ACIT Vs Adiish Jain (ITAT Delhi)
Introduction: The case of ACIT Vs Adiish Jain before the ITAT Delhi revolves around the contentious issue of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961. The Income Tax Department sought to add a substantial amount as deemed dividend, which was later contested by the assessee.
Detailed Analysis: The crux of the matter lies in determining whether the transactions between M/s. SMW Metal Pvt. Ltd and M/s. JP Engineers qualify as deemed dividend under section 2(22)(e) of the Act. The Revenue contended that the advances made by M/s. SMW Metal Pvt. Ltd to M/s. JP Engineers should be treated as deemed dividend as the assessee held substantial interest in both entities.
However, the assessee argued that the transactions were commercial in nature, part of their ordinary course of business, and not loans or advances as per the provisions of the Act. The contention was supported by evidence of ongoing business transactions between the entities, including sales and purchases.
The ITAT Delhi carefully analyzed the nature of the transactions, considering the business relationship between the entities and the purpose behind the advances. It observed that the transactions were part of a running current account, typical of business dealings between shareholding entities.
Additionally, the ITAT referenced relevant judicial precedents, including the decision in CIT Vs. Creative Dyeing and Printing Pvt. Ltd, to support its findings. It emphasized that transactions conducted in the ordinary course of business should not be treated as deemed dividend unless they meet specific criteria outlined in the Act.
Conclusion: Ultimately, the ITAT Delhi ruled in favor of the assessee, deleting the addition made by the Income Tax Department. The decision underscored the importance of assessing transactions in the context of business relationships and commercial practices. This case sets a precedent for similar disputes involving deemed dividend under the Income Tax Act, providing clarity on the treatment of transactions between shareholding entities.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. The appeal in ITA No. 284/Del/2021 for AY 2016-17, arises out of the order of the Commissioner of Income Tax (Appeals)-33, Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] in Appeal 10324/18-19/773/19-20 dated 21.09.2020 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 21.12.2018 by the Assessing Officer, ACIT, Circle-63(1), New Delhi (hereinafter referred to as ‘ld. AO’).
2. The revenue has raised the following grounds of appeal :-
“1 The Ld. CIT(A) has erred in deleting the addition of Rs. 5,67,72,393/- and has not appreciated the fact that till 27.11.2015 no sale or purchase transactions occurred between the two parties, Mis J.P. Engineers and M/s SMW Metal Pvt Ltd, however, there was huge amount of financial transactions held between the two parties. Further, the Lat. CIT(A) has not appreciated the fact that the credit entries to M/s J.P. Engineers received from SMW Metals were almost settled even before initiation of any commercial transaction. This clearly establishes that such transaction are not in nature of trade advances but deemed dividend in the hands of assessee u/s 2(22)(e) of the Act.”
3. The only issue to be decided in this appeal is as to whether the ld CIT(A) was justified in deleting the addition made on account of deemed dividend u/s 2(22)(e) of the Act in the facts and circumstances of the instant case.
4. We have heard the rival submissions and perused the material available on record. The assessee is an individual and apart from being a partner of M/s. JP Engineers having 50% share thereon, he is also a shareholder in SMW Metal Pvt. Ltd having 22.08% voting power thereon. During the year under consideration, M/s. SMW Metal Pvt. Ltd had advanced some monies to M/s. JP Engineers. The ld AO sought to treat the amount advanced by M/s. SMW Metals Pvt. Ltd to M/s. JP Engineers as deemed dividend in the hands of the assessee herein as the assessee was having more than 10% share in both the entities and having substantial interest thereon and that according to ld AO, the monies advanced by a concern in which the assessee has substantial interest had advanced monies in the nature of loan and advances to the other concern i.e. M/s. JP Engineers in which the assessee is substantially interested, would squarely fall within the ambit of definition of section 2(22)(e) of the Act. The ld AO also observed that M/s. SMW Metal Pvt. Ltd has accumulated profits to the tune of Rs. 9,68,26,731.68. For this purpose, the ld AO analysed the ledger account of M/s. SMW Metal Pvt Ltd and M/s. JP Engineers. The ld AO observed that though there are trading transactions in respect of sales/ purchases that had occurred between the parties only from 27.11.2015 and in earlier year. Accordingly, the ld AO concluded that up to 26.11.2015 the transactions carried out between M/s. SMW Metal Pvt. Ltd and M/s. JP Engineers are only in the nature of loan and advances transaction warranting invocation of provisions of section 2(22)(e) of the Act. Accordingly, the ld AO held that the CBDT Circular No. 19/2017 dated 12.06.2017 relied upon by the assessee could be made applicable only from 27.11.2015 onwards and not earlier.
5. The ld AR before us filed a tabulation on the basis of working of deemed dividend by the ld AO and the anomalies thereon as under:-
