DCIT Vs Svarna Infrastructure & Builders Pvt. Ltd. (ITAT Kolkata)
The issue under consideration is whether the receipt of advance vis-a-vis no accumulated profit in case of lending company is considered as deemed dividend u/s 2(22)(e)?
ITAT states that when dividends are declared by a company, it is solely the shareholders who benefit from the transaction. No benefits accrue to the company by way of dividend distribution. Thus, section 2(22)(e) of the Act covers only such situations, where the shareholder alone benefits from the loan transaction, because if the company also benefits from the said transaction, it will take the character of a commercial transaction and hence will not qualify to be dividend. In the case of the assessee, by giving and taking financial assistance from each other. both the assessee and the company were benefited and such transactions between them were nothing but commercial transactions and dividend attributable to the shareholder is nothing to do with such business transaction. From the above discussions it can be said that sec.2(22)(e) of the Act covers only those transactions which benefit the shareholder alone and results in no benefit to the company. On the other hand, if the transaction is mutual by which both sides are benefited, it is undoubtedly outside the purview of provisions of sec. 2(22)(e) of the Act. From the above, it is clear that the loan account differs from current account and the provisions of section 2(22](e] of the Act, being a deeming section, cannot be applied to current account. In such circumstances, ITAT delete the addition and this common issue of assessee’s appeals is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
The captioned appeal filed by the Revenue and the cross objection filed by the assessee, pertaining to assessment year 2012-13, are directed against the order passed by the Commissioner of Income Tax (Appeal)-4, Kolkata, in appeal no. 39/CIT(A)-4/2015-16/Kol, which in turn arises out of an assessment order passed by the Assessing Officer u/s143(3) of the Income Tax Act, 1961 (in short the ‘Act’) dated 09/03/2015.
2. The grounds of appeal raised by the revenue are as follows:
1. The ld. CIT(A) has erred in deleting the addition of Rs. 2,88,30,842/-, being the transaction with E-edit Infotech Pvt. Ltd, ignoring the fact that the assessee was holding all the shares of the above said company which needed to be considered whereas the amount of advances which was received by the assessee from its subsidiaries was rightly treated by the Assessing Officer as deemed dividend.
2. The ld. CIT(A) has erred in deleting the addition of Rs. 24,25,168/- being transaction with EDP Software Ltd. ignoring the fact that the assessee is holding all the shares of the above said company which needed to be considered, whereas the amount of advance which was received by the assessee from its subsidiaries was rightly treated by Assessing Officer as deemed dividend.
3. That the appellant craves leave to add, delete or modify any of the grounds of appeal before or at the time of hearing.
3. Ground No. 1 raised by the Revenue relates to addition of Rs. 2,88,30,842/-being the transaction with E-edit Infotech Pvt. Ltd; treated by assessing officer as deemed dividend u/s 2(22) (e) of the Act.
4. Facts of the case which can be stated quite shortly are as follows:The assessee company filed its return of income for the assessment year under consideration declaring total income of Rs. 79,51,000/-. Subsequently, assessment order u/s 143(3) of the Act was passed wherein Assessing Officer has treated Rs. 3,14,40,519/- as deemed dividend u/s 2(22)(e) of the Act. The Assessing Officer had made additions of Rs. 3,14,40,519/- in terms of provisions of section 2(22)(e) of the Act as shown below:
i) Rs. 2,88,30,842/- with respect to advance received from E. Edit Infotech P ltd.
ii) Rs. 1,84,509/- with respect to advance received from Nathvar Tracon (P) Ltd.
iii) Rs. 24,25,168/- with respect to advance received from EDP Software Ltd.
The basic grounds of additions by the Assessing Officer were that fresh advances have been given by the subsidiary companies to the assessee company and since such advances were not in the normal course of business, therefore the provisions of Section 2(22)(e) of the Act shall get attracted to the extent of accumulated profits of the respective subsidiary companies. Therefore, the AO made addition of Rs. 2,88,30,842/- with respect to advance received from E. Edit Infotech P ltd. The AO also made addition in respect of advance received from Nathvar Tracon (P) Ltd and from EDP software Ltd.
