2017 (5) TMI 525

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..... epak Mohla is having the other 50% of the same. Those two persons are equal shareholders in one M/s TMI Associates (P) Ltd. in which the public are not subsequently interested. For the AY 2006-07 the assessee firm filed the return of income on 31.10.2006 declaring a total income of Rs. 10,97,233/-. During the course of assessment proceedings, the AO found that the assessee firm had shown a loan of Rs. 3 lakhs from M/s TMI Associates Pvt. Ltd. and the accumulated reserves of M/s TMI Associates P. Ltd. was Rs. 43,89,616/- 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 .....

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..... shareholder. The provisions of s. 2(22)(e) do not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern (non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of s. 2(22)(e). The intention behind enacting provisions of s. 2(22)(e) is that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, comp .....

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..... er and not in the hands of a non-shareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words there is a deemed accrual of income even under s. 5(1)(b) in the hands of the shareholder only and not in the hands of the payee viz., nonshareholder (concern). Sec. 5(1)(a) contemplates that the receipt or deemed receipt should be in the nature of income. Therefore, the deeming fiction can be applied only in the hands of the shareholder and not the non-shareholder viz., the concern. CBDT Circular No. 495, dt. 22nd Sept., 1987, to the extent not benevolent is not binding. In the event of the payment of loan or advance by a company to a concern being treated as dividend and taxed in the hands of t .....

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