2012 (9) TMI 321 - AT - Income Tax

Deemed Dividend - partnership concern constituted of two partners C & H - said C was also Director of M/s V having 23% share holding in the said company - addition made on premise that holdings of the partners of the erstwhile partnership concern were more than 10% and hence provisions of S2(22)(e) were applicable - Held that - Where the conditions laid down in S2(22) with regard to minimum shareholding by the shareholders in the assessee company were not fulfilled, the shareholding of various different persons could not be clubbed to decide the issue of fulfillment of condition laid down in section 2(22)(e). Undoubtedly the assessee had business relations with M/s V and over and above the sales amount, the said company had given cheques to the assessee. The said transactions though were in the nature of advances or loans, but no shareholding was held by the assessee partnership concern in the Indian company and in the absence of the same, the provisions of section 2(22)(e) were not attracted, which comes into operation only when there is shareholding of more than 10% of voting power and there is interchange of funds for non-business purposes - Decided in favor of assessee.

Issues:
1. Condonation of delay in filing Cross Objection.
2. Application of section 2(22)(e) of the Income Tax Act.
3. Interpretation of deemed dividend provisions.
4. Shareholding criteria for invoking section 2(22)(e) of the Act.

Condonation of Delay in Filing Cross Objection:
The appeal involved a delay of 65 days in filing a Cross Objection. The Tribunal, considering the circumstances and the reasons provided in the application for the delay, condoned the delay, allowing the Cross Objection to be considered.

Application of Section 2(22)(e) of the Income Tax Act:
The primary issue in the appeal was the application of section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer had made an addition of Rs. 27 lacs as deemed dividend in the hands of the assessee. The CIT (Appeals) upheld the addition to the extent of Rs. 5 lacs based on precedents like ACIT Vs. Bhaumik Color Pvt. Ltd. and CIT Vs. Hotel Hill Top.

Interpretation of Deemed Dividend Provisions:
The Tribunal analyzed the shareholding structure and transactions between the parties. It was established that the provisions of section 2(22)(e) were not attracted as the assessee firm was not a shareholder in the concerned company. The Tribunal emphasized that the provision comes into operation only when specific conditions related to shareholding and fund interchange for non-business purposes are met.

Shareholding Criteria for Invoking Section 2(22)(e) of the Act:
The Tribunal referred to a previous judgment by the Chandigarh Bench, highlighting that the cumulative shareholding of partners cannot be clubbed to determine the applicability of section 2(22)(e). It was noted that in the absence of substantial shareholding by the assessee firm in the company and without any individual benefit to the shareholder, the transaction did not fall under the deemed dividend category.

Conclusion:
Ultimately, the Tribunal directed the Assessing Officer to delete the addition of Rs. 27 lacs, ruling in favor of the assessee. The appeal by the Revenue was dismissed, while the Cross Objections filed by the assessee were allowed. The decision was based on the clear interpretation of the law and established precedents regarding the application of section 2(22)(e) of the Income Tax Act.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the Tribunal's decision in each aspect of the case.

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