2019 (8) TMI 701 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - AO noticed that assessee had received loan from Mahesh Ginning Pvt. Ltd., in which both the partners of the firm i.e., Goverdhandash H. Tayal and Gopal Hazarimal Tayal held 18.19% share each and assessee firm had only two partners holding 50% share each - HELD THAT - It is an undisputed fact that assessee had received loan from Mahesh Ginning Pvt. Ltd., in which both the partners of the assessee also held 18.19% shares each. CIT(A) while deciding the issue in favour of the assessee has given a finding that the chief ingredient of Sec.2(22)(e) of the Act is that one should be a shareholder on the date on which the advance was made. Though the advances were made out of the profits of the lending company but the assessee was not the registered shareholder and beneficial interest was not existing. She therefore, following the decision of CIT Vs. Universal Medicare Private Limited 2010 (3) TMI 323 - BOMBAY HIGH COURT and other decisions cited in the order, has held that the receipt of loan cannot be contemplated as deemed dividend u/s 2(22)(e) of the Act. Before us, Revenue has not pointed out any contrary binding decision in its support. We therefore find no reason to interfere with the order of Ld.CIT(A). Thus, the grounds of the Revenue are dismissed.

Summary

Issues:
1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.
2. Treatment of loan received by a partnership firm under Section 2(22)(e).
3. Application of legal principles in determining deemed dividend.

Issue 1: Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend:

The appeal and cross-objection were directed against the Commissioner of Income Tax (Appeals) order for the assessment year 2013-14. The Revenue raised concerns regarding the allowance of unexplained money under Section 2(22)(e) of the Income Tax Act. The Assessee's contention was that the loan received should not be treated as deemed dividend as the partnership firm was not a shareholder. The Commissioner of Income Tax (Appeals) considered various legal precedents and held that the loan did not qualify as deemed dividend as the firm was not a registered shareholder of the lending company. The decision was supported by the judgment of the Bombay High Court in the case of CIT Vs. Universal Medicare Private Limited. The Tribunal upheld the Commissioner's decision, dismissing the Revenue's grounds.

Issue 2: Treatment of loan received by a partnership firm under Section 2(22)(e):

The Assessing Officer made an addition to the income of the partnership firm under Section 2(22)(e) based on a loan received from Mahesh Ginning Pvt. Ltd. The firm argued that the loan was given for commercial expediency and was returned during the year, thus no tax evasion occurred. The Commissioner of Income Tax (Appeals) analyzed the facts and legal provisions, concluding that the loan did not constitute deemed dividend under Section 2(22)(e) due to the absence of registered shareholdership by the firm. The Tribunal upheld this decision, emphasizing the importance of being a shareholder at the time of the advance, as per legal precedents and statutory provisions.

Issue 3: Application of legal principles in determining deemed dividend:

The Tribunal considered the legal fiction created by Section 2(22)(e) of the Income Tax Act, emphasizing that a partnership firm, not being a legal person, holds shares in the name of its partners. The judgment highlighted that the provision of deemed dividend requires specific conditions to be met, including being a registered shareholder at the time of the advance. Citing relevant judicial decisions and the purpose of statutory fictions, the Tribunal upheld the Commissioner's decision to delete the addition made by the Assessing Officer. The Tribunal dismissed the Revenue's appeal and the Cross-Objection of the assessee based on the legal interpretations and factual findings regarding the loan received by the partnership firm.

This detailed analysis of the judgment highlights the key legal issues, interpretations of relevant provisions, and the application of legal principles in determining the tax treatment of the loan received by the partnership firm under Section 2(22)(e) of the Income Tax Act, 1961.