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TMI Blog2010 (11) TMI 378X X X X Extracts X X X X X X X X Extracts X X X X ..... received during the year. Since the company is a sister concern of the assessee firm and as the partners of the firm own substantial shares in the company the A.O. show caused the assessee why the same should not be treated as deemed dividend under section 2(22)(e). Assessee objected to the same stating that the assessee is not a registered shareholder in the said company, M/s. Fine Fragrance Pvt. Ltd. and relied on the decision of the Hon'ble Supreme Court in the case of CIT vs. C.P. Sarathy Mudaliar 83 ITR 170 and CIT vs. Rameshwarlal Sanwarmal 83 ITR 628 for the proposition that shareholder means a registered shareholder and not the beneficial owner. The A.O., however, did not accept the plea holding that the conditions specified in section 2(22)(e) have been satisfied as the said company is a private limited company and the Directors of the company are partners in the firm also and the three partners are holding 24.8%, 11.85% and 11.85% shares of the company and accordingly held that provisions of section 2(22)(e) are attracted as per Explanation 3 to the section. He, therefore, considered an amount of Rs.36,11,523/- as taxable during the year. The CIT(A) considered assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct on facts and law. 6. After considering the submissions of the learned D.R. and the learned counsel we are of the opinion that the decision of the CIT(A) is correct both on facts and on law. It is a fact that the assessee firm received advance of Rs.36,11,523/- from M/s. Fine Fragrance Pvt. Ltd.. It also a fact that the partners of the firm, Shri A.J. Shah has 24.18% share holding in the said company and 50% share in the profits of the firm. Mr. J.M. Shah and Smt. A.S. Mehta are also holding 11.85% each of sharing holding M/s. Fine Fragrance Pvt. Ltd. and also has 40% and 10% share of profits respectively in the firm. It is also a fact that the assessee firm does not have any shares in the company and it is not the case of the Revenue that these partners are holding shares in the company on behalf of the firm. The question of attracting provisions of section 2(22)(e), i.e. deemed dividend have been analysed by the ITAT Special Bench in M/s Bhaumik Colour (P) Ltd. (supra) wherein held that the deemed dividend can be assessed only in the hands of the person who is a shareholder of the lender company and not in the hands of the person other than the shareholder. The Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 2(22)(e) and treated the amount of Rs.35,00,000/- as deemed dividend in the hands of the assessee and directed the amount to be added back to the income. It was the contention of the assessee that one Mr. Teredesai, Vice President (Finanace) had misappropriated large sums of money and contested the action of the A.O. in treating the amount at deemed dividend. In appeal the Commissioner of Income Tax affirmed the order of the A.O., save and except with a modification that the actual amount which has been received by the assessee was held to be Rs.32,00,000/- and not Rs.35,00,000/-. The Tribunal, in appeal, has reversed the findings of the CIT(A) on two grounds; firstly, it was held that the provisions of section 2(22)(e) would be attracted if a loan was taken by the shareholder from a closely held company. In the present case the Tribunal noted that the amount of fraud committed on the part of the assessee and the transaction was not reflected in the books of account. Secondly, the Tribunal held that even otherwise the amount would have been taxed in the hands of the shareholder who obtained the benefit and not in the hands of the assessee, relying on the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holder or to any concern of which such shareholder is a member or partner, subject to the fulfilment of the requirements which are spelt out in the provision. Similarly, a payment made by a company on behalf, or for the individual benefit, of any such shareholder is treated by clause (e) to be included in the expression "dividend". Consequently, the effect of clause (e) of section 2(22) is to broaden the ambit of the expression "dividend" by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder. The definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. Consequently in the present case the payment, even assuming that it was a dividend, would have to be taxed not in the hands of the assessee but in the hands of the shareholder. The Tribunal was, in the circumstances, justified in coming to the conclusion that, in any event, the payment could not be taxed in the hands of the assessee. We may in concluding note that the basis on which the assessee is sought to be taxed in the present case in respect of the amount of Rs.32,00,000/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax under section 68 of the Act as a cash credit. He also further treated the amount as value of any benefit or perquisite arising from the business as the assessee has let out the property as part of business and also was taxable under section 28(iv) of the Act. The CIT(A), based on the findings given by the A.O., confirmed the addition invoking the provisions of section 41(1) while opining that provisions of section 68 are not applicable as the amount was not found credited during the year under consideration. The assessee is aggrieved on the above confirmation of the CIT(A). 11. The learned counsel submitted that it was the contention of the assessee that there were disputes between the assessee firm and the said company with reference to the compensation payable for premature vacation of the premises and accordingly the amount was treated as income in A.Y. 2007-08 and offered to tax, the fact of which could be verified from the Balance Sheet and computation of income whereas both the A.O. and the CIT(A) has given a wrong finding that the same was not written back in A.Y. 2007-08. It is also further submitted that the amount cannot be treated a income under section 41( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o exist during the year under consideration. This aspect has not been examined by the CIT(A). It was assessee's contention that there were disputes between the assessee firm and the said company with reference to compensation payable for premature vacation of the premises. It is also assessee's submission that the above said deposit of Rs.1,82,80,880/- was written back and offered as income in A.Y. 2007-08 for which the assessee relied on the Balance and P and L Account of that year. The A.O. has given a finding that no such income was offered which was the basis for CIT(A)'s also that the same was not written back. We are of the view that this aspect has not been examined correctly and the assessee has no objection for setting aside it to the file of the A.O. for examination of the facts. We accordingly set aside the orders of the A.O. and the CIT(A) on this issue and restore the matter back to the file of the A.O. to examine; (a) yearly rents offered (b) the dispute between the assessee and the said company, and (c) whether the liability ceased to exist during this year or in the later year, i.e. A.Y. 2007-08 when the assessee has suo moto written back to the P and L Account as s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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