2012 (8) TMI 484 - AT - Income Tax

ITAT Upholds Deletion of Deemed Dividend Addition

The Assistant Commissioner of Income Tax, Company Circle-V (3) Versus Smt. G. Sreevidya,

The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition made on account of deemed dividend under section 2(22)(e). ... Repayment of loan to be treated as deemed divided - Addition under the head “other sources” invoking the provisions of section 2(22)(e) - Held that:- In order to attract the provisions of section 2(22)(e) there should be loan/advance by a company to its shareholder with an every amount paid must make the company a creditor of the shareholder of that amount. At the same time, it is to be borne in mind that every payment by a company to its shareholders may not be loan/advance. In the present case, the amount was withdrawn by the assessee from the company only to meet her short term cash requirements. By virtue of offering personal guarantee and collateral security for the benefit of the company, the liquidity position of the assessee had gone down, thus if it is to be construed the amount forwarded by the company to the assessee was not in the shape of advances or loans. The arrangement between the assessee and the company was merely for the sake of convenience arising out of business expediency. In the facts and circumstances of the case, it is not appropriate to hold that the amount withdrawn by the assessee partakes the character of deemed dividend under the provisions of section 2(22)(e) - in favour of assessee. Issues:Appeal by Revenue against CIT(A) order deleting additions under section 2(22)(e) and other heads.Analysis:1. The case involves an appeal filed by the Revenue against the order of the CIT(A)-V, Chennai dated 06.04.2011. The assessee, a Managing Director of a company, had taken a loan from the company and repaid it. The Assessing Officer treated the amount as deemed dividend under section 2(22)(e) and made additions under different heads. The CIT(A) allowed the appeal of the assessee, deleting the additions.2. The Revenue appealed solely on the ground that the CIT(A) erred in deleting the addition made by the Assessing Officer as deemed dividend under section 2(22)(e) of the Act. The Revenue contended that the loan advanced to the assessee fell within the definition of deemed dividend as the company had accumulated profits when the amount was advanced. The Revenue relied on various judgments to support its argument.3. The counsel for the assessee argued that the transaction between the assessee and the company was for business purposes, involving a bank guarantee and collateral security for funding the company. The amount was withdrawn and repaid based on business expediency, not as a dividend. The counsel cited judgments supporting the commercial expediency of such transactions.4. The ITAT Chennai analyzed the provisions of section 2(22)(e) which define deemed dividend and the conditions to be met for a transaction to be considered as such. The ITAT emphasized that every payment by a company to its shareholders may not be a loan/advance, especially if it is for business convenience. The ITAT referred to relevant case laws to support its decision.5. The ITAT found that the case of the assessee was similar to a judgment of the Calcutta High Court where a transaction was deemed for business interest, not as a dividend. The ITAT concluded that the loan given to the shareholder should be deemed as dividend only if specific conditions are met, which were not present in the current case. The ITAT upheld the CIT(A)'s decision to delete the addition made by the Assessing Officer.6. In summary, the ITAT dismissed the Revenue's appeal, stating that the addition made on account of deemed dividend was rightly deleted by the CIT(A). The ITAT found no merit in the Revenue's arguments and upheld the decision in favor of the assessee.