5. On appeal, the ld. CIT(A) deleted the addition. Aggrieved the Revenue is in appeal before us.
6. We have heard both the parties and perused the material available on record. We note that finding of the ld. CIT(A) that E- Edit Infotech Pvt. Ltd. is a lending company is perverse vide pg no. 15, para 3.2 of the order of ld. CIT(A). Since the object clause of memorandum of association of the E-Edit Infotech Pvt. Ltd. does not contain lending business activity. That is, the substantial part of business of E-edit Infotech Pvt. Ltd. was not granting of loans, and the said aspect has not been examined by ld CIT(A).Apart from this, the case of the assessee is that E-Edit Infotech Pvt. Ltd. advanced the money to the assessee for the purpose of purchase ofland and the said issue has also not been examined by the ld. CIT(A). This is evident from the finding portion of ld. CIT(A) which is reproduced below:
“Since all the grounds are interrelated therefore, I am taking up all the grounds together. I have perused the assessment order and the submissions of the appellant and the case laws on this subject. For the sake of clarity, I am discussing advances from the three companies separately since the applicability of section 2(22)(e) of the Act is dependent on several facts which arenot identical in all the cases.In respect of addition of Rs. 2,88,30,842./- with respect to amount received from E- Edit Infotech Pvt. Ltd., 1 find that the appellant was maintaining two ledgers for E-Edit Infotech Pvt. Ltd., one with respect to sale of immovable property and second one, being in the nature of current account. This is even evident from the assessment order wherein at Page 6, the Ld. Assessing Officer has reproduced ledger copy of first nature of transactions and at Page 7 to 9, wherein he has reproduced ledger copy of second nature of transactions. The Assessing Officer has separately calculated peak credit for both the types of transactions and applied the provisions of section 2(22)(e) of the Act.
Ld AR emphasized that the money advanced to the assessee co. by EIPL is either an advance for property and current account transaction or a loan. If it is an advance for property then it is a business advance and therefore section 2(22) (e) would not apply. The AR argued that alternatively if it is a loan then since substantial part of the business of the lending company is granting of loan and hence section 2 (22) (e) would not apply. Ld AR also pointed out that the assessee is subsequently paying interest on this loan/business advance amount (assessment order page 3 para 3).
I have gone through the audited accounts of E-edit Infotech Pvt. Ltd. for F.Y. 2011-12, wherefrom it is evident that the substantial part of business of E-edit Infotech Pvt. Ltd. was granting of loans.”
7. We note that during the appellate proceedings, the A.R. of the assessee emphasized the money advanced to the assessee company by EIPL (E-edit Infotech Pvt. Ltd.) is either an advance for property or current account transaction. The ld. CIT(A) has also gone through the audited account of E-edit Infotech Pvt. Ltd. and noticed that substantial part of business of E-Edit Infotech Pvt. Ltd. was granting of loans. The ld DR submits before us that object clause of memorandum of association of E-Edit Infotech Pvt. Ltd. does not say that the company is in the business of money lending. It is also not clear that said advance by E-Edit Infotech Pvt. Ltd. is for advance for purchase of property / land. Both these issues have not been examined by ld. CIT(A). Therefore, we think it fit and appropriate to remit this issue back to the file of ld. CIT(A) for fresh examination. Therefore, we set aside the order of ld. CIT(A) and remit this issue back to the file of ld. CIT(A) for fresh adjudication in accordance to law. For statistical purposes, the ground raised by the Revenue is allowed.
8. Ground No. 2 raised by the revenue relates to addition of Rs. 24,25,168/- being transaction of EDP Software Ltd, treated by Assessing Officer as deemed dividend, under section 2(22) (e) of the Act.
9. At the outset itself the ld. Counsel submitted before us that the Assessing Officer has erred in making addition of Rs. 24,25,168/- u/s 2(22)(e) being trade advance received from EDP Software Ltd, since such advance was given by EDP Software Ltd in the ordinary course of business and substantial business of the said company were to deal in loan and advance, as evident from the audited accounts. Besides, there is no accumulated profits in the hands of the EDP Software Ltd., hence addition u/s 2(22)(e) should not be made. Whereas the ld. D.R. for the revenue has reiterated the stand taken by the Assessing Officer.
10. We have heard both the parties and perused the materials available on record. The ld Counsel submitted before us that in the instant case, the ld. Assessing Officer failed to appreciate the fact that there was no accumulated profit in the books of EDP Software Ltd as on 31.03.2011. At this juncture it is relevant to mention here the written submissions furnished by the assessee before the ld CIT(A) in respect of accumulated profit in the books of EDP Software Ltd as on 31.03.2012:
“Debit Balance of profit & loss account of EDP Software Ltd. was Rs. 10,60,332/-. Break up of Reserves & Surplus as on 31.03.2011 of EDP Software Ltd. is given below:
