Amount advanced for supply Material/Labour cannot be treated as deemed dividend U/s. 2(22)(e)

Brief of the case:

In the case of Smt. Uppala Rajani Vs. DCIT Hyderabad Bench of ITAT have held that the amount advanced for business transaction between parties regarding supply of material and labour, are not such to fall within the definition of ‘deemed dividend’ under S.2(22)(e). ITAT Also adjudicated issue of reopening and held that reopening was based on information revealed out during survey and also statements were recorded at the time of survey. So it can not be said that reopening was based on change of opinion if earlier order was passed u/s 143 (3).

Facts of the Case:

• The assessee is an individual, who is promoter and Director of M/s. Aster Pvt. Ltd. Assessee filed its return after declaring total income of Rs.16,47,133.
• In the said return, loss of Rs.5,77,562 was shown by the assessee from her proprietary business of providing staff services to M/s. Aster Pvt. Ltd. claimed to be carried on in the name of M/s. Aster Industries, the same was set off against other income.
• In original proceedings u/s 143 (3) the income was accepted by AO.
• Subsequently, a survey action u/s 133A was carried out in the case of M/s. Aster Pvt. Ltd. and it was revealed out during the course of survey that the proprietary concern of the assessee, M/s. Aster Industries had actually not provided any staff services to M/s. Aster P. Ltd.
• During survey statement of CEO of Aster Pvt. Ltd. and brother of the assessee was recorded according to which there were no such staff services actually provided by M/s. Aster Industries during the year under consideration.
• CEO also agreed to offer to tax the amount claimed to be paid to M/s. Aster Industries towards providing staff services in the hands of M/s. Aster P. Ltd. and accordingly, filed a revised return of the said company, admitting such additional income.
• On the basis of this information assessment was reopened and notice u/s 148 was issued.
• During the course of reassessment proceedings, the assessee objected to the reopening of the assessment as well as the disallowance proposed to be made by the Assessing Officer on account of its claim for loss of Rs.5,77,562 suffered by her proprietary concern, M/s. Aster Industries.
• AO rejected the objections raised by the assessee and made an addition of Rs.5,77,562 to the total income of the assessee, by disallowing the loss claimed in the proprietary concern of Ms. Aster Industries.
• AO also noticed that the assessee was holding major part of the shares of both these companies and the provisions of S.2(22)(e) of the Act were applicable to the amount of loans and advances given by M/s. Aster P. Ltd. to M/s. Aster Infrastructure P. Ltd.
• Accordingly the addition was proposed to be made by him on account of the said amounts, treating it as deemed dividend under S.2(22)(e) in the case of M/s.Aster Infrastructure Private Limited.
• AO added the amount of Rs.5,38,42,692 advanced by M/s.Aster Private Limited to M/s.Aster Infrastructure Private Limited in the hands of M/s.Aster Infrastructure Private Limited under S.2(22)(e) on substantive basis, treating it as deemed dividend and also proposed to add the said amount in the hands of the assessee in her individual capacity, being share-holder of both the companies, on protective basis.
• Assessee contested the validity of reopening.

Contention of the assessee:

• The transactions between M/s.Aster Infrastructure Private Limited and M/s.Aster Private Limited were regular business transactions and the provisions of S.2(22)(e) therefore were not attracted.
• The claim of the assessee for loss of Rs.5,77,562 incurred in the proprietary concern M/s. Aster Industries having been allowed by the Assessing Officer after examining all the relevant aspects in the scrutiny assessment made originally under S.143(3), the reopening of assessment on this issue was based on mere change of opinion.
• There were similar transactions entered into between M/s.Aster Infrastructure Private Limited and M/s.Aster Private Limited even during the earlier years, but no addition was made on account of deemed dividend under S.2(22)(e) in the earlier years, either in the hands of M/s.Aster Infrastructure Private Limited or even in the hands of assessee.
• The nature of relevant transactions was duly reflected in the relevant books of account and if at all, such nature is not verified either by the revenue. Hence, the addition made by them under S.2(22)(e) cannot be sustained.

Contention of the revenue:

• The total income of the assessee on account of the amounts advanced by the M/s.Aster Private Limited to M/s.Aster Infrastructure Private Limited, wherein the assessee is a common shareholder, treating the same as deemed dividend under S.2(22)(e).
• The assessee’s claim that the relevant transactions between M/s.Aster Private Limited and M/s.Aster Infrastructure Private Limited are in the nature of business transactions is not supported by any documentary evidence, such as bills, vouchers, etc. and the same, therefore, has not been accepted by the lower authorities.
• Although the regular business transactions are outside the purview of S.2(22)(e), argued by the assessee, onus is on the assessee to prove the nature of the relevant transactions as business transactions on the basis of relevant supporting documentary evidence.

Held by CIT (A):

• During survey, the key individuals connected with the business of the appellant have categorically admitted that the assessee did not provide any services. Moreover, this issue was never verified in the original assessment .
• In the case of Consolidated Photo & Finvest Ltd. vs. ACIT 281 ITR 394 (Del), the Hon’ble High Court held that principle of change of opinion is not applicable where the Assessing Officer did not address the issue in original assessment. Hence at the time of issue of notice there was a valid reason for the Assessing Officer.
• CIT (A) held notice u/s 148 as valid.
• CIT(A) confirmed the addition made by the Assessing Officer under S.2(22)(e) to the total income in the hands of the assessee, on substantive basis.

Held by ITAT:

• The basis of reopening was information revealed out during survey and hence it can not be said that reopening was mere a change of opinion.
• It is observed that the nature of the relevant transactions between the M/s. Aster P. Ltd. and M/s. Aster Infrastructure P. Ltd., which are treated as deemed dividend in the hands of the assessee, was claimed to be that of regular business transactions by the assessee from the assessment stage.
• The AO, however refused to look into this vital aspect and made the addition under S.2(22)(e) on account of deemed dividend in the case of assessee on protective basis, by relying on the assessment made in the case of M/s. Aster Infrastructure P. Ltd., where the same addition was made on substantive basis.
• The business connection between the M/s. Aster P. Ltd. and M/s. Aster Infrastructure P. Ltd. was clearly established by the assessee on the basis of analysis made of the relevant transactions between the said two companies and the nature of business transactions.
• Assessee is right in arguing that the relevant transactions were duly recorded in the books of account regularly maintained and the nature of the said transactions was verifiable from the relevant ledger account itself. In the absence of proper verification of relevant transaction applicability of S.2(22)(e) would certainly fail.
• The Hon’ble Delhi High Court in the case of CIT V/s. Creative Dyeing & Printing Ltd. (318 ITR 476) held that the amount advanced to assessee company by another company having common directors not being a loan, but an advance for business transaction which is to be adjusted against the moneys payable by the latter to the assessee in subsequent years, does not fall within the definition of ‘deemed dividend’ under S.2(22)(e).
• It was held that the amount advanced for business transaction between parties, are not such to fall within the definition of ‘deemed dividend’ under S.2(22)(e)