2013 (10) TMI 476 - AT - Income Tax

Tribunal upholds decision: Advances not deemed dividends for non-shareholder entities

The Tribunal dismissed all appeals, upholding the CIT(A)'s decision that the amounts received were not deemed dividends under Section 2(22)(e) as the ... Deemed dividend u/s 2(22)(e) - nature of advances received against the bills raised for the services rendered - accumulated profit - Held that:- Amounts received by the assessee from M/s Ushodaya Enterprises P. Ltd. cannot be treated as deemed dividend under section 2(22)(e) of the Act - CIT(A) has elaborately and exhaustively dealt with the issue by examining all the relevant facts and materials and thereