Deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961 is taxable in the hands of the individual shareholder who is the beneficial owner of the shares, and not in the hands of an entity which does not hold shares in the company.

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IN THE HIGH COURT OF ORISSA AT CUTTACK

ITA No.18 of 2018

M/s. Mahimananda Mishra

….

Appellant

Mr. Saswat Kumar Acharya, Advocate

-versus-

Assistant Commissioner of Income

Tax, Circle-1(1), Cuttack

….

Respondent

Mr. Radheshyam Chimanka, Senior Standing Counsel for the

Revenue Department

CORAM:

THE CHIEF JUSTICE

JUSTICE M.S. RAMAN

ORDER

10.01.2023

Order No.

05.

1. The present appeal by the Assessee is directed against an order

dated 10^th October, 2017 passed by the Income Tax Appellate

Tribunal, Cuttack Bench, Cuttack (ITAT) in ITA No.52/CTK/2016

for the Assessment Year (AY) 2011-12.

2. While admitting the present appeal on 27^th July 2022, the

following question was framed for consideration:

“Whether the deemed dividend paid by the Orissa Stevedores

Ltd. should be taxed in the hands of Mr. Mahimananda

Mishra, the Individual Director who holds shares therein or

in the hands of the appellant firm of which he is a partner?”

3. This Court has heard the submissions of Mr. Saswat Kumar

Acharya, learned counsel for the Appellant and Mr. Radheshyam

Chimanka, learned Senior Standing Counsel for the Revenue

Department.

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4. The facts relevant for the present appeal as set out in the

assessment order is that the Assessee is a Firm engaged in the

business of labour contract under the name and style M/s.

Mahimananda Mishra. Admittedly, the said Firm has four partners

one of whom is Mr. Mahimananda Mishra having contributed 20%

of the shares of the Firm. There are three other partners as well.

5. Mr. Mishra also happens to be the Director of M/s. Orissa

Stevedores Ltd. (OSL) and in OSL, he holds 36.95% shares.

6. During the AY in question, OSL gave a unsecured loan of

Rs.3,75,78,685/- to the Firm i.e. M/s. Mahimananda Mishra. Of

this, Rs.1,74,04,185/- was received as cash. The Assessing Officer

(AO) proceeded to treat the above unsecured loan as a deemed

dividend in the hands of the Firm and added it to the income of the

Firm invoking Section 2(22)(e) of the Income Tax Act, 1961 (Act).

7. When the Assessee took the matter in appeal to the

Commissioner of Income Tax (Appeals), Cuttack [CIT(A)], it was

noted by the CIT(A) in the order dated 16^th November, 2015

allowing the appeal that in terms of Section 2(22)(e) of the Act, the

amount could be treated as deemed dividend only in the hands of

shareholder since he is the beneficial owner of the shares in OSL.

8. Section 2(22)(e) of the Act reads as under:

“2. (22). xxx

(e) any payment by a company, not being a company in

which the public are substantially interested, of any sum

(whether as representing a part of the assets of the company

or otherwise) made after the 31^st day of May, 1987, by way

of advance or loan to a shareholder, being a person who is

the beneficial owner of shares (not being shares entitled to a

fixed rate of dividend whether with or without a right to

participate in profits) holding not less than ten per cent of the

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voting power, or to any concern in which such shareholder is

a member or a partner and in which he has a substantial

interest (hereafter in this clause referred to as the said

concern) 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;”

9. A plain reading of the above provision indicates that the taxing of

the deemed dividend has to be in the hands of the shareholder of

OSL. In the present case, admittedly it is Mr. Mishra in his

individual capacity who holds 36.95% of the paid-up share capital

of the OSL. On the other hand, M/s. Mahimananda Mishra, the

Firm, does not hold any shares in OSL. Consequently, this Court

finds that the CIT (A) was right in his conclusion in para 6, which

reads as under:

“6. Thus, the amount should be treated as deemed

dividend u/s.2(22)(e)