Issue before court:
- The main issue in both the years relates to whether transaction made in normal course of business can be treated as deemed dividend u/s 2 (22) (e) of the act.
- The another issue besides the issue above in AY 2007-08 is addition of Rs. 45,00,000/- as unexplained cash credit.
- Assesse is having shares in various companies. A search & seizure operation was carried out on 26.03.2010. During search statement of assessee was recorded.
- AO noticed certain amounts were transacted in between the companies in which assessee is having shares.
- AO classified those amounts as loans & advances and treated the same as deemed dividends u/s 2 (22) (e) of the Income-tax Act.
- While framing assessment AO also made addition on account of unexplained cash credit.
- CIT (A) not only upheld the order of assessment passed by Assessing Officer but also enhanced addition as deemed dividend in AY 2007-08.
Contention of the revenue:
- The amounts were shown as loans in the balance sheets of companies and not as trade advances given during the normal course of business. Those balance sheets were prepared by qualified auditors on the basis of thorough examination of books.
- In absence of any certificate from the auditors assessee cannot claim occurrence of any inadvertent mistake which was subsequently corrected.
- Liability of Rs. 45,00,000/- is not appearing in the balance sheet of the assessee though the money was credited in the bank account of the assessee. Also no evidence in filed by assessee in this regard.
Contention of assessee:
- During the AY 2005-06 transactions are made for purchasing and selling of goods in normal course of business and therefore, these amounts are business transactions and hence cannot treated as deemed dividend.
- Showing these transactions as loan in balance sheets is an inadvertent mistake which was subsequently corrected.
- Business transactions between the companies are accepted by AO in assessment orders made u/s 153 A/143 (3) for companies.
- In AY 2007-08 transactions between the group companies are current account transaction and no part of running account can be treated as loan or advance as the amounts is continuously moving and balances reflected in that accounts are momentary in nature.
- The transactions made between the companies are mutually reciprocal transactions entered in normal course of business.
- Regarding addition of Rs. 45,00,000/- assessee contended that it was advance received for sale of land and wrongly entered in unrelated account containing debit balance of Rs. 50 Lacs coming from earlier year. Amounts were received from cheques and amount was reflected in the accounts of parties.
Held by the court:
- While deleting addition in AY 2005-06 court have held that on perusal of assessment orders framed u/s 153 A/143 (3) for the companies it was found that AO accepted business transactions between companies and he could not classified same transactions as loan in case of assessee.
- Nomenclature cannot be a conclusive basis to disregard and overlook the true nature of transaction. Contention of the AO that the amounts were shown as loan in balance sheet is rejected. Reliance was placed on the judgment of Delhi High Court in the case of CIT vs. Arvind Kumar Jain ITA No. 589/11 dated 30.9.2011 where court have held that
“It is trite law that mere nomenclature of entry in the books of accounts is not determinative of the true nature of the transaction. See Commissioner of Income Tax vs. India Discount Co. Ltd. 75 ITR 191 (SC), Commissioner of Income Tax vs. Provincial Farmers (P) Ltd. 108 ITR 219 (Cal) and KCP Ltd. vs.CIT 245 ITR 421. In the present case after going through the relevant evidence as well as current account maintained between the parties, it has been established that the payment made were the result of trading transaction between the parties and the amount was not given by way of loan or advances”.
- In year 2007-08 tribunal held that It is evident that there are mutual transactions between two group companies and the account being the two companies is current account transaction. It is thus held that once the transactions between two companies are current account transactions which are entered in the ordinary course of business, the same cannot be classified as advance or loan under section 2(22)(e) of the Act. Reliance was placed on the decision of ITAT Delhi in ITA no. 2573/D/ 2004 in where tribunal decided identical issue relying upon the judgement of Delhi High Court in CIT vs. Ambessdor Travels Pvt. Ltd.
- Regarding addition on account of unexplained cash credits issue was remitted back to the AO for fresh consideration after giving proper opportunity to assessee.
Transactions which are made in normal course of business can be taxed in purview of section 2 (22) (e) brings net accumulated profits in tax net which are distributed by closely held companies to its distributors. There are some business transaction occurred in daily routine of companies which relates to business of the companies. Normally loan includes positive lending of money with acceptance from other side. It generally carries an interest and obligation of repayment. On the other side business transaction are payments in connection to purchasing and selling of goods. Therefore, both the things are different in nature and cannot interfere with scope of each other.
(Compiled by our Team Member Advocate Jagjeet Singh)