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2015 (6) TMI 397 - AT - Income TaxDeemed dividend u/s 2(22)(e) - holding or ownership of voting rights of the shares held by the family - FAA deleted addition - Held that - AO is of the view that that whether a person has a substantial interest in the company or not, the holding of the family members including the APS is to be seen and clubbed together and as such the share holding receipts of 20% in all the companies or concerns, the provisions of section 2(22)(e) of the I.T. Act gets attracted. In the impugned order the Ld. First Appellate Authority held that there is nothing in section 2(22)(e) of the Act or section 2(32) of the Act so as to suggest that the holding or ownership of voting rights of the shares held by the family can be taken into consideration for the purposes of determining substantial shareholding of a person/shareholder. The words used are such shareholder is a member or a partner and in which he has a substantial interest as appearing in section 2(22)(e) of the Act and a person who is the beneficial owner of the shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting power as appearing in section 2(32) of the Act. Thus it is the ownership of the shareholder alone in the company to which the loan/advance is made by the company, and not his or her relative or family members, which is the determinative factor. Accordingly, inclusion/clubbing of beneficial ownership of family members with that of Shri Anand Prakash Srivastava is not mandated by the provisions of the Act and thus tantamount to reading a condition which is not there. We find that Ld. CIT(A) has also held that the loan/advance given by the assessee company cannot be termed as having been made for and on behalf or for the individual benefit of APS, as envisaged by the provisions of section 2(22)(e) of the I.T. Act. The intention behind enacting the provisions of section 2(22)(e) is that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become tax-able in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholder or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions such payment by the company is treated as dividend. The intention behind the provisions of section 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance.d. First Appellate Authority has deleted the addition in dispute by respectfully following the judgment of the Hon ble Supreme Court in the case of Nalin Behari Lall Singha (1969 (7) TMI 2 - SUPREME Court) and Bhaumik Colour (P.) Ltd. (2008 (11) TMI 273 - ITAT BOMBAY-E ), which does need any interference on our part, hence, we uphold the impugned order by dismissing the Appeal filed by the Revenue. - Decided against revenue.
Issues Involved:
1. Deletion of addition made on account of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. 2. Alleged non-compliance with Rule 46A by the Commissioner of Income Tax (Appeals) [CIT(A)]. Issue-wise Detailed Analysis: 1. Deletion of Addition Made on Account of Deemed Dividend under Section 2(22)(e): The primary issue in this appeal was the addition of Rs. 1,56,81,039/- made by the Assessing Officer (AO) under Section 2(22)(e) of the Income Tax Act, 1961. The AO held that loans or advances given by the assessee company to certain entities were deemed dividends because more than 90% of the beneficial and registered shareholding in these entities was held by the family members of a significant shareholder, Shri Anand Prakash Srivastava. The CIT(A) analyzed the shareholding patterns and the provisions of Section 2(22)(e) and Section 2(32) of the Act. The CIT(A) noted that the term "substantial interest" as defined in Section 2(32) means owning at least 20% of the voting power. The CIT(A) found that Shri Anand Prakash Srivastava did not hold substantial interest in any of the entities to which the loans were given, as his shareholding was below 20% in each case. The CIT(A) also referred to the Special Bench decision in the case of Assistant Commissioner of Income Tax v. Bhaumik Colour P. Ltd, which emphasized a strict interpretation of Section 2(22)(e). The CIT(A) concluded that the loans or advances given by the assessee company could not be treated as deemed dividends because they were not made for the individual benefit of Shri Anand Prakash Srivastava, nor was there any evidence of funds flowing to him. The Tribunal upheld the CIT(A)'s decision, agreeing that the inclusion or clubbing of shareholding of family members is not mandated by the provisions of the Act. The Tribunal also noted that the AO did not demonstrate any nexus between the loans granted and any benefit accruing to Shri Anand Prakash Srivastava. 2. Alleged Non-compliance with Rule 46A: The Revenue contended that the CIT(A) deleted the disallowance without providing the AO an opportunity to rebut, as per the provision of Rule 46A. However, the Tribunal found that the CIT(A) did not admit any additional evidence on the addition in dispute. Therefore, the contention raised by the Revenue regarding non-compliance with Rule 46A was dismissed. Conclusion: The Tribunal concluded that the CIT(A) had correctly deleted the addition of Rs. 1,56,81,039/- made under Section 2(22)(e) by following the judgment of the Hon'ble Supreme Court in the case of Nalin Behari Lall Singha and the ITAT Special Bench decision in the case of Bhaumik Colour P. Ltd. The appeal filed by the Revenue was dismissed, and the CIT(A)'s order was upheld. Result: The appeal filed by the Revenue stands dismissed.
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