TMI Blog2014 (3) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... er or a partner in which he has substantial interest or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits is deemed dividend - The Assessee firm is not shareholder of M/s Shree Vallabhlaxmi Cotton Pvt. Ltd. but partner of the assessee firm who has substantial share in firm, is shareholder in M/s Shree Vallabhlaxmi Cotton Pvt. Ltd. thus, the order of the CIT(A) upheld - Decided against Assessee. Deletion made on account of interest chargeable on loans given to sister concern Held that:- The assessee has debit opening balance at Rs.1.04 crore which pertained to purchase made by the company from the assessee - the company also sold goods to assessee - All the transactions with company are mixed transactions thus, there is no reason to charge interest notionally on debit balance - The income is to be assessed on the basis of real income not notionally the order of the CIT(A) upheld. Deletion made on account of bogus purchase Held that:- The AO worked out creditors erroneously by reducing the cheque payment for credit balance of entry as to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5/- against sale of Rs.39,05,695/- vide letter dated 20.12.2011. The assessee had also explained that it has received Rs.66,81,930/- from M/s. Vallabhalaxmi Cotton Pvt. Ltd., therefore, it is clear that M/s. Vallabhalaxmi Cotton Pvt. Ltd. had advanced Rs.66,81,930/- [Rs.1,05,87,625/- - Rs.39,05,695/-] to the assessee firm. The assessee had given details of the directors of company of M/s. Vallabhalaxmi Cotton Pvt. Ltd., which shows that one of the partners of the firm, Sri Jagdishbhai Vallabhbhai Jasani is having 12.82% of shareholding of the total authorized capital of the company which is more than 10% of the authorized share capital of the company. The first condition is substantial shareholding of the assessee in the company, second the giving of loan and advances by the said company and third the existence of the accumulated profits of the company making the loan and advances to the assessee, then such amount of loans and advances to the extent of accumulated profits are to be treated as deemed to be the dividend income in the hands of recipients, i.e., assessee. Thus, AO made addition of Rs.66,81,930/- u/s. 2(22)(e) of the IT Act. 3. Being aggrieved by the order of the AO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as per the provisions of sec.2(22)(e), these payments cannot be taxed as deemed dividend. It is noticed that some of the payments made by the appellant during the year under consideration fulfills these conditions and accordingly the deemed dividend provisions are not attracted on such receipts. Payments received by the appellant from M/s. Shree Vallabhalaxmi Cotton Pvt. Ltd. from 1.4.2008 upto 12/1/2009 falls in this category as upto this date the balance in this account was debit and this debit balance has come as a result of purchase of cotton from M/s. Shree Vallabhalaxmi Cotton Pvt. Ltd. However, from this date onwards the account of M/s. Shree Vallabhalaxmi Cotton Pvt. Ltd. in the books, of appellant is showing a credit balance. It means that in the regular course of business the appellant has to make payment to the sister concern namely M/s. Shree Vallabhalaxmi Cotton Pvt. Ltd. against these purchases. It is strange to note that, even in cases where the credit balance stands in the account of M/s. Shree Vallabhalaxmi Cotton Pvt. Ltd., the appellant kept on receiving the payment from-Shree Vallabhalaxmi Cotton Pvt. Ltd. The details of receipt of such payments are annexed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losely held company. The payments has been received by the appellant firm in which Shri Jagdishbhai Vallabhbhai is beneficially entitled to 50% of income. It is also a matter of fact that Shri Jagdishbhai Vallabhbhai is having 12.82% of voting power in M/s.Shree Vallabhalaxmi Cotton Pvt. Ltd. These facts are accepted even by the appellant as the appellant had not contested the same. This way the condition no.(ii) as mentioned above is fulfilled and the loans and advances received by the appellant firm are hit by the provisions of sec.2(22)(e). It is also a matter of fact that M/s. Shree Vallabhalaxmi Cotton is having reserves and surplus of Rs. 1,17,18,870/-. This means that loans and advances received to the extent of Rs.1,17,18,870/- can be taxed as deemed dividend. The deemed dividend of Rs. 60,70,000/- is much below this limit. As discussed above, the advances received from Shree Vallabhalaxmi Cotton Pvt Ltd. are not in the regular course of business. The advances of Rs.60,70,000/- has been received by the appellant firm when the balance in the account of M/s. Shree Vallabhalaxmi Cotton Pvt. Ltd. was showing credit balance. This way by the receipt of these payments, the credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vances received by the appellant to the tune of Rs. 60,70,000/- is a deemed dividend in the hands of the appellant as per the provisions of sec.2(22)(e) of the I.T. Act. Accordingly, addition to the tune of Rs. 60,70,000/- is confirmed. The appellant will get a relief of Rs.6,11,930/- (66,81,930-60,70,000). This ground of appeal is partly allowed. 