Case Law Details
Smt. Sabhapathi Padmasree Vs ITO (ITAT Visakhapatnam)
Introduction: Delve into the intricacies of the dispute between Smt. Sabhapathi Padmasree and the Income Tax Officer (ITO), as the Income Tax Appellate Tribunal (ITAT) Visakhapatnam addresses the tax implications of loans and advances under section 2(22)(e). The case revolves around the treatment of a debit balance in the company’s books, collateral security provided by the assessee, and the subsequent tax treatment of deemed dividends.
Detailed Analysis: The article provides a detailed analysis of the arguments presented by both parties. The assessee contends that the debit balance in the company’s books is a normal current account, not constituting gratuitous payments. Emphasizing that the assessee offered her personal property as collateral security for the company’s credit facilities, it is argued that such advances cannot be categorized as gratuitous payments falling under the ambit of loans and advances defined in section 2(22)(e) of the Income Tax Act.
Drawing parallels with the precedent set in the case of Pradip Kumar Malhotra vs. CIT, the article underscores the importance of the phrase “by way of advance or loan.” The tribunal’s interpretation highlights that gratuitous loans or advances fall under section 2(22)(e), while those given in return for an advantage conferred upon the company are excluded.
Conclusion: In a significant decision, the ITAT Visakhapatnam rejects the application of section 2(22)(e) in the present case. The tribunal underscores that the debit balance in the company’s books does not represent gratuitous payments, considering the nature of the current account. Furthermore, the collateral security provided by the assessee in the form of her personal property plays a crucial role in differentiating between gratuitous and consideration-based loans and advances.
The decision aligns with the precedent set in Pradip Kumar Malhotra’s case, emphasizing the importance of understanding the nature of the transaction and the purpose behind loans or advances. As the ITAT rules in favor of the assessee, the article concludes by shedding light on the broader implications of this decision on the taxation of deemed dividends in similar cases.
In the present case , the deemed section 2(22)(e) has no application as the debit balance in the company’s books of accounts is normal current account wherein the company has credited amounts payable to her and debited amounts withdrawn by her and net result of which is shown debit balance which cannot be considered as gratuitous payment. Considering the fact that the assessee had give her personal property as collateral security to the bank for the purpose of availing credit facilities by the company, in turn the company has given certain advances, therefore, the same cannot be considered as gratuitous payments which are coming within the meaning of loans and advances as defined U/s. 2(22)(e) of the Act. We also find that the facts in the case of Pradip Kumar Malhotra vs. CIT (supra) are akin to the facts under reference in the instant case. Therefore, we are of the considered view that the loans and advances cannot be considered as deemed dividend U/s. 2(22)(e) of the Act and accordingly allow the relevant grounds raised by the assessee.
FULL TEXT OF THE ORDER OF ITAT VISAKHAPATNAM
This appeal filed by the assessee against the order of the Ld. CIT(A)-1, Visakhapatnam in appeal ITA No. 10115/201617/CIT(A)-1 /VSP/ 2020-21, 21/07/2020 passed U/s. 143(3) r.w.s 147 and U/s. 250(6) of the Act for the AY 2011-12.
2. Brief facts of the case are that the assessee is deriving income from salary, house property and other sources filed her return of income declaring total income of Rs. 11,26,444/-. The case was selected for scrutiny under manual selection U/s. 147 of the Act and statutory notice U/s. 148 was issued on 12/5/2014. The Assessing Officer considering the submissions made by the assessee’s representative completed the assessment by adding 1,04,28,518/- as deemed dividend U/s. 2(22)(e) of the Act. Aggrieved by the order of the AO assessee filed an appeal before the Ld. CIT(A)-1, Visakhapatnam. Considering the submissions made by the assessee’s representative, the ld. CIT(A) upheld the order of the AO and dismissed the appeal. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.
3. The assessee has raised the following grounds of appeal:
“1. The order of the Ld. CIT(A) is contrary to the facts and also the law applicable to the facts of the case.
2. The Ld. CIT(A) is not justified in sustaining the addition of Rs. 1,04,28,517/- made by the Assessing Officer treating the amount received from Pavan Cargo (P) Ltd as deemed dividend U/s. 2(22)(e) of the IT Act, 1961.
3. Without prejudice to the above, the Ld. CIT(A) ought to have held that to the extent of opening balance of Rs. 89,16,288/- as on 1/4/2010, addition could not have been made for the impugned assessment year.
4. Any other ground or grounds may be urged at the time of hearing.”
4. Ground No. 1 and 4 are general in nature and need no adjudication.
5. With respect to Grounds No.2 and 3, the Ld. AR submitted that the addition of Rs. 1,04,28,517/- includes opening balance of Rs. 89,16,288/- and the amount advanced during the year is only Rs. 15,12,229/-. The Ld. AR also submitted that the assessee has offered her personal property valued at Rs. 3 Crs as collateral security for the loans taken by the company. The Ld. AR also argued that as per the section 2(22)(e), deemed dividend shall arise only if the loans or advances paid to a share holder. The Ld. AR relied on the decision of the Vizag Bench of the Tribunal in the case of Sri Hari Prasad Bhararia and the case of Pradip Kumar Malhotra vs. CIT [2011] 338 ITR 538. Per contra, the Ld. DR placed reliance on the orders of the authorities below.
6. We have heard the rival contentions and perused the material available on record and the orders of the Authorities below. We find merit in the argument of the Ld. AR that the amount of Rs. 15,12,229/- is only the advance made during the year under review. We have also considered the fact that the assessee has offered her personal property as collateral security for the loan obtained by the company. We do not find merit in the argument of the Ld. AR that only loan to a share holder is considered as deemed dividend whereas the notice U/s. 148 says that this loan is given to Directors. Since the facts are that the company is a closely held and the assessee and her husband are only the two Directors on the Board of the Company, the Ld. AR admitted that the assessee is also a share holder holding more than 10% of the shares in the company. We find from the paper book submitted by the Ld. AR as per the sanction letter of Indian Bank dated 9/7/2011, the assessee has given her residential property as collateral security for the loans taken by the company. The reliance placed by the Ld. AR in the case of Pradip Kumar Malhotra [2011] 338 ITR 538 (Calcutta) deserves consideration based on the ratio laid down as under in Para 10 of the order:
10. After hearing the learned Counsel for the parties and after going through the aforesaid provisions of the Act, we are of the opinion that the phrase “by way of advance or loan” appearing in sub-clause (e) must be construed to mean those advances or loans which a share holder enjoys for simply on account of being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power; but if such loan or advance is given to such share holder as a consequence of any further consideration which is beneficial to the company received from such a share holder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. Thus, for gratuitous loan or advance given by a company to those classes of share holders would come within the purview of Section 2(22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such share holder.
In the present case also, the deemed section 2(22)(e) has no application as the debit balance in the company’s books of accounts is normal current account wherein the company has credited amounts payable to her and debited amounts withdrawn by her and net result of which is shown debit balance which cannot be considered as gratuitous payment. Considering the fact that the assessee had give her personal property as collateral security to the bank for the purpose of availing credit facilities by the company, in turn the company has given certain advances, therefore, the same cannot be considered as gratuitous payments which are coming within the meaning of loans and advances as defined U/s. 2(22)(e) of the Act. We also find that the facts in the case of Pradip Kumar Malhotra vs. CIT (supra) are akin to the facts under reference in the instant case. Therefore, we are of the considered view that the loans and advances cannot be considered as deemed dividend U/s. 2(22)(e) of the Act and accordingly allow the relevant grounds raised by the assessee.
7. The assessee has raised the following additional ground: “On the facts and circumstances of the case, whether the reopening is bad in law and therefore the notice issued U/s. 148 of the Act is liable to be quashed as illegal and the entire assessment proceedings concluded on the basis of such illegal notice are also liable to be quashed is void ab initio.”
8. Since the core issue involved in the appeal is allowed in favour of the assessee, adjudication of this additional ground raised by the assessee is not required. It is ordered accordingly.
9. In the result, appeal of the assessee is allowed. Pronounced in the open Court on the 14th June, 2022.
