ACIT Vs Seema Devi Bansal (ITAT Delhi)
Trade and commercial transactions are not covered in the definition of ‘loans and advances’ on which section 2(22)(e) can be applied. When the company got back its funds on the same day, it could not fall into the definition of the deemed dividend.
FULL TEXT OF THE ITAT JUDGMENT
Revenue has filed this appeal against the order dated 01.9.2014 for A.Y. 2010-11 of the Ld. CIT(A)-I, New Delhi relevant to assessment year 2010-11.
2. The Revenue has raised the following grounds:-
“(i) The order of Ld. CIT(A) is not correct in law and facts.
(ii) On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 1,03,00,000/- made by AO on account of deemed dividend u/s. 2(22)(e) of the I.T. Act, 1961.
(iii) The appellant craves leave to add, amend any / all the grounds of appeal before or during the course of hearing of the appeal.
3. The brief facts of the case are that return declaring income of Rs. 7,19,410/- was filed on 30.7.2010. The return was processed u/s. 143(1) of the Income Tax Act, 1961 (hereinafter referred as the Act). The original assessment in this case was completed u/s. 143(3) of the Act on 14.11.2012 at returned income at Rs. 7,19,410/-. Notice u/s. 148 of the Act was issued on 24.1.2013, after recording reasons and objections were filed by the assessee were also disposed of vide order dated 17.2.2013. Notice u/s. 142(1) of the Act alongwith questionnaire was issued on 20.12.2013. In response to the same, the A.R. of the assessee attended the proceedings from time to time and filed the necessary details/clarifications. The AO reassessed the income of the assessee Rs.1,10,19,412/- after making addition of Rs. 1,03,00,000/- as deemed dividend u/s. 2(22)(e) of the Act vide his order dated 11.3.2014 passed u/s. 148 of the Act. Against the reassessment order dated 11.3.2014, the assessee appealed before the Ld. CIT(A), who vide his impugned order dated 1.9.2014 deleted the addition u/s. 2(22)(e) of the Act on the ground that the said amount was advanced for the business purposes and hence a commercial transaction not covered within the meaning of deemed dividend u/s. 2(22)(e) of the Act.
4. Aggrieved with the ld. CIT(A)’s order, the Revenue is in appeal and assessee has filed Cross Objection.
5. DR relied upon the order of the AO and reiterated the contentions raised in the grounds of appeal. In support of his contention, he filed the Written Submission, which read as under:-
“Sub: Written Submission in the above case- reg. In the above case, it is humbly submitted that the following decisions may kindly be considered with regard to deemed dividend u/s 2(22)(e) of I.T. Act:
1- Miss P. Sarada Vs CIT T96 Taxman 11. 229 ITR 444. 144 CTR 2091 (where Hon’ble Supreme Court held that advances made by company to assessee would have to be treated as deemed dividends paid on dates when withdrawals were allowed to be made and subsequent adjustment of account made on very last day of accounting year would not alter position that assessee received notional dividends on various dates.
CIT Vs Miss P. Sarada T21 Taxman 941
where Hon’ble Madras High Court held that Amount of impugned excess withdrawals, even though adjusted against credit balance before close of year, was assessable as deemed dividend in assessee’s hands in terms of section 2(22)(e)
2. Gopal And Sons (HUF) Vs CIT [2017] 77 com71 (SC)/2017 245 Taxman 48 (SC)[2017] 391 ITR 1 (SC)/[2017] 291 CTR 321 (SC)
where Hon’ble Supreme Court held that even if HUF is not a registered shareholder in lending company, advances/loans received by HUF is taxable as deemed dividend under section 2(22)(e) if Karta-shareholder has substantial interest in HUF.
3. CIT Vs Mukundrav K. Shah r20071 160 Taxman 276 (SC)/r20071 290 ITR 433 (SC)/r20071 209 CTR 97 (SC)
A search conducted at assessee’s premises led to seizure of a diary, which contained purchasing of nine per cent RBI relief bonds by assessee from funds received from two firms ‘B’ and ‘C’ in which he was a partner. Tribunal after examination of cash flow statement held that two firms were used as conduits by assessee; that ‘A’ had made payments to ‘B’ and ‘C’ for benefit of assessee, which enabled him to buy nine per cent RBI Relief Bonds and upheld finding of Assessing Officer. Upheld addition u/s 2(22(e) of I.T. Act.
4. Puneet Bhaqat v. ITO (157 ITD 353)
Where Hon’ble ITAT Delhi held that deemed dividend-Loans and advances to share holders- Loans received by the company would be treated as deemed dividend in hands of P and S in proportion to their shareholdings.
5. Addl CIT Vs Shri Chandrakant V Gosalia [2015]-TIQL-1187-lTAT-MUM
where Hon’ble ITAT Delhi held that mere repayment of money borrowed by the shareholder will not escape him from the provisions of section 2(22)(e), and thus, it can be treated as deemed dividend.
6. Sunil Kapoor Vs CIT f2015l 63 com 97 (Madras)/[2015] 235 Taxman 279 (Madras)
where Hon’ble Madras High Court held that where assessee, holding 60 per cent shares of a company, took personal loan from accumulated surplus of said company, said amount would be treated as deemed dividend under section 2(22)(e), after reducing therefrom amount repaid by assessee during year
7. Shashi Pal Aqarwal Vs CIT T20151 54 com289 (Allahabad)/[2015] 229 Taxman 307 (Allahabad)/[2015] 370 ITR 720 (Allahabad)
where Hon’ble Allahabad High Court held that where lending of money was not part of business of lending companies, loan/advance given to assessee-shareholder would be treated as deemed dividend under section 2(22)(e)
8. Star Chemicals (P.) Ltd Vs CIT T72 Taxman 279. 203 ITR 11, 114 CTR 1851
where Hon’ble Bombay High Court held that provisions of section 2(22)(e) would apply to a company which had taken loan from its subsidiary.
