Deemed Dividend-Loan to firm where partners are shareholders of the company not considered deemed dividend u/s 2(22)(e)

Deemed Dividend-Loan to firm where partners are shareholders of the company. Advances not considered deemed dividend u/s 2(22)(e)

ABCAUS Case Law Citation:
ABCAUS 1224 (2017) (04) ITAT

The Grievance:
The appellant assessee was aggrieved by the order passed by the Commissioner of Income Tax (Appeals) in confirming the order of the Assessing Officer (AO) in treating the amount received as loan as deemed dividend u/s 2(22)(e) of the Income tax Act, 1961 (‘the Act’).

Assessment Year : 2006-07
Date/Month of Pronouncement: April, 2017

Important Case Laws Cited/relied upon:
ACIT vs. Bhaumik Colour (P) Limited.

Brief Facts of the Case:
The appellant assessee was a partnership firm with two partners with 50% shares each in the firm. The two partners were also equal shareholders in one Private Limited company (‘the company’).

For the relevant year, during the course of assessment proceedings, the AO found that the assessee firm had shown a loan of Rs. 3 lakhs from the company and the accumulated reserves of the said company was far greater as per its balance sheet as on 31.03.2006. After affording an opportunity of being heard to the assessee, the AO treated such loan amount of Rs. 3 lacs as deemed dividend u/s 2(22)(e).

Assessee challenged the same before the Ld. CIT (A) but the CIT(A) dismissed the ground relating to this issue of deemed dividend and confirmed the same.

Aggrieved, the assessee was before the Tribunal.

Contentions of the appellant assessee:
It was submitted that section 2(22)(e) had no application to the amounts received from the company by the partnership firm who was not a shareholder in the company and therefore, the said loan could not be assessed to tax in the hands of the assessee.

It was further submitted that the partner never withdrew any amount from the partnership firm.

Observations made by the Tribunal:
Placing reliance on the decision in the case of Bhaumik Colours (P) Ltd. the Tribunal opined that so long as the assessee firm was not a shareholder, any loan obtained by the assessee firm from the Private Limited Company, wherein the partners of the assessee firm were  the shareholders, was not taxable in the hands of the assessee.

Held:
Held that the orders of the authorities below could not be sustained and the appeal had to be allowed deleting the addition made by the AO treating the loan as a deemed dividend u/s 2(22)(e) of the Act.