Deemed Dividend Taxable in the hands of Individual Director, Not Firm: Orissa HC [Read Order]

A division bench of the Orissa High Court has held that the deemed dividend is taxable in the hands of the individual director only and not from the Firm under section 2(22)(e) of the Income Tax Act, 1961.

The Assessee, M/s. Mahimananda Mishra is a Firm engaged in the business of labour contract under the name and style M/s. Mahimananda Mishra. Admittedly, the said Firm has four partners one of whom is Mr. Mahimananda Mishra having contributed 20% of the shares of the Firm. There are three other partners as well. Mr. Mishra also happens to be the Director of M/s. Orissa Stevedores Ltd. (OSL) and in OSL, he holds 36.95% shares.

During the AY in question, OSL gave a unsecured loan of Rs.3,75,78,685/- to the Firm i.e. M/s. Mahimananda Mishra. Of this, Rs.1,74,04,185/- was received as cash. The Assessing Officer treated the above unsecured loan as a deemed dividend in the hands of the Firm and added it to the income of the Firm invoking Section 2(22)(e) of the Income Tax Act, 1961.

A bench comprising Chief Justice S Muralidhar and Justice M.S. Raman observed that “a plain reading of the above provision indicates that the taxing of the deemed dividend has to be in the hands of the shareholder of OSL. In the present case, admittedly it is Mr. Mishra in his individual capacity who holds 36.95% of the paid-up share capital of the OSL. On the other hand, M/s. Mahimananda Mishra, the Firm, does not hold any shares in OSL.”

Reversing the ITAT order, the High Court held that “the ITAT in the impugned order has, in the considered view of this Court, needlessly remanded the matter to the CIT (A) on the ground that it was not clear whether deemed dividend should be taxed in the hands of Assessee’s partner or in the hands of the Assessee. Since the plain reading of Section 2(22)(e) of the Act makes it clear that the deemed dividend is to be taxed in the hands of individual shareholder and not an entity which does not hold shares in OSL, the question of remanding the matter to the CIT(A) did not arise.”

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates