R.Chitra Vs Vice Chairman, Income Tax Settlement Commission (Madras High Court)
Summary: The Madras High Court considered a challenge to the Income Tax Settlement Commission’s order dated 14.09.2015, insofar as it treated Rs.137,19,75,000 advanced by Rasi Seeds Private Limited (RSPL) to Rasi Tex India Private Limited (RTPL) as deemed dividend in the hands of R. Chitra for assessment years 2009-10 to 2013-14. The petitioner, a shareholder holding more than 20% in both companies, contended that the inter-corporate advances arose in the ordinary course of business and were commercial transactions, relying on CBDT Circular Nos. 19/2017 and 495/1987 and judicial decisions concerning the binding effect of beneficial circulars.
The Court held that CBDT circulars are binding on the tax authorities where applicable and found that the Settlement Commission had not disputed the petitioner’s assertion that the advances were inter-corporate loans made in the ordinary course of business, charging interest at market rates. The Court also considered arguments concerning taxation in the hands of the shareholder or concern, the effect of repayments, the applicability of Section 10(34), and the presence of more than one substantial shareholder.
Importantly, the Court found that the petitioner had specifically raised before the Settlement Commission the absence of incriminating material relating to deemed dividend, but that issue had not been adjudicated. Relying on the principles stated in CIT v. Continental Warehousing Corporation Ltd. and CIT v. Kabul Chawla, the Court held that the proceedings under Sections 153A read with 153C were not valid in the circumstances. It therefore held that the Settlement Commission’s order was not in accordance with the Act, quashed the impugned order insofar as it concerned deemed dividend for AYs 2009-10 to 2013-14, permitted the petitioner to claim refund of tax paid pursuant to that order, and allowed the writ petition without costs.
