Deemed dividend-share premium not part of accumulated profits. Proportionate taxation u/s 2(22)(e) to be made if more than one shareholder satisfy conditions-ITAT

Deemed dividend-share premium not part of accumulated profits. Proportionate taxation u/s 2(22)(e) to be made if more than one shareholder satisfy conditions-ITAT 

ABCAUS Case Law Citation:
ABCAUS 1139 (2017) (02) ITAT

Assessment Year : 2009-10
Date/Month of Pronouncement: February, 2017

Important Case Laws Cited/relied upon:
Commissioner of Income Tax Vs. Bhumik Colour Private Limited (2009) reported in 313 ITR (AT) 146
CIT Vs. Ankitech (P) Ltd. & Others., reported in (2012) 340 ITR 0014
CIT Vs. Universal Medicare (P) Ltd. (2011) 237 CTR (Bom) 147
Deputy Commissioner of Income Tax Vs. Radhe Sham Jain (ITAT, Chandigarh)
Puneet Bhagat Vs. Income Tax Officer, Ward-1(2), Delhi

Brief Facts of the Case:
The assessee is a partner having 20% share of profit in a firm. The return of the assessee was processed u/s 143(1) of the income tax Act, 1961 (“the Act”). The Assessing Officer received an information that during the relevant assessment year, one Private Limited company had advanced an aggregate loan of Rs.50,67,980/- to the assessee’s firm. In view of the fact that the assessee was having substantial interest in the firm and was also having 33.33% shareholding in said private limited company, the Assessing Officer, was of the view that the loan advanced by the company to the firm, was deemed dividend under section 2(22)(e) of the Act in the hands of the assessee. Accordingly, the AO reopened the assessment by way of issuing notice under section 148. Finally, not convinced by the reply of the assessee the AO taxed the amount advanced as deemed dividend in the hand of the assessee.

Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who upheld the liability of deemed dividend but directed the Assessing Officer to restrict the disallowance u/s 2(22)(e) to the extent of accumulated profits of the company.

Contentions of the Appellant assessee:
It was contended that the Assessing Officer had not followed instruction contained in CBDT Circular No. 495, dated 29th September, 1987. Which specified that deemed dividend in cases where loans/advances were made to other concerns/firms would be taxed in the hands of such concern/firm and not in the hands of other partners.

It was also contended that the amount standing in the share premium cannot form part of the accumulated profits.

The assessee also raised an additional ground that out of the deemed dividend finally determined, only 20% thereof should be assessed in the hands of the appellant who had only 20% shareholding in the concerned firm which was the recipient of the loan amount in question.

Observations made by the Tribunal:
It was observed that in the case of Ankitech (P) Ltd. & Ors it was held by the Delhi High Court that where a loan or advance has been given by the company to the concern, addition for deemed dividend can be made in the case of shareholders only who satisfy the conditions of Section 2(22)(e) of the Act and not in the case of concern, who is not share holder of the closely held company.

It was observed that in the case of Radheshyam Jain the Tribunal had decided that the share premium could not be stated to be a commercial profit to apply for deemed dividend provision. Following the above decision, it was held that the share premium amount appearing in the financial statement could not be included while computing the accumulated profit of the assessee company as on the date of loan or advance to the concerned firm.

Regarding the additional ground raised by the assessee, it was observed that according to section 2(22)(e) of the Act, the deemed dividend is taxed in the hands of the shareholders who satisfy the above two conditions. In a situation, if there are more than one shareholder who satisfy the above conditions, then the issue of proportionate distribution of deemed dividend in their hands may arise. It was further observed that in the case of Puneet Bhagat the deemed dividend was confirmed by the Tribunal in their hands in the ratio of the share of profit in firm at the hand of assessees who satisfied the conditions.

Held:
The appeal was partly allowed.