K.K. Tanners, Jalandhar vs Department Of Income Tax

This is Department's appeal for the assessment year 2007-08 against the order dated 20.08.2013 passed by the CIT(A), Jalandhar, taking the following sole effective ground of appeal:

"That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in deleting the addition made by A.O. amounting to Rs.10,30,257/- on account of deemed dividend. The AO has rightly made the addition of Rs.10,30,257/- treating the advance forwarded by M/s. Kirandeep Leather (P) Ltd. ( a company in which the partners of the assessee firm are the shareholders) in the hand of the assessee firm as deemed dividend within the meaning of section 2(22)(e) of the Income-tax Act, 1961."

2 ITA No.642(Asr)/2013 2. On the last date of hearing, i.e., 30.12.2014, the appeal was adjourned

to 19.02.2015 on the written request of the assessee. The date was noted on

behalf of the assessee, as is evident from the order sheet noting. However,

on 19.02.2015, nobody appeared on behalf of the assessee before us. As

such, we are proceeding to decide this appeal on having heard the ld. DR.

3. The facts are that the assessee is a partnership firm deriving income

from running a Leather Tannery. It filed a return of income declaring income

of Rs.7,25,118/-. The assessment was completed u/s 143(3) of the Income

Tax Act, 1961 ( In short, 'the Act'), at an assessed income of Rs.29,05,322/-.

The AO, inter-alia, made an addition of Rs.10,30,257/- on account of

deemed dividend. It is this addition, which forms the subject matter of the

present appeal.

4. By virtue of the impugned order, the ld. CIT(A) deleted this addition.

While doing so, it was held as follows:

"6.3. I have considered the observations of the AO as made in the assessment order as well as the written submissions of the assessee firm on the issue under reference. In my opinion, the amount treated as advance by the AO is certainly going to benefit the partners directly or indirectly. In my considered opinion, the deeming provisions of section 2(22e) of the Income Tax Act, 1961 are attracted in the case of a shareholder whereas in the case under reference, the assessee firm is not a shareholder of M/s. Kirandeep Leathers Pvt. Ltd. but the partners of the assessee firm are its beneficial shareholders. In other words, the assessee firm is not the beneficial shareholder of the company M/s. Kirandeep Leathers Pvt. Ltd. In 3 ITA No.642(Asr)/2013

these facts and circumstances of the case and in my considered opinion the provisions of section 2(22e) of the Act are not attracted in the case of the assessee firm. This view is also supported by various judicia pronouncements in the case of CIT-II Ludhiana vs. M/s. Sharma Woollens Limited (2012) 204 Taxman 82 (P&H. The other case laws relied upon by the assessee firm also support the case of the assessee firm. In these facts and circumstances of the case and in my considered opinion, the addition made by the AO amounting to Rs.10,30,257/- by invoking the provisions of section 2(22e) of the Act as deemed dividend in the hands of the assessee firm is not justified and is directed to be deleted. In the result, grounds of appeal No. 5 and 6 by the assessee are, therefore, allowed.

6.4. Before parting with this ground of appeal, I would also like to make it clear that the AO is free to take action in the hands of partners of the assessee firm with regard to the applicability of the provisions of section 2(22e) of the Income Tax Act, 1961."

5. Aggrieved, the department is in appeal.

6. Challenging the impugned order, the Ld. DR has contended that the

ld. CIT(A) has erred in deleting the addition of Rs.10,30,257/- correctly

made by the AO on account of deemed dividend; that while doing so, the ld.

CIT(A) erred in not taking into consideration the fact that the AO had

rightly made the addition while treating advanced forwarded by M/s.

Kirandeep Leathers (P) Ltd., a company in which the partners of the

assessee firm are the shareholders, in the hands of the assessee-firm as

deemed dividend; that the ld. CIT(A) has failed to consider that the action

of the AO in making such addition was well within the provisions of section

2(22)(e) of the Act., and that, therefore, the deletion requires to be cancelled. 4 ITA No.642(Asr)/2013

7. We have heard the ld. DR and have examined the material placed on

record. The matter, it is seen, is covered directly in favour of the assessee by

number of case law, Including the following:

i) 'ACIT, Circle-33,Mumbai vs. Bhaumik Colour (P) Ltd.,' (2009) 117 ITD 1 (Mum) (SB).

ii) 'CIT vs. Hotel Hilltop' (2009) 313 ITR 116 (Raja)

iii) 'CIT vs. Universal Medicare Private Limited' (2010) 324 ITR 263 (Mum.)

iv) 'CIT vs. Ankitech' 340 ITR 14 (Del)

v) 'CIT vs. C.P. Sarathy Mudaliar' 83 ITR 170 (SC)

vi) 'Rameshwar Sanwarmal vs. CIT' 122 ITR 1 (SC)

8. The latest decision on this issue is that rendered by the Hon'ble

Bombay High Court in the case of 'CIT vs. Jagnesh P Shah', 114 DTR

(Bom) 249, holding that unless the assessee is a shareholder of the company

lending him money, no occasion to apply section 2(22)(e) of the Act can

arise.

9. The Ld. CIT(A), while correctly deleting the addition, has duly taken

note of the fact that the assessee firm is not a shareholder of M/s. Kirandeep

Leather (P) Ltd., though, the partners of the assessee-firm are its beneficial

shareholders and that too, the assessee firm is not the beneficial shareholder

of the company, M/s. Kirandeep Leather Pvt. Ltd. It was on the basis of

these facts that the ld. CIT(A) held the provisions of section 2(22)(e) of the 5 ITA No.642(Asr)/2013

Act, not attracted to the assessee-firm. The AO, on the other hand, had

based the addition as deemed dividend on the following facts:-

"It is seen from the records that the account of the asssee in the books of M/s. Kirandeep Leather Pvt. Ltd. shows a peak debit balance of Rs.90,22,826/- as on 29.03.2007. Moreover, the debit balance starts from 19.01.2007 and this state of affair continues till 30.03.2007, without fail and at the end of the year i.e. on 31.03.2007 when transfer entries are made, there is credit balance of Rs.49,13,274/-, [ Copy of account of M/s. Kirandeep Leather Pvt. Ltd. is attached as Annexure-1 to this order.] The partner of the assessee firm Sh. Girdhari Lal with 33.33% share in the firm is not only Chairman-cum- Managing Director of M/s. Kirandeep Leather Pvt. Ltd. but a shareholder at 39% who is covered to be a person holding not less than ten percent of voting power as per provisions of section 2(22)(e) of the Income-tax Act, 1961.The other partner of the assessee firm Smt. Narinder Kaur with 33.33% share in the firm is not only Director of M/s. Kirandeep Leather Pvt. Ltd. but a shareholder at 25% who is also covered to be a person holding not less than ten percent of voting power as per provisions of section 2(22)(e) of the Act. The company M/s. Kirandeep Leather Pvt. Ltd. has accumulated profit of Rs.10,30,257/-."

10. From the above, we are in agreement with the order of the ld. CIT(A).

Finding no error therein, it is confirmed.

11. In the result, the appeal of the Revenue is dismissed.

Order pronounced in the open court on 26th February, 2015.

Sd/- Sd/- (B.P. JAIN) (A.D.JAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 26th February, 2015 /SKR/ Copy of the order forwarded to: 1. The Assessee:M/s. K.K. Tanners, Jalandhar. 2. The ACIT, R-I, Jalandhar. 3. The CIT(A), Jalandhar. 4. The CIT, Jalandhar. 5. The SR DR, ITAT, Amritsar.