Deemed dividend treatment does not apply to reciprocal business current-account entries that are mere adjustment transactions.

Frequent reciprocal business transactions in a running account, involving debit and credit entries on a need basis, were treated as current accommodation and adjustment entries rather than loans or advances. On those facts, the statutory conditions for deemed dividend under section 2(22)(e) of the Income-tax Act, 1961 were not met, because the movement of funds was in the ordinary course of business and was not a one-way lending arrangement. The addition made under section 2(22)(e) was therefore held unsustainable and the matter was decided in favour of the assessee.

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Issues: Whether the amounts arising from frequent two-way business transactions between the assessee and its associate concern were liable to be taxed as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.

Analysis: The transactions between the assessee and the associate concern consisted of a large number of debit and credit entries arising in the ordinary course of business, including purchase of raw material and temporary accommodation deposits. The factual finding accepted by the appellate authorities and affirmed by the jurisdictional High Court was that the movement of funds was both ways, on need basis, and was in the nature of current accommodation or adjustment entries rather than loans or advances. On these facts, the statutory condition for treating the amounts as deemed dividend was not satisfied.

Conclusion: The addition made by invoking section 2(22)(e) was not sustainable and the issue was decided in favour of the assessee.

Ratio Decidendi: For the purposes of section 2(22)(e) of the Income-tax Act, 1961, frequent reciprocal business transactions in the nature of current account adjustments do not constitute loans or advances attracting deemed dividend treatment.

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