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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 ..... t and also found to be having substantial controlling interest in the firm (assessee). AO preferred to capture the peak credit and proceeded to treat the same as deemed dividend. He has not further verified whether they are regular business transactions or diverted to the individual benefits of the shareholders, further, whether above said payments were in turn paid by the assessee to the individual shareholders or to the family members of such shareholders. The definition is very clear that such payments are made for the individual benefit of shareholders.
After careful consideration, we are of the view that CIT(A) has given benefit to the assessee based on shareholder i.e., the assessee not a shareholder and the deeming fiction is attracted only to the payments made to the shareholder, since the assessee is not a shareholder after incorporation as LLP. However, in our view, the assessee had regular transaction during the whole year even before it was converted into LLP. Therefore, we are inclined not to disturb the findings of Ld CIT(A). Hence, we are inclined to dismiss the grounds raised by the revenue X X X X Extracts X X X X X X X X Extracts X X X X ..... p Kumar Windlass holding 50% of the shares. He also observed that the company had reserves and surplus of Rs. 14,88,65,869/- at the end of FY 2012-13 and Rs. 26,49,10,944/- at the end of FY 2013-14. The AO after analyzing the provisions of section 2(22)(e) of the Act and Explanation 3 of the Act was of the view that WESPL is a closely held company, any loan or advance paid to a concern in which the shareholder holding at least 10% of the voting power then the partner is also a beneficiary entitled to 20% of the income of the partnership concern then the payer i.e. WESPL in case of having accumulated profit on the date of payment then the payment of loan/advances are not in the ordinary course of business then the provisions of section 2(22)(e) are directly applicable. He observed that WESPL has lent money to the partnership firm wherein the individual partners having substantial interest in this case Sudhir Kumar Windlass and Pradeep Kumar Windlass has substantial interest in the company and they are not in the lending business, therefore, he was of the view that the provisions of section 2(22)(e) are applicable in the present case and he rejected the plea of the assessee that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneficial shareholder either. In this manner, the AR has distinguished the facts of the case from the facts in the case of CIT vs. National Travel Services 347 ITR 205 relied upon by the AO. In that case, the firm had invested in the equity shares of the company and the shares were allotted in the name of partners. With respect to the contention that the transactions have been done in the normal course of business, the AR has furnished a copy of resolution dated 22.07.2010 issued by the company for undertaking sale and purchase of material and use of common facilities in manufacturing process with the appellant. The AR has also furnished a copy of agreement dated 26.07.2010 between the appellant and the company for undertaking trade transactions. The AR has relied upon various case laws in his submission. 6.3.1 Reference is made to the decision of Hon'ble Supreme Court in the case of CIT vs. Madhur Housing & Development Company dated 05.10.2017, in which the decision of Hon'ble Delhi High Court in the case of CIT vs. Ankitech (P) Ltd. 340 ITR 14 (Delhi) (2011) has been upheld on the very issue, which is under consideration in this case. In the said judgment, the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness transactions between the parties, such payment would not fall within the deeming dividend under Section 2(22)(e) of the Act. 28. Insofar as reliance upon Circular No. 495 dated 22.09.1997 issued by Central Board of Direct Taxes is concerned, we are inclined to agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P) Ltd. (supra) that such observations are not binding on the Courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that according to us is the correct legal position, such a circular would be of no avail. 29. No doubt, the legal fiction/ deemed provision created by the Legislature has to be taken to logical conclusion as held in Andaleeb Sehgal (supra). The Revenue wants the deeming provision to be extended which is illogical and attempt is to create a real legal fiction, which is not created by the Legislature. We say at the cost of repetition that the definition of shareholder is not enlarged by any fiction. 30. Before we part with, some comments are to be necessarily made by us. As pointed out above, it is not in dispute that the conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT (A) as well as the Tribunal have found that the assessee having a trading relationship with M/s Golden with whom during the year, job work of 1,98,66,179/- was done. The audited accounts were submitted. The submission of the assessee is that the transactions carried during the year had been carried on the normal course of business and as such, there was no advance of money to invoke provisions of deemed dividend. The AO, in fact, did not even go into this assessee and simply going by the interest of the two shareholders (two Bhatias) in M/ s Golden and in the assessee, he taxed the assessee. Finding of facts found by the CIT (A) and the Tribunal are that the transaction in question was a business transaction which had benefitted both the assessee's and M/ s Golden, and that the transaction did not represent giving any loan or advance simplicitor by M/ s Golden to the assessee. 