2023 (1) TMI 780 - HC - Income Tax

Deemed dividend addition u/s 2(22)(e) - Liability of firm or individual directors - Validity of order of ITAT to Remand the matter back to CIT(A) - HELD THAT - Mr. Mishra in his individual capacity who holds 36.95% of the paid-up share capital of the OSL. On the other hand, M/s. Mahimananda Mishra, the Firm, does not hold any shares in OSL. ITAT in the impugned order has, in the considered view of this Court, needlessly remanded the matter to the CIT (A) on the ground that it was not clear whether deemed dividend should be taxed in the hands of Assessee s partner or in the hands of the Assessee. Since the plain reading of Section 2(22)(e) of the Act makes it clear that the deemed dividend is to be taxed in the hands of individual shareholder and not an entity which does not hold shares in OSL, the question of remanding the matter to the CIT(A) did not arise. The question framed by this Court is answered in favour of the Assessee and against the Department by holding that the deemed dividend should be taxed in the hands of Mr. Mahimananda Mishra, the individual Director of OSL and not in the hands of the Appellant-Assessee, the Firm.

Summary

Issues:
Taxation of deemed dividend in the hands of individual shareholder vs. firm partner

Analysis:
The High Court heard an appeal against an order passed by the Income Tax Appellate Tribunal regarding the taxation of deemed dividend paid by a company to a firm. The main question was whether the deemed dividend should be taxed in the hands of the individual director who holds shares in the company or in the hands of the appellant firm. The Assessee, a firm engaged in labor contracts, had a partner who was also a director in another company and received an unsecured loan from that company. The Assessing Officer treated this loan as a deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. However, the Commissioner of Income Tax (Appeals) noted that the deemed dividend should be taxed in the hands of the individual shareholder, not the firm.

The Court analyzed Section 2(22)(e) of the Act, which specifies that any payment by a company to a shareholder should be treated as deemed dividend in the hands of the shareholder. In this case, the individual director held shares in the company, not the firm. Therefore, the Court agreed with the Commissioner's conclusion that the deemed dividend should be taxed in the hands of the individual director, not the firm. The Income Tax Appellate Tribunal's decision to remand the matter was deemed unnecessary as the law was clear on taxing deemed dividends in the hands of individual shareholders.

Ultimately, the Court ruled in favor of the Assessee, directing that the deemed dividend should be taxed in the hands of the individual director of the company and not in the hands of the appellant firm. The Court upheld the Commissioner's decision and set aside the Income Tax Appellate Tribunal's order. The appeal was disposed of accordingly.