2012 (10) TMI 604 - HC - Income Tax

Deemed dividend income under section 2(22)(e) - partners had collectively more than 10% voting power in sister concern - Held that - As decided in CIT v. Universal Medicare (P) Limited 2010 (3) TMI 323 - BOMBAY HIGH COURT the shareholders of different holdings cannot be clubbed to decide the issue of fulfilment of the conditions laid down in Section 2(22)(e). It was further observed that only the shareholder can be assessed on account of deemed dividend and not the company under the aforesaid provision. As in present case Shri Balbir Kumar, partner possessed 6.64% of the shareholding whereas Shri Harsh Kumar, partner had 6% only. The share of the assessee i.e. M/s Octave Apparels was 1.07% and in such circumstances, the provisions of Section 2(22)(e) could not be resorted to. The Tribunal was, thus, right in concluding in favour of the assessee.

Issues:
1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend income.
2. Whether the loan amount advanced by a company to the respondent-assessee falls under Section 2(22)(e) of the Act as deemed dividend.

Analysis:

1. The case involved an appeal by the revenue under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal, Chandigarh Bench. The issue was whether the Tribunal was correct in confirming the deletion of addition by the Commissioner of Income Tax (Appeals) regarding deemed dividend income under Section 2(22)(e) of the Act. The Tribunal had dismissed the revenue's appeal, leading to the current appeal. The respondent-assessee was a firm involved in manufacturing and trading of garments and clothes, and the dispute arose from the addition of deemed dividend income by the Assessing Officer, which was later deleted by the Commissioner of Income Tax (Appeals) and upheld by the Tribunal.

2. The main issue was whether the loan amount advanced by M/s Octave Apparels Private Limited to the respondent-assessee would fall under Section 2(22)(e) of the Act as deemed dividend. The Tribunal noted the shareholding percentages of the firm and its partners to determine that the firm held less than 10% shareholding of the voting power, making any amount advanced by the closely held company not deemed dividend under Section 2(22)(e) of the Act. The Tribunal's decision was based on the specific shareholding percentages of the parties involved.

3. The judgment referenced previous legal interpretations of Section 2(22)(e) of the Act by the Rajasthan High Court and the Bombay High Court. It highlighted the four conditions necessary for the provision to apply, including the shareholder being a beneficial owner of shares, the company being closely held, the payment being made as an advance or loan, and the existence of accumulated profits in the company. The Bombay High Court emphasized the inclusive definition of 'dividend' under the Act and clarified the conditions for a payment to be classified as a dividend under Section 2(22)(e).

4. Referring to a previous case, the Court reiterated that shareholders of different holdings cannot be clubbed to decide the applicability of Section 2(22)(e) of the Act. It was emphasized that only the shareholder can be assessed for deemed dividend income, not the company itself. In the current case, the shareholding percentages of the partners and the firm were crucial in determining that the provisions of Section 2(22)(e) did not apply due to the firm holding less than 10% shareholding of the voting power.

5. Ultimately, the Court found no merit in the revenue's appeal and dismissed it, concluding that no substantial question of law arose. The decision was based on the specific shareholding percentages of the parties involved, which did not meet the threshold required for the application of Section 2(22)(e) of the Income Tax Act, 1961.

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