36. We are of the opinion that under no circumstances, the provisions of Section 2(22)(e) of the Act could be invoked. This appeal is accordingly dismissed." 6.3.2 In the above case, it has been clearly laid down that the legal fiction relates to the term 'dividend' only and it cannot be ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in deleting the addition made by AO on account of deemed dividend ignoring the fact that the assessee fulfills all the following conditions necessary for considering the payments received from the company a deemed dividend. * The payer company (WESPL) is a closely held company * The loan or advance by the company has been paid to a concern (the assessee) in which the shareholder holding at least 10% of voting power, is a partner (Sh. Sudhir Windlass, Sh. Pradeep Windlass) 'and the partner is also beneficially entitle to 20% of the income of partnership concern. * The payer company (WESPL) has accumulated profits in the date of the payment. * The payment of loan/advance is not in the course of ordinary business activities. 5. On the facts and circumstances of the case, Ld. CIT (A) has erred in deleting the addition made by the AO on the issue of deemed dividend u/s 2(22)(e) by placing reliance upon the decision of Hon'ble Supreme Court in the case of CIT vs. Madhur Housing & Development Co., dated 05.10.2017, which is being reconsidered by Special 3 Judge Bench of the Apex Court including Chief Justice of India as held subsequently by the Hon'ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above submission by bringing on record that assessee was a partnership firm which was converted into LLP only w.e.f. 25.02.2014 which is a situation subsequent to the receipt of loan from WESPL and thus the assessee, when it was a partnership firm, taken the relevant loan from the company. Therefore, provisions of section 2(22)(e) are applicable in the present case. When the loan was taken the partners in their individual capacity has substantial interest in the company and he prayed that the provisions of section 2(22)(e) are applicable in this case. 10.1 With regard to ground no.2, ld. DR submitted that ld. CIT (A) has not given any opportunity to the AO on the issue of transactions were done in the normal course of business and placing reliance of certain documents pertaining to FY 2010-11 submitted by the assessee. In this regard, he brought to our notice page 15 of the assessment order. He submitted that the provisions of section 2(22)(e) are applicable to partnership firm which is synonym of partners. He brought to our notice Circular No.8/18/75-CL-V issued by the SEBI dated 13.03.1975 interpreting section 187(C) of the Companies Act. Accordingly, he submitted that partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;" 14. From the above definition we observe that any payment directly to the shareholder, to any concern in which such shareholder is a member or a partner and in which he has substantial interest or any payment by any such company on behalf of or for the individual benefit of any such shareholder. Therefore, from the above definition it is clear that the provisions of Section 2(22)(e) of the Act is attracted if any advances or loan given directly to the shareholder or to a concern in which the shareholder is having a substantial interest or any payment by such company in which assessee is having a substantial interest on behalf of or for the individual benefit of any such shareholder. From the above definition we infer that the payment made to the concern in which the assessee is having a substantial interest and in turn above such concerns make a payment to the assessee direct / indirect benefit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions. 17. In our considered view, we have noticed the transactions which are reproduced by the AO in his order at page 21. On careful consideration, we observed that the assessee maintained the ledger account of the company, the transactions starts with the opening balance of loan/advance of Rs. 50.61lakhs and during the year, the assessee has taken several amounts and also paid certain amount back. The transactions are in our view, are in the nature of business transactions like trade advances taken and returned during the year and also certain expenses are incurred on behalf of the company. It looks like a running account maintained by the assessee for the mutual benefits. The AO merely stopped with the ledger account and not established how the transactions are carried out for the individual benefits of the shareholders. In this case, two shareholders have substantial interest and also found to be having substantial controlling interest in the firm (assessee). The AO preferred to capture the peak credit and proceeded to treat the same as deemed dividend. He has not further verified whether they are regular business transactions or diverted to the individual benefits of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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