2020 (9) TMI 977 - HC - Income Tax

Deemed dividend u/s 2(22) (e) - to be assessed in the hands of the share holder or in the hands of the firm - share holder of the company had substantial interest in the firm - HELD THAT - Section 2(22)(e) provision would stand attracted when a payment is made by a company, in which public are not substantial interested by way of advance or loan to a share holder, being a person who is the beneficial owner of the shares. On facts, it is clear that the payment has been made to the assessee, a partnership firm. The partnership firm is not a share holder in the company. If such is the factual position, the decision in the case of National Travel Services relied on by the revenue cannot be applied, nor the case of Gopal and Sons, as they are factually distinguishable. The records placed before the assessing officer clearly shows the nature of transaction between the firm and the company and it is neither a loan nor an advance, but a deferred liability. These facts have been noted by the assessing officer. Tribunal rightly reversed the order passed by the CIT(A) affirming the order of the assessing officer. - Decided against revenue.

Summary

Issues:
Challenge to the order of the Income Tax Appellate Tribunal regarding deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961 for assessment years 2012-2013 and 2014-2015.

Analysis:
The Revenue filed appeals challenging the Tribunal's order on the issue of deemed dividend under Section 2(22)(e) of the Income Tax Act. The dispute revolved around whether the deemed dividend should be assessed in the hands of the shareholder or the firm. The Revenue contended that the loan from the company to the firm's partner constituted deemed dividend as the partner had a substantial interest in both entities. The assessing officer treated the loan as deemed dividend, leading to appeals before the Tribunal.

The Revenue argued that the loan should be considered as deemed dividend due to the substantial interest of the partner in both the firm and the company. They cited relevant legal provisions and previous court decisions to support their stance. However, the respondent contended that the amount in question was a deferred liability, not a loan or advance, and hence did not fall under the definition of deemed dividend. They highlighted discrepancies in the assessing officer's interpretation and emphasized the commercial nature of the transaction.

The High Court analyzed Section 2(22)(e) of the Act, which defines dividend and its applicability to payments made by a company to a shareholder. The Court noted that the payment was made to the partnership firm, not a shareholder, making the case factually distinct from precedents cited by the Revenue. The Court agreed with the Tribunal's decision to reverse the assessing officer's order, as the transaction was deemed a deferred liability, not a loan or advance. Consequently, the Court dismissed the Revenue's appeals and ruled in favor of the respondent.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing the factual nature of the transaction and the absence of deemed dividend due to the specific circumstances of the case. The Court found no grounds to interfere with the Tribunal's order and dismissed the appeals, answering the substantial question of law against the Revenue.