Deemed Dividend Is Taxable Only In The Hands Of The Shareholder: ITAT

The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) has held that a deemed dividend is taxable only in the hands of the shareholder.

The bench of Siddhartha Nautiyal (Judicial Member) and Annapurna Gupta (Accountant Member) has observed that the assessee firm was neither a registered shareholder nor a beneficial shareholder; there is no reason to tax the amount received by it by way of advance from Shree Electromelts Ltd. (SEL) amounting to Rs. 2,28,53,926 as a deemed dividend in terms of Section 2(22)(e) of the Income Tax Act.

Deemed dividend tax falls under the Income Tax Act's Section 2(22)(e). As per Section 2(22)(e), when a closely held company gives a loan or extends an advance to the personnel: a shareholder who holds a minimum of 10 percent of the voting rights and is the beneficial owner of shares

The AO had noted that the respondent/assessee had received various sums from SEL, both from its steel and coke divisions. One of the directors of SEL, Ram Krishan Jain, held more than 10% of the company and a 50% partnership in the assessee firm.

The AO held that the firm had a substantial interest in the company. The amount of advance outstanding at the end of the year from two divisions was treated as a deemed dividend in terms of Section 2(22)(e), liable to be taxed in the hands of the assessee firm.

The CIT(A), however, deleted the addition, noting that R.K. Jain had invested in the company SEL in his individual capacity out of his funds and not as and on behalf of the partnership firm. He noted from the balance sheet of Shri R.K. Jain that he had sufficient funds to make the investment and from the balance sheet of the assessee firm. There was no investment recorded in the books of the firm pertaining to that made in the shares of SEL. The investment in shares by Shri R.K. Jain in SEL was in his own individual account and not on behalf of the firm. The firm was neither a registered shareholder nor in any way a beneficial owner of the shares in SEL, and therefore, he held that the provisions of Section 2(22)(e) were not attracted in the hands of the assessee firm.

The department appealed against the order of the CIT (A).

The issue raised was whether an addition was made to the deemed dividend in the hands of the assessee in terms of Section 2(22)(e), which was deleted by the CIT (A).

The tribunal held that the assessee firm was neither the registered shareholder nor beneficial shareholder of SEL so as to invoke Section 2(22)(e) of the Act in its hands on receipt of advances from SEL.

Counsel For Appellant: Umaid Singh Bhati

Counsel For Respondent: Ashok Kumar Suthar

Case Title: ACIT versus Kiran Ship Breaking Company

Case No.: ITA No.2219/Ahd/2015

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