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TMI Blog2025 (2) TMI 1081X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 (for short 'the Act') were issued and served on the assessee along with questionnaire. In response, ld. AR of the assessee attended and submitted the relevant information as called for. 3. During the relevant assessment year, assessee was a partnership firm operating under the name and style of 'Windlass Steel Crafts', later which was converted into Limited Liability Partnership (LLP) w.e.f. 25.02.2014 as per the certificate of registration on conversion of LLP. Originally partnership firm had four partners, viz., Sudhir Kumar Windlass (35% share), Pradeep Kumar Windlass (45% share), Ranit Kumar Windlass (10%) and Rajeev Goil (10% share). On conversion of LLP, three new partners were introduced, namely, Rahul Windlass (1% share), Tarun Windlass (1% share) and Sugandh Windlass (1% share) and the profit sharing ratio of SudhirKumar Windlass was reduced to the extent of profits shared with new partners. The assessee is engaged in the business of manufacture and export of handicrafts products. 4. During the course of assessment proceedings, the AO observed that Windlass Engineers and Services Pvt. Ltd. (WESPL) given loan to the assessee and assessee has repaid the same and assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by relying on the decision of Hon'ble Supreme Court in the case of P. Sharda vs. CIT 229 ITR 44. 6. Further during assessment proceedings, he observed that the assessee has several cars in the make of Mercedes, Porsche, Audi, Renault, etc. and the personal usage of abovesaid cars by the partners cannot be ruled out. He observed that assessee has claimed vehicle running and maintenance expenses of Rs. 15,50,655/- under the head 'conveyance' and also claimed depreciation of Rs. 37,69,433/- and interest of car loans amounting to Rs. 10,24,233/-. After considering the submissions of the assessee, he sustained 20% of the above expenditure towards personal expenditure of the partners and disallowed Rs. 12,74,624/-. 7. Aggrieved assessee preferred an appeal before the ld. CIT (A)-11, New Delhi and made detailed submissions on the issue of deemed dividend. After considering the detailed submissions of the assessee, ld. CIT (A) deleted the additions made by the AO by observing as under :- "6.3 I have gone through the facts of the case and the submission made by the AR. It is contended that the appellant is neither a registered nor a beneficial shareholder in the company WESPL. It is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non-members. The second category specified under Section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of -deeming shareholder, then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspective. 26. In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the Revenue to argue that if this position is taken, then the income -is not taxed at the hands of the recipient. Such an argument based on the scheme of the Act as projected by the learned counsels for the Revenue on the basis of Sections 4, 5, 8, 14 and 56 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al steps by roping in the shareholder(s) and tax the deemed dividend at their hands. - 32. We, thus, answer the questions in favour of the assessee and against the Revenue, as a result, these appeals are dismissed. 33. In this appeal, we find that the addition is deleted on two counts: (i) The assessee who was recipient of the amount was not the shareholder in the payer company and therefore, provisions of Section 2(22)(e) of the Act were not applicable. (ii) Even the money which was paid was not in the nature of loan or advance simplicitor, but the amounts were advanced for business transaction. 34. Though the appeal of the Revenue is to fail on the first question, which is answered while deciding this appeal above, answer to second question is also necessary for the simple reason that if the assessee succeeds on this issue, then even the shareholder cannot be fastened with any tax liability as conditions stipulated under Section 2(22)(e) of the Act would not be treated as satisfied. 35. From the orders of the Authorities below, we find that an amount of '4,25,08,497/- was given by M/ s. Golden Strands Private Limited (hereinafter referred to as M/s Golden') to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. On the facts and circumstances of the case, Ld. C1T(At has erred in deleting addition on the issue of deemed dividend distinguishing the facts of the case from National Travel Services vs. CIT (347 ITR 205) ignoring that the partners - Sh. Sudhir Windlass, Sh. Pradeep Windlass & Sh. Rohit Windlass having 32%, 45% & 10% shareholding in LLP are also having 40%, 50% & 10% shareholding respectively in the company, WESPL from which loans have been received and the facts are squarely applicable in the present case. 2. On the facts and circumstances of the case. Ld. CIT (A) has erred in deleting the addition on the issue of deemed dividend. b) holding that the transaction \ ere done in normal course of business placing reliance upon certain documents pertaining to FY 20 10-11 without providing any opportunity to the AO for comments on the same and without establishing any link between the loan transactions during the relevant A.Y. and the documents relating to FY 2010-11. 3. On the facts and circumstances of the case. Ld. CIT (A) has erred in holding that the assessee cannot be considered as shareholder for the purpose of section 2(22)(e) ignoring the clearly prescribed statutory p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly brought on record that the provisions of section 2(22)(e) of the Act are attracted where advance or loan made to a shareholder are the said concern by a company in the ordinary course of business where the lending of money is the substantial part of the company which alone can be excluded from the purview of deemed dividend. He submitted that the nature of business with the company and assessee are not in the ordinary course of business and further he submitted that WESPL is not in the business of lending of money which is not substantial part of its business. Further he submitted that once any payment is made to the shareholder or any concern in which shareholder is holding substantial shareholding then mere payment of loan or advances will get provisions of section 2(22)(e) attracted. It is immaterial if the same is repaid within the same year. He brought to our notice the case of P. Sharda vs. CIT (supra) relied upon by the AO. Further he brought to our notice para 4.7.6 of the assessment order wherein assessee submitted vide letter dated 19.12.2016 in which plea was taken that LLP being a juristic person is capable of purchasing and holding shares in its name but it has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of section 2(22)(e) has no application in the present case. 12. Considered the rival submissions and material available on record. We observed from the record that assessee is a LLP converted from the partnership firm from dated 25.02.20214 and prior to the conversion, individual shareholders having substantial shareholding in the company i.e.WESPL and also they are partners in partnership firm (erstwhile partnership firm). The assessee has taken loan or regular business transactions prior to conversion of partnership firm into LLP. The AO at the time of assessment observed that the partners having substantial interest in the company and the company has given loan to the erstwhile partnership firm and since individual partners holding substantial interest in the company, he was of the view that the provisions of section 2(22)(e) are attracted in this case. Accordingly, he proceeded to make the addition. 13. As per the provisions of Section 2(22)(e) of the Act "any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the partnership firm, 35% and 45% respectively. On strict interpretation yes, the transactions with the company will certainly fall under the deeming provisions u/s 2(22)(e) of the Act. The definition given in clause (e) has two parts, first, giving the loan directly and indirectly by any such company on behalf, or second part is, whether it is paid for the individual benefit of the shareholder. It clearly shows that the payment by such company directly or indirectly may fall in the category but whether it is paid for the individual interest is the issue to be determined in the present case. 16. The section 2(22) gives the definition of "dividend" with the exclusion of certain transactions. Particularly, the clause (ii)are as under: "any advance or loan made to a shareholder(or the said concern) by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;" That means any transaction with the other entity in which the shareholders having controlling interest may enter into business transactions which may fall under the category of ordinary course of business transactions. The above exclusion has two pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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