In the case, CIT Jaipur Vs. M/s. Sunny Developers Pvt. Ltd, the division bench of the Rajasthan High Court categorically held that TDS under section 194 of the Income Tax Act is not applicable to payments in the nature of deemed dividend to a concern in which shareholder of assessee company is a member as a partner and the assessee have a substantial interest on such concern.
Coming to the facts of the case, the AO rejected the claim of the assessee on ground that they have not deducted TDS on payments of deemed dividends to a concern in which shareholder (holding not less than 10% of the voting power) of assessee company is a member as a partner and in which he has a substantial interest.The ITAT concluded the second appeal in favour of the assessee.
Before the High Court, the Department relied upon the Bombay High Court decision in Bombay High Court in Star Chemicals Pvt. Ltd. vs. Commissioner of Income Taxand contended that TDS provisions are applicable in such a case.
Rejecting the contention, the bench comprising of Justice Jhaveri and Justice Mahendra Maheswari held that “the tax is not liable to be deducted at source u/s Section 194 of the Income Tax Act on deemed dividend to a concern in which shareholder of assessee company is a member as a partner and in which he has substantial interest as per provisions of Section 2(22)(e) of the Act. It can’t be covered u/s 194.”
Read the full text of the Judgment below.