of Rs. 11,89,050 under section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer treated the loan amount as deemed dividend, which was contested by the appellant. The Tribunal analyzed the facts, including the shareholding structure and the provisions of section 2(22)(e). It was established that for the provisions to apply, the recipient must be both a registered and beneficial shareholder. As the appellant was a partner, not a shareholder, of the lending company, the provisions of section 2(22)(e) were deemed inapplicable. Various judicial precedents were cited to support this interpretation, leading to the allowance of this ground in favor of the appellant.

3. The final issue involved the disallowance of petrol expenses amounting to Rs. 88,134 claimed by the appellant. The Assessing Officer had disallowed a portion of the claimed expenses, citing lack of verification. The Tribunal considered the percentage of expenses in relation to the total receipts and previous years' expenditures. Ultimately, a partial allowance of 10% disallowance was directed to address the non-verification issue, as agreed upon by the appellant's counsel.

In conclusion, the Tribunal partly allowed the appeal of the assessee, ruling in their favor on the second issue regarding the addition under section 2(22)(e) of the Income Tax Act, 1961, while partially allowing the third issue related to the disallowance of petrol expenses.