The Madras High Court while upholding the order passed by the Tribunal held that the deemed dividend under Section 2(22) (e) is to be assessed in the hands of the shareholder and not in the hands of the firm.
The assessee, M/s T.Abdul Wahid & Co. filed the return of income admitting the total income of Rs.1,19,26,530. An order was passed under Section 143(3) of the Act assessing the said income. The assessment was reopened by issuance of notice under Section 148 of the Act.
The reason being that a sum of Rs.2 Crores was shown as unsecured loan obtained from M/s Abdul Wahid Tanneries Pvt., Ltd. by the assessee firm. One of the partners of the assessee firm, namely, Mr.T.Rafeeq Ahmed, who holds 35% stake in the assessee partnership firm, is also a shareholder in the company holding 26.25% shares.
Therefore, it was stated that the shareholder of the company had substantial interest in the firm and consequently, the concept of deemed dividend under Section 2(22)(e) of the Act would apply.
The assessing officer confirmed the proposal in the notice under Section 148 of the Act and completed the assessment vide order under Section 143(3) read with Section 147 of the Act for the assessment year 2012-2013 and under Section 143(3) of the Act for the assessment year 2014-2015 by an order.
Aggrieved by the orders, the assessee preferred appeals before the CIT(A), who dismissed the appeals by order. Challenging the same, the assessee filed appeals before the Tribunal, which was allowed by the Tribunal.
The Tribunal held that the deemed dividend under Section 2(22) (e) is to be assessed in the hands of the shareholder and not in the hands of the firm.
The revenue submitted such loan or advance has to be treated as dividend to the extent of accumulated profits. Further, loan or advance may be given directly to a shareholder or it may be given for the benefit of shareholder or on behalf of shareholder.
Thus it was contended that the assessing officer rightly treated the loan as deemed dividend under Section 2(22)(e) of the Act. It is further submitted that before the CIT(A), a new ground was canvassed by the assessee stating that the assessee was purchasing finished leather from the company for manufacture of shoe and shoe uppers and during the financial year, the assessee firm had to pay a sum of Rs.6,31,49,598 to the company towards the supply of leather.
The respondent assessee submitted that the fundamental error committed by the assessing officer and the CIT(A) is on facts because the amount of Rs.2 Crores paid to the assessee firm is neither a loan nor an advance, but a deferred liability. The assessee firm is not a beneficial shareholder or a registered shareholder. The shareholder is a partner of the assessee firm and the shares held by him in the Private Limited Company is, in his individual capacity and therefore, the firm is not a beneficial owner.
The division bench of Justice T.S. Sivagnanam and Justice V. Bhavani Subbaroyan held that the partnership firm is not a shareholder in the company. The records placed before the assessing officer clearly shows the nature of transaction between the firm and the company and it is neither a loan nor an advance, but a deferred liability.
“We find no grounds to interfere with the order passed by the Tribunal and accordingly, dismisses the present appeals and answer the substantial question of law against the Revenue,” the court said.Subscribe Taxscan AdFree to view the Judgment