2017 (5) TMI 525 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - taxability of the loan obtained by the assessee firm from the Private Limited Company, in the hands of the assessee firm - Held that - So long as the assessee firm is not a shareholder, any loan obtained by the assessee firm from the Private Limited Company, wherein the partners of the assessee firm are the shareholders, is not taxable in the hands of the assessee. We, therefore, find that the orders of the authorities below cannot be sustained and the appeal has to be allowed deleting the addition made by the AO treating the loan as a deemed dividend u/s 2(22)(e) of the Act. - Decided in favour of assessee.

Summary

Issues:
1. Whether the loan obtained by the assessee firm from a Private Limited Company, in which the partners of the assessee firm are shareholders, should be treated as deemed dividend under section 2(22)(e) of the Income Tax Act.

Analysis:
1. The appeal challenges an order by the Commissioner of Income Tax (Appeals) regarding the treatment of a loan as deemed dividend under section 2(22)(e) of the Income Tax Act. The assessee firm, deriving income from Management Consultancy Services, filed its return for AY 2006-07 declaring a total income. The Assessing Officer (AO) treated a loan from a Private Limited Company as deemed dividend, which was confirmed by the CIT (A). The appeal argues that section 2(22)(e) does not apply to amounts received from a company by a non-shareholder, and since the assessee firm is not a shareholder in the company, the loan should not be taxed in its hands. The common shareholders in both entities are Neeta Mohla and Deepak Mohla, but the assessee firm is not a shareholder in the company. The decision in Assistant Commissioner of Income Tax vs. Bhaumik Colour (P) Ltd. is cited, stating that deemed dividend can only be assessed in the hands of a shareholder of the lender company, not a non-shareholder. The intention behind section 2(22)(e) is to tax dividend in the hands of the shareholder, not the concern (non-shareholder). Therefore, the loan obtained by the assessee firm from the Private Limited Company, where its partners are shareholders, should not be taxable in the hands of the assessee firm.

2. The Tribunal holds that as long as the assessee firm is not a shareholder, any loan from a Private Limited Company, where the partners of the assessee firm are shareholders, should not be treated as deemed dividend under section 2(22)(e) of the Income Tax Act. The decision in the cited case is followed, concluding that the loan is not taxable in the hands of the assessee. The orders of the authorities below are deemed unsustainable, and the appeal is allowed, deleting the addition made by the AO treating the loan as deemed dividend. The appeal of the assessee is therefore allowed, and the judgment is pronounced in open court on a specified date.