International Creations Pvt. Ltd Vs ITO (ITAT Surat)
The Income Tax Appellate Tribunal (ITAT), Surat Bench, in the case of International Creations Pvt. Ltd. Vs. ITO, ruled in favour of the assessee, holding that a financial contribution made by a company to a partnership firm, where the shareholder had a substantial interest, was a capital contribution for commercial purposes and not a loan or advance. Consequently, the amount did not fall under the purview of Section 2(22)(e) of the Income-tax Act, 1961 (which defines “deemed dividend”). This decision led to the deletion of the demand raised against the company for failing to deduct Tax Deducted at Source (TDS) on the alleged deemed dividend.
The Factual Background and Revenue’s Contention
The case pertains to the Assessment Year (AY) 2015-16. The assessee, International Creations Pvt. Ltd., a closely held company, was alleged by the Income Tax Officer (ITO) to have extended a loan or advance of Rs. 39,50,000 to the partnership firm M/s. Gulmohar Knitting during the Financial Year 2014-15. The ITO initiated proceedings under Sections 201(1) and 201(1A) for non-deduction of TDS under Section 194, citing the provisions of Section 2(22)(e).
The Revenue’s argument was built on the following elements:
A director of the assessee company, Shri Ashok Kumar Jindal, held a substantial interest (over 33.36%) in the company.
The same director also had an interest in M/s. Gulmohar Knitting, satisfying the ‘substantial interest’ link required by Section 2(22)(e).
The company’s payment of Rs. 39,50,000 was treated as a loan/advance given to a concern in which a substantial shareholder had an interest, thus qualifying as a deemed dividend to the extent of the payer company’s accumulated profits (which were sufficient at over Rs. 6 crore).
Since the payment was deemed a dividend, the company was obligated to deduct TDS at 10% (Rs. 3,95,000) under Section 194, failing which it was held to be an assessee in default under Section 201(1), with corresponding interest levied under Section 201(1A).
The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO’s action, confirming the demand of Rs. 3,95,000 plus interest of Rs. 3,31,800.
