prpri Mutual Transactions can’t come under section 2(22)(e) Mutual Transactions can’t come under section 2(22)(e)

Case Law Details

Case Name : ITO Vs Smt. Gayatri Chakroborty (ITAT Kolkata)
Appeal Number : ITA 151/KOL/2013
Date of Judgement/Order : 30/10/2015
Related Assessment Year :

Brief of the Case

ITAT Kolkata held in case of ITO v Smt. Gayatri Chakroborty that where the transactions are mutual in nature or there is benefit or no benefit to each other, then these kind of transactions will not come under the purview of section 2(22)(e).

Facts of the Case

The Assessee is a director in a company having 25.24% shares. There were transactions between the Assessee and company of giving money to each other. The AO only noted one sided transaction where money was given from Company to Assessee and was of the view that the same was “Loan or Advance” within the meaning of Sec.2(22)(e) of the Act. The AO treated the transactions as in the nature of “Loan or Advance” within the meaning of Sec.2(22)(e) of the Act. The AO however treated some amount as deemed dividend and brought the said sum to tax in the hands of the Assessee.

Order of the ld. CIT(A)

Before the ld. CIT(A), it was contended by the Assessee that the transactions was for “current and mutual account” and not a “loan account”. It was submitted that a current or mutual account is different from a loan account in the sense that it has the feature of mutuality which is not present in a loan account. When an account has a shifting balance that is favourable to one party at times and favourable to the other party at other times, the account is current and mutual. The Assessee relied on the decision of the Hon’ble Supreme Court in the case of Kesari Chand Jaisukh Lal vs Shillong Banking Corporation Ltd. in which it has been held that “to be mutual there must be transactions on each side creating independent obligations on the other and not merely transactions which create obligations on the one side”. It was also pointed out that in almost every month of the FY 2008-09, there were about 5 to 10 transactions involving payments by both the parties to each other. The Assessee mentioned the transactions in the Ledger Account, and pleaded that during the first few months of the FY 2008-09, the outstanding balances were in favour of the Company and in subsequent months the position reversed and the balances after each transaction were in favour of the Assessee. Therefore, in any case whether the outstanding balances at the end of each transaction were in favour of Assessee or the Company, it cannot be held that it was a loan account.

The ld. CIT(A) after going through the arguments of both the sides held that it is now well established that the deeming provision should be construed strictly and the meaning of the words “loans or advances” used in Sec.2(22)(e) cannot be extended to other transactions like ICD or mutual and current transactions. Accordingly, the ld. CIT(A) allowed the appeals of the assessee.

Judgment of the Hon’ble Tribunal

The learned Counsel for the Revenue relied on the order of the AO and the learned counsel for the Assessee reiterated submissions made before the CIT(A).

The Hon’ble Tribunal after going through all the submissions observed that mutual transactions went on in this fashion throughout the previous year and as on the last date of the previous year that neither the Assessee owes the Company nor the company owes Assessee any sum. It was mutual running or current account which created independent obligations There were reciprocal demands between the parties and the account was mutual.

The Hon’ble tribunal relied on the Judgment of the Purushottam Das Mimani v DCIT in which there was the reference of Pradip Kumar Malhotra v. CIT 338 ITR 538 (Cal) wherein Hon’ble High Court held that the phrase “by way of advance or loan” appearing in sub-clause (e) of section 2(22) of the Income-tax Act, 1961, must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company such advance or loan cannot be said to be deemed dividend withín the meaning of the Act.

The Hon’ble Tribunal after making reliance on the Judgment of the Hon’ble High Court held that in the present case the transactions in question does not benefit the Assessee alone and there was no benefit to the Company. The transactions were mutual in nature. The loan account is different from a current account with a shareholder and the transactions between the Assessee and Company are in the nature of current account and provisions of Sec.2(22)(e ) of the Act will not be applicable to the case of the Assessee.

Accordingly, the appeals of the revenue were dismissed.

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