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TMI Blog2009 (4) TMI 937X X X X Extracts X X X X X X X X Extracts X X X X ..... nd as the amount received from sister concern is purely a business transaction and the same need not be treated as Loans and Advances within the meaning of Sec. 2(22)(e) of the Income Tax Act, 1961. 3. The order appealed against is bad in law and against the principles tax jurisprudence. 4. The order appealed against is based on surmises and conjectures. 5. The Appellant-firm craves leave to add to and/or to amend and/or to delete any of the foregoing grounds of appeal. As clear from the above grounds, the issue relates to penalty levied u/s. 271(1)(c) of the income Tax Act 1961 (in short the Act). 2. Short facts apropos are that assessee, a firm manufacturing and exporting of knitted hosiery garments had filed return for the impugned AY after claiming deduction u/s. 80HHC of the Act. During the course of assessment, AO noted that a sister concern of assessee M/s. Aagam Design Broderies Pvt. Ltd. was having a credit balance of ₹ 8,93,79,671/- in the books of the assessee. Since the partners of the assessee firm were having substantial interest in the said Company, AO treated ₹ 59,25,916/- out of the total credit balance as it's income u/s. 2(22)(e) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Copy of the order dt. 26.03.07 of the AO was placed at Paper Book Page No. 10. Therefore, according to him, penalty in so far as it is related to disallowance of deduction u/s. 80HHC of the Act would not survive any more. As for the penalty relatable to addition on account of deemed dividend u/s. 2(22)(e) of the Act, Ld. Counsel brought to the attention of the Bench the order of the Tribunal in assessee appeal for the impugned Assessment Year in quantum proceedings placed at Paper Book pages 1 to 90. According to the Learned Counsel, such addition was confirmed by the Tribunal relying on the decision of Nikko Technologies (India) Pvt. Ltd. in ITA No. 4077/M/2002. Learned Counsel submitted that this decision in Nikko Technologies's case (supra) was subsequently considered by the Special Bench of this Tribunal in ACIT vs. Bhaumic Colour Pvt. Ltd. (ITA No. 5030/M/04) and in it's order dt. 19th November 2008 had held that the law laid down in Nikko Technologies Ltd. was not correct. According to the ld Counsel, the Special Bench had held that the deemed dividend can be assessed only in the hands of a shareholder who is both the registered as well as beneficial shareholder. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, there is no doubt that this addition was confirmed by the Tribunal in assessee's own appeal for the impugned AY in ITA No. 7833/M/2004. With regard to this issue of deemed dividend, the findings in the order of the Tribunal dt. 30th December 2005 ran under: 6. So, the only issue which requires our consideration is whether such deemed income can be assessed in the hands of assessee. The contention of the assessee's counsel is that, assessee cannot be taxed in respect of such income as it is not the shareholder of lending company, which is the condition precedent for making assessment in the hands of assessee. We are unable to accept this contention as this very contention has been considered and rejected in the case of of Nikko Technologies (I) Pvt. Ltd. in ITA No. 4077/Mum/2002 to which one of us is party. The said Bench, after considering the relevant provisions and the decisions cited by the assessee's counsel, came to the conclusion that the deemed dividend is to be assessed in the hands of the recipient. In Para-7 of its order of the even date, the said Bench referred to the following situations where the payments made by the company in which public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strictly as per the settled legal position. It is also the settled legal position that provisions should be interpreted in the manner that no part of the provision should become redundant or otiose. Section 2(22)(e) only specifies the circumstances under which a payment by way of loan / advance is to be treated as deemed dividend. Once it is determined that any payment falls within the ambit of Section 2(22)(e), then, it has to be treated as dividend even though such payment in the ordinary circumstances may not be considered as dividend. At this point of time, role of Section 2(22)(e) ends. It nowhere provides as to who is to be taxed in respect of such income. It is to be borne in mind that the tax can only be assessed in the hands of right person as held by the Apex Court in the case of ITO vs. Ch. Atchaiah, 218 ITR 239, at Pages 243-244. 13. In order to find out the right person, one has to examine the charging provisions of the Act. Section 4 and 5 of the Act are the charging provisions. Section 4 provides that income tax shall be charged in respect of the total income of the previous year of every person. Section 5 provides the determination of total income of every perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cern is also beneficially entitled to 20 per cent of the income of such concern. With a view to avoid the hardship in cases where advances or loans have already been given, the new provisions have been made applicable only in cases where loans or advances are given after 31st May, 1987. 15. The intent of the legislature is, therefore, clear beyond doubt that in situation (b) , the dividend would be taxable in the hands of concern and not in the hands of shareholder. 16. The contention of the assessee that deemed income is assessable in the hands of M/s. Janus Consultants (P) Ltd. which is the shareholder of M/s. Concast (I) Ltd. cannot be accepted for the reasons that Section 5(1)(a) does not permit the same to include in the total income of such shareholder as such shareholder had not received such deemed income. Further, it cannot be said that such income was indirectly received or spent for the benefit of such shareholder so as to include within the expression deemed to be received in India . Such shareholder also had no enforceable right against such income and, therefore, such deemed income could not also be included on accrual basis. Hence, the said shareholder co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions also therefore contemplate deemed dividend being taxed in the hands of a shareholder only. For the reasons stated above, we are of the view that the law laid down in the case of Nikko Technologies Ltd. (supra) is not correct. We therefore hold that deemed dividend u/s. 2(22)(e) of the I T Act, 1961 can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person. Thus, there is no doubt that there could have been two opinions regarding taxability of deemed dividend vis-a-vis a firm i.e. whether to be done in the hands of the firm or to be done in the hands of the partners of the firm. In this case, there is no doubt that the shares in M/s. Aagam Design Broderies Pvt. Ltd. were held by the partners and not by the firm. In fact, the assessment order itself, at para 15 states that it was partner of the firm Smt Saumilya Shah who was having a shareholding in M/s. Aagam Design Broderies Pvt. Ltd. Even if we hold assessee firm to be a beneficial holder it is not admittedly the registered owner of the shares. Hence assessee had reasonable justification for not showing any deemed dividend in it's hands. We cannot say that t ..... 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