2008 (3) TMI 310 - HC - Income Tax

Firm not a shareholder; s.2(22)(e) deemed dividend applies to individual shareholders for payments made on their behalf

HC held the firm was not a shareholder of the company, so any deemed dividend under s.2(22)(e) could not arise in the firm's hands but would arise in the ... Deemed dividend u/s 2(22)(e) - Whether the assessee-firm whose partners hold 100% share in M/s. Hilltop Palace Hotels (P.) Ltd., had received the payment of Rs. 10 lakhs by way of security and not as an advance is perverse? - HELD THAT:- The assessee in the present case is not shown to be one of the persons being shareholder - Of course, the two individuals being Roop Kumar and Devendra Kumar are the common persons holding more than requisite amount of shareholding and having requisite interest in the firm but then thereby the deemed dividend would not be deemed dividend in the hands of the firm rather it would obviously be deemed dividend in the hands of the individuals on whose behalf or on whose individual benefit being such shareholder the amount is paid by the company to the concern - The assessee-firm whose partners hold 100% share in M/s. Hilltop Palace Hotels (P.) Ltd., had received the payment of ₹ 10 lakhs by way of security - the fact that substantial portion of this ₹ 10 lakhs of amount, say more than ₹ 9 lakhs, have been advanced only during January 7, 1991, to March 22, 1991, it is difficult to accept it as a security. Issues:1. Whether the Tribunal was justified in upholding the deletion of the addition of Rs. 10 lakhs as deemed dividend under section 2(22)(e) of the Income-tax ActRs.2. Whether the payment of Rs. 10 lakhs received by the assessee-firm was by way of security and not as an advanceRs.Analysis:Issue 1:The case involved a dispute regarding the addition of Rs. 10 lakhs as deemed dividend under section 2(22)(e) of the Income-tax Act. The Assessing Officer treated the amount as deemed dividend, but the Commissioner (Appeals) deleted it, stating that since the firm was not a shareholder of the company, the amount could not be taxed under section 2(22)(e). The Tribunal upheld this decision, emphasizing that the deeming provisions under section 2(22)(e) aim to include what is obvious or uncertain. The Tribunal found that the firm not being a shareholder of the company, the amount could not be taxed under the said provision. Additionally, it was noted that the agreement specified the amount as security, not an advance or loan. The Tribunal also considered the company's accumulated profits, which were minimal. It was concluded that unless the firm was a registered shareholder of the company, any advance to the partner could not be taxed in the firm's hands. Therefore, the Tribunal dismissed the appeal by the Revenue.Issue 2:Regarding the nature of the payment of Rs. 10 lakhs, the Tribunal analyzed the provisions of section 2(22)(e) of the Income-tax Act. It was observed that the payment should be made by way of advance or loan to a shareholder or a concern in which the shareholder has substantial interest. The Tribunal found that the payment should be made on behalf of or for the individual benefit of the shareholder to attract tax liability. In this case, the payment was not made to the assessee-firm, but to the individuals who were shareholders of the company. Therefore, the Tribunal concluded that the liability of tax as deemed dividend could be attracted in the hands of the individuals, not the firm. Consequently, the Tribunal answered the questions in favor of the Revenue and against the assessee, leading to the dismissal of the appeal.In summary, the High Court upheld the Tribunal's decision, emphasizing that the provisions of section 2(22)(e) required the payment to be made to a shareholder or a concern in which the shareholder has substantial interest. Since the payment was not made to the firm but to individuals who were shareholders of the company, the amount could not be taxed as deemed dividend in the hands of the firm. The judgment clarified the distinction between the tax liability of individuals and firms under the specified provision, ultimately dismissing the appeal by the Revenue.