9. CIT v Sunil Chopra f20111 12 com496 (Delhi)/f2011l 201 Taxman 316 (Delhi)/r20111 242 CTR 498 (Delhi)
Tribunal deleted addition accepting assessee’s contention that said advances were received against sale of property under terms of agreement dated 18-9-2003 and, therefore, money was taken by assessee in line of his business of real estate. Hon’ble Delhi High Court held that there was great perversity and infirmity in findings and observations of Tribunal and, therefore, impugned order was to be set aside.
10. A. Amareswara Rao v. Dv.CIT [157 ITD 6571 136 DTR [153/ 178 TTJ 700]
where Hon’ble ITAT Vishakhapatnam held that deemed dividend-Loan-beneficial ownership of more than 10 per cent shares in a closely held company- Assessable as deemed dividend.”
6. On the contrary, Ld. A.R. of the assessee relied upon the order of the Ld. CIT(A) and filed the written synopsis, which read as under:-
“1. This is an appeal filed by the department against the order dated 01.09.2014 passed by the Ld. CIT(A), whereby the Ld. CIT(A) has deleted the addition of Rs.1,03,00,000/- made by the AO on account of deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961.
2. Assessee filed her return of income for the year under consideration on 30.07.2010, declaring an income of Rs.7,19,410/-. The said return was assessed u/s 143(3) of the Act and was completed on 14.11.2012
3. Thereafter, after recording reasons, the case of the assessee was reopened and notice u/s 148 of the Act was issued to the assessee on 24.01.2013. Objection filed by the assessee was also disposed by a written order dated 17.02.2013. The AO reassessed the income of the assessee at Rs 1,10,19,412/-,after making an addition of Rs.1,03,00,000/- u/s 2(22)(e) of the Act. The AO has discussed this issue at Page 2 onwards of the assessment order.
4. Pursuant to the order passed by the Ld. AO, the assessee went into appeal before the Commissioner of Income Tax (Appeals)-I. The CIT(A) allowed the appeal of the assessee vide order dated 01-09-2014 and deleted the addition made by the AO u/s 2(22)(e) of the Act. He has deleted the addition on the grounds that the said amount was advanced for the business purposes and hence a commercial transaction not covered within the meaning of deemed dividend under section 2(22)(e) of the Act.
5. It was explained to the AO that the companies have received the money for its business purposes and hence a commercial transaction. The AO has quoted the explanation at Pg 10 para (g) and Pg 12 para (b) where records as under:
Page 10
“(g) To Sum up M/s Super Plastic Coats Limited had advanced (advance against Business transaction and Material amounting to Rs.
1.0 Crores) to Northern Strips Limited and M/s Northern Strips Limited had advanced against business transactions amounting to Rs.
3.0 Lacs to Allied Poles India Limited and not the assessee whose case is supposed to be reassessed under section 147 read with Section 148 of the Act. It may be placed on record that Section 2(22)(e) of the Act provided the payment to the assessee who is registered Share holder not in the case of assessee who had not received the payment.”
Page 12
(b) It may be placed on record that M/s Super Pastic Coats Private Limited and M/s Northern Strips Limited are engaged in similar trade and activities. It had already been stated during assessment proceedings of both the Companies (the assessment proceedings in both the company case have been completed under section 143(3) of the Act and under your charge) that these amount was given as advance against material. The same fact was also confirmed and certified by the Statutory Auditors in their Report that the company had given advance as against material not Loan to companies in which directors are interested. The Company M/s Northern Strips Limited is providing Goods transport services to M/s Super Plastic Coats Private Limited. “
The above explanation of the assessee has not been controverted by the AO as in evident from the assessment order where AO after quoting submission of the assessee has just referred to percentage of holding and various case laws from Pg 21 to 41.
Thus the fact that amount was for a commercial transaction has not been rebutted.
6. In this regard, the CBDT has also recently issued a Circular No. 19/2017 dated 12.06.2017, whereby it has been clarified by the CBDT that the advances which are in the nature of commercial transactions would not fall within the ambit of the word ‘advance’ u/s 2(22)(e) of the Act. The relevant extract of the Circular is reproduced hereunder for the sake of ready reference:
“3. In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word ‘advance’ in section 2(22)( e) of the Act. Accordingly, henceforth, appeals may not be filed on this ground by Officers of the Department and those already filed, in Courts/Tribunals may be withdrawn/not pressed upon.”
7. Therefore, in view of the facts of assessee’s case, the Circular issued recently by the CBDT in this regard, the addition made by the AO is liable to be deleted.
8. Further, reliance is placed on the judgment of Hon’ble Jurisdictional High Court in the case of CIT Vs Raj Kumar [2009] 318 ITR 462, whereby the Hon’ble Court has held as under:
“If the history and purpose with which the said provision was brought on to the statute book is kept in mind, it is clear that sub-clause (e) of section 2(22) which is pari materia with clause (e) of section 2(6A) of the Indian Income-tax Act, 1922, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons, who manage such closely held companies, should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan. [Para 10.4]. Keeping the aforesaid rule in mind, the word ‘advance’, which appears in the company of the word ‘loan’, can only mean such advance which carries with it an obligation of repayment. Trade advance, which is in the nature of money transacted to give effect to a commercial transaction, would not fall within the ambit of the provision of section 2(22)(e). This interpretation would alloy the rule of purposive construction with noscitur a sociis.[Para 10.9]”
9. Further reliance in this regard is placed on the following judgments:
