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TMI Blog2013 (8) TMI 438X X X X Extracts X X X X X X X X Extracts X X X X ..... 22)(e) and that the order is so poorly drafted that the same is required to be struck down being perverse and erroneous in its conclusion and without any basis. 3. That the learned Commissioner of Income-tax (Appeals) erred in law and on facts in deleting the addition of Rs. 4,49,967 made by the Assessing Officer by disallowing 20 percent of bonus and wages, ignoring the fact that the Assessing Officer has clearly brought out in the assessment order that the signatures and thumb impressions of the workers do not match in these registers." The issue raised, vide ground Nos. 1 and 2 by the Revenue is in relation to the application of the provisions of section 2(22)(e) of the Income-tax Act. The brief facts of the case are that the assessee-firm is constituted of three partners Shri Balbir Kumar with a 40 percent share, Shri Harsh Kumar with a 40 percent share and M/s. Octave Apparels with a 20 per cent. share. The assessee in its balance-sheet under the head "current liabilities" had shown a balance of Rs. 2,98,07,898 against the sister concern M/s. Octave Apparels P. Ltd. On perusal of the copies of account the Assessing Officer noted that though the credit balance was appearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 2(22)(e), in order to cover payment to a shareholder, within the above provisions, the shareholder should hold not less than 10 percent of the voting power. The Commissioner of Income-tax (Appeals) further observed "in this case the assessee is holding through its partners only 1.07 percent of the share holding in M/s. Octave Apparels P. Ltd. and thus the said payments are not covered within the purview of above provision". It was also observed that payment made by the concern to the firm was not for the individual benefit of any shareholder and as the firm was an independent income-tax assessee, there is no merit in applying the provisions of section 2(22)(e) of the Act by clubbing the shareholding of the different persons. In view thereof, the addition made under section 2(22)(e) of the Act was deleted by the Commissioner of Income-tax (Appeals). The Revenue is in appeal against the said order of the Commissioner of Income-tax (Appeals). The learned Departmental representative for the Revenue pointed out that both the partners and the partnership concern were not separate and secondly the provisions of section 2(22)(e) of the Act were squarely applicable to the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd. 80000 2.5 2,00,000 1.07 1.07 7. Sh. Abhishek Arora 31980 2.5 79,950 0.43 0.43 8. Harsh Kumar HUF 100000 2.5 2,50,000 1.33 1.33 9. Balbir Kumar HUF 100000 2.5 2,50,000 1.33 1.33 Total 1,87,50,150 100 100 The concern M/s. Octave Apparels P. Ltd. had total capital balance as on March 31, 2000, at Rs. 1,07,88,035 and the break-up of the capital account is reproduced at pages 7 and 8 of the assessment order. Further the assessee-firm had also shown amount received from M/s. Octave Apparels P. Ltd. under the head "current liabilities" and as on March 31, 2000 the balance was Rs. 2,98,07,898. The break-up of copies on account of the said concern in the books of the assessee-firm are incorporated at pages 6 and 7 of the assessment order. The perusal of the copies account for the financial year 2006-07 reveals that there was opening balance of Rs. 295.40 lakhs and there was closing balance of Rs. 298.07 lakhs. During the year under consideration, the assessee has only received cheque of Rs. 2,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the hands of the shareholder. The shareholder referred to in the said sub-section is a person who is beneficial owner of shares in the said company holding not less than 10 percent of the voting power." Coming to the facts of the present vase we find that the assessee-firm holds only 1.07 percent shares of the sister-concern, whereas the partners of the assessee-firm Shri Balbir Kumar and Shri Harsh Kumar holds 6.64 percent and 6 percent shareholding respectively. The Assessing Officer had observed that the cumulative holding of both partners of the assesseefirm being more than 10 per cent., results in application of the provisions of section 2(22)(e) of the Act. Undoubtedly, the assessee-firm on its own is holding only 1.07 percent of shareholding in the concern. The issue to be considered is whether for applying the provisions of section 2(22)(e) of the Act the cumulative holding of the assessee-firm and its partners is to be considered or the shareholding of the firm in isolation is to be considered. We find that the similar issue arose before the Rajasthan High Court in CIT v. Hotel Hilltop [2009] 313 ITR 116 (Raj), wherein it was held as under (headnote) : "In order t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge to tax in the hands of the shareholder and not in the hands of a non-shareholder, viz., the concern. The definition of dividend under section 2(22)(e) of the Act is an inclusive definition which enlarges the meaning of the term 'dividend' according to its ordinary and natural meaning to include even a loan or advance. The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. If the definition of 'dividend' is extended to a loan or advance to a non-shareholder the ordinary and natural meaning of the word dividend is taken away. Deemed dividend under section 2(22)(e) of the Act can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person." In view of the settled principle we hold that where the assessee-firm in the present case is holding less than 10 percent of shareholding, any amount advanced by closely held company to the assessee-firm is not to be treated as deemed dividend under the provisions of section 2(22)(e) of the Act, irrespective of the fact that the shareholding of the firm to whom advance had been made and the partners of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X
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