4. Now assessee is before us. Learned counsel for the assessee contended that assessee is not a shareholder of the company. Partners are the shareholder in the company s book and received dividend by them. The assessee is neither shareholder nor beneficial shareholder of the company. He further relied upon the decision of Hon ble Rajasthan High Court in the case of CIT V/s. Hotel Hilltop, (2009) 313 ITR 116 (Raj.), where identical issue has been considered. The shareholders were the partners of the firm. The loan advances were received by the firm, therefore, it was held that the firm was not beneficial shareholder, the deeming provision can be applied only on shareholders. He further drawn our attention on meaning of dividend by relying upon the decision of Hon ble Bombay High Court in the case of CIT Vs. Bank of India, (1976) 102 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding more than 10% of shares. The Hon ble Delhi High Court confirmed deemed dividend addition in the hand of firm. 6. We have heard the rival submissions and perused the material available on record. On verification of the copy of account placed before us, revealed that assessee had debit balance as on 01.04.2008 at Rs. 1,04,25,744/-, which was continued up to 07.02.2009. Thereafter, the company was advancing loan to the firm through cheques. Finally, company was the creditor in the books of firm at Rs. 2,64,33,003/-. Ld. CIT(A) has tabulated these advances in his order as annexure in totaling Rs.60,70,000/- which was received by the firm when the balances in the account of M/s Shree Vallabhlaxmi Cotton Pvt. Ltd. was showing credit balance. These payments have not been received against the sale and accordingly, these payments cannot be said to have been received in regular course of business and accordingly these are in the nature of loan and advances and the same are covered by the provisions of section 2 (22) (e) of the I.T. Act. As per section 2 (22) (e), any payment even to any concern in which such shareholder is a member or a partner in which he has substantial interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer, the assessee carried the matter before learned CIT(A). After considering the assessee s reply, he allowed the appeal by observing as under: 4.2 I have carefully considered the rival submissions. I have also perused the case laws relied upon by the appellant. After taking the entirety of facts in view, I am inclined to agree with the contentions of the Ld. A.R. for the following reasons :- (i) Opening debit balance of Rs. 1,04,25,744/- in the account of M/s. Shree Vallabhalaxmi Cotton Pvt. Ltd. pertains to the purchases made by the appellant from this concern in the month of March, 2008. Since the opening debit balance pertains to the business transactions, accordingly, there is no rational to charge interest on the opening debit balance. (ii) It is a trite law that notional interest cannot be charged. The Hon'ble Gauhati High Court in the case of Highways Construction Co. Ltd. vs CIT reported at 199 ITR 702 has held that there is no compulsion that one must earn, and if one has not earned income, notional income cannot be charged to tax. There is no provision in the Act providing for taxing of notional income. In this regard, I further placed reliance on the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been treated as deemed dividend and substantial part of this addition has been confirmed in this order. Since the working of the A.O. is erroneous and against the settled principles of accountancy, accordingly I am inclined to agree with the contentions of the Ld. A.R. In view of above, addition of Rs. 37,43,814/- is ordered to be deleted. This ground of appeal is allowed. 14. Now the Revenue is before us, the learned DR Relied upon the order of the AO whereas assessee supported the order of the learned CIT(A) and argued that there is no difference between the creditors shown in the balance sheet and balance shown in the ledger account. 15. We have heard the rival submissions of both the sides and perused the material available on record. The AO worked out creditors erroneously by reducing the cheque payment of Rs.1,65,000/- for credit balance of entry as to be constructed which has been certified by the learned AR that there is no difference on account of creditor of M/s. Shree Vallabhalaxmi Cotton Pvt. Ltd. Therefore, we do not find any reason to intervene in the order of the learned CIT(A). Accordingly, this ground of the Revenue is dismissed. 6. In the result, Assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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