2009 (3) TMI 633 - AT - Income Tax

Loans to Firm Not Deemed Dividends; Shares Held Individually, Not by Firm Under Section 2(22)(e) Income-tax Act.

The Tribunal upheld the CIT(A)'s decision, concluding that the assessee-firm was not a registered shareholder of M/s. Jetair Pvt. Ltd., as the shares were ... Deemed dividend - engaged in the business as general sales agent for passenger sales and cargo - AO observed that since shares of M/s. Jetair Pvt. Ltd. stood registered in the name of the assessee-firm through its partners, it was the assessee’s firm, who was the only registered owner of the shares - According to him, the partnership firm was not a legal person, and, therefore, whenever it enters into any transaction relating to any property such a transaction invariably has to be entered through the partners only - AO invoked the provisions contained in section 2(22)(e) and treated the loan given by M/s. Jetair Pvt. Ltd. to the assessee-firm as deemed dividend, and added the same to the assessee’s total income as deemed dividend assessable under the head 'Income from other sources' - CIT(A) held that the assessee-firm was not a shareholder as per law and, therefore, the loan received by it from the company M/s. Jetair Pvt. Ltd. cannot be treated as deemed dividend within the meaning of section 2(22)(e). HELD THAT:- In the present case, Shri Naresh Goyal, Shri Surender Goyal and Jet Enterprises Pvt. Ltd. are the registered shareholders of M/s. Jetair Pvt. Ltd. They are the partners in the present assessee partnership firm having share in profit of 35 per cent, 15 per cent and 50 per cent respectively. M/s. Jetair Enterprise Pvt. Ltd. is holding shares in Jetair Pvt. Ltd. only to the extent of 8.77 per cent, which is less than the 10 per cent of voting power. Similarly, Shri Surender Goyal is a shareholder in M/s. Jetair Pvt. Ltd. to the extent of 7.02 per cent, which is also less than 10 per cent of the voting power. However, Shri Naresh Goyal is a registered shareholder in M/s. Jetair Enterprise Pvt. Ltd. with 51 per cent of shareholding satisfying the first limb of section 2(22)(e). Insofar as the new category of payment which has been considered as dividend by the Finance Act, 1987 with effect from 1-4-1988, Shri Naresh Goyal is holding more than 20 per cent of shares in the present partnership firm to which the loan has been granted by M/s. Jetair Pvt. Ltd. However, we are not concerned with the question as to whether deemed dividend within the meaning of section 2(22)(e) can be assessed in the hands of Shri Naresh Goyal or other partner of the assessee firm in respect of the loan granted by M/s. Jetair Pvt. Ltd. to the present assessee partnership firm, but we are called upon to decide as to whether the deemed dividend within the meaning of section 2(22)(e) can be assessed in the hands of the present assessee firm in respect of the loan given to the assessee firm by M/s. Jetair Pvt. Ltd. Since the present assessee firm is not a registered shareholder of M/s. Jetair Pvt. Ltd., the condition necessary to invoke section 2(22)(e) is not satisfied. The Special Bench in Bhaumik Colour (P.) Ltd.[2008 (11) TMI 273 - ITAT BOMBAY-E] has taken a view that the deemed dividend can be assessed only in the hands of a person, who is a shareholder of the lender company and not in the hands of a person other than a registered shareholder. Respectfully following the decision of Special Bench in the case of Bhaumik Colour (P.) Ltd.[2008 (11) TMI 273 - ITAT BOMBAY-E], we are inclined to uphold the order of ld. CIT(A) in deleting the addition made by AO on account of the deemed dividend u/s 2(22)(e). Similarly in the AY 2004-05, the order of ld. CIT(A) in deleting the addition made by AO on account of loan treating the same as deemed dividend u/s 2(22)(e) on identical facts is upheld. It is pertinent to know that the ld. CIT(A) has decided this issue in the AY 2004-05 by following his decision for the year 2003-04. We order accordingly. Issues Involved:1. Addition of loan as deemed dividend under section 2(22)(e) of the Income-tax Act for the assessment years 2003-04 and 2004-05.Issue-wise Detailed Analysis:Issue 1: Addition of Rs. 21,95,21,000 as deemed dividend for AY 2003-04The Assessing Officer (AO) observed that the assessee, a partnership firm consisting of three partners, had taken a loan of Rs. 28,52,41,516 from M/s. Jetair Pvt. Ltd. during the year under consideration. The AO required details of the shareholding of the assessee-firm or its partners in M/s. Jetair Pvt. Ltd. The details revealed that the partners, Shri Naresh Goyal and Shri Surender Goyal, held shares in M/s. Jetair Pvt. Ltd., with Naresh Goyal holding 51% and Surender Goyal holding 7.02%. The AO noted that M/s. Jetair Pvt. Ltd. had accumulated profits of Rs. 21,95,21,000 as on 31-3-2003.The AO concluded that since the assessee-firm was the beneficial owner of more than 10% of the voting power in M/s. Jetair Pvt. Ltd., the loan taken by the assessee-firm should be treated as deemed dividend under section 2(22)(e) of the Act. Consequently, the AO added Rs. 21,95,21,000 to the assessee's total income as deemed dividend.Issue 2: Addition of Rs. 95,78,000 as deemed dividend for AY 2004-05Similarly, for the assessment year 2004-05, the AO made an addition of Rs. 95,78,000 on account of a loan treated as deemed dividend under section 2(22)(e) of the Act.CIT(A) Decision:The CIT(A) held that the assessee-firm was not a shareholder as per law and, therefore, the loan received from M/s. Jetair Pvt. Ltd. could not be treated as deemed dividend within the meaning of section 2(22)(e) of the Act. This decision was based on the interpretation that only a registered shareholder could be assessed for deemed dividend.Tribunal's Analysis:The Tribunal referred to the Special Bench decision in the case of Asstt. CIT v. Bhaumik Colour (P.) Ltd. [2009] 27 SOT 270, which clarified that deemed dividend under section 2(22)(e) can only be assessed in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. The Special Bench further held that the term 'shareholder' refers to both a registered shareholder and a beneficial shareholder. If a person is either a registered shareholder without being a beneficial shareholder, or a beneficial shareholder without being a registered shareholder, the provisions of section 2(22)(e) would not apply.Tribunal's Conclusion:The Tribunal concluded that the assessee-firm could not be considered a registered shareholder of M/s. Jetair Pvt. Ltd. The shares were held by the partners in their individual capacities and not on behalf of the firm. Therefore, the loan received by the assessee-firm could not be treated as deemed dividend under section 2(22)(e).Outcome:The Tribunal upheld the CIT(A)'s order, deleting the additions made by the AO for both assessment years 2003-04 and 2004-05. The appeals filed by the revenue were dismissed.