2017 (10) TMI 1623 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - deemed dividend has to be taxed in the hands of the partnership firm OR in the hands of partner as beneficial partner - CIT(A) deleted 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 - HELD THAT - 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 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. Also 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 the assessee and grounds of appeal of revenue are allowed for statistical purpose.

Summary

Issues:
1. Deletion of addition on account of deemed dividend in the hands of the assessee.
2. Application of provisions of section 2(22)(e) of the Income Tax Act.
3. Taxation of deemed dividend in the hands of the partnership firm or the partner.

Issue 1: Deletion of addition on account of deemed dividend in the hands of the assessee.
The revenue appealed against the CIT(A)'s order deleting the addition on account of deemed dividend in the hands of the assessee. The AO treated the unsecured loan obtained by the assessee firm, where a partner had substantial interest in the payer company, as deemed dividend under section 2(22)(e) of the Act. However, the CIT(A) held that since the assessee firm was not a shareholder in the payer company, the amount should be treated as deemed dividend in the hands of the individual director, not the firm. The Tribunal upheld this decision, remitting the issue back to the CIT(A) for further verification.

Issue 2: Application of provisions of section 2(22)(e) of the Income Tax Act.
The AO applied section 2(22)(e) to tax the unsecured loan received by the assessee firm from a company where a partner had substantial interest. The CIT(A) disagreed, stating that the provisions should apply to the individual director, not the firm, as the firm was not a shareholder in the payer company. The Tribunal, considering judicial decisions and the facts presented, agreed with the CIT(A) and directed the taxation of deemed dividend in the hands of the partner, not the firm.

Issue 3: Taxation of deemed dividend in the hands of the partnership firm or the partner.
The revenue contended that the deemed dividend should be taxed in the hands of the partnership firm, not the partner. However, the Tribunal, based on judicial decisions and the specific circumstances of the case, upheld the CIT(A)'s decision to tax the deemed dividend in the hands of the individual director with substantial interest in the payer company. The Tribunal remitted the issue back to the CIT(A) for further verification and decision, emphasizing the need for clarity on the source of the shares invested by the director.

In conclusion, the Tribunal upheld the CIT(A)'s decision to tax the deemed dividend in the hands of the individual director with substantial interest in the payer company, rather than the partnership firm. The issue was remitted back to the CIT(A) for further verification and clarification on the source of the shares invested by the director.