2012 (8) TMI 484 - AT - Income Tax

ITAT Upholds Deletion of Deemed Dividend Addition

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). ... Deemed dividend under section 2(22)(e) - advance or loan by a closely held company to a shareholder holding substantial interest - to the extent of accumulated profits - not in the ordinary course of business / money lending not a substantial part of business - business expediency / commercial consideration - personal guarantee and collateral security as consideration for company benefitDeemed dividend under section 2(22)(e) - business expediency / commercial consideration - personal guarantee and collateral security as consideration for company benefit - Whether the amount of Rs. 17,65,517 withdrawn by the assessee from a closely held company constituted a deemed dividend under section 2(22)(e) for Assessment Year 2006-07. - HELD THAT: - The Tribunal upheld the CIT(A)'s finding that the payments did not partake the character of deemed dividend. Although s.2(22)(e) treats advances or loans by a closely held company to a substantial shareholder as deemed dividend to the extent of accumulated profits, the factual matrix must be examined. In the present case the assessee, a managing director and substantial shareholder, had provided personal guarantee and collateral security to enable the company to obtain bank finance; her liquidity was thereby reduced and withdrawals from the company were permitted as a commercial accommodation against that background. The Tribunal found the transactions were made as a matter of commercial expediency to protect the business interest of the company rather than as gratuitous advances to a shareholder. Reliance placed on precedents favourable to the assessee, notably the Division Bench decision in Pradip Kumar Malhotra (following Creative Dyeing & Printing P. Ltd.), was held to be apposite; conversely, decisions relied on by Revenue (Sarada P., Tarulata Shyam, P.K. Abubucker) were held inapplicable on the facts. Applying these principles, the Tribunal concluded that the amounts advanced did not constitute loans/advances in the sense contemplated by s.2(22)(e) and therefore were not taxable as deemed dividend. [Paras 7, 8, 10]The addition of Rs. 17,65,517 as deemed dividend under section 2(22)(e) was deleted and the Revenue's appeal dismissed.Final Conclusion: On the facts, withdrawals made by the assessee against the background of personal guarantees and collateral security furnished for the company's bank finance amounted to commercial accommodation and did not attract the deeming fiction of section 2(22)(e); the CIT(A)'s deletion of the addition is sustained and the Revenue's appeal is dismissed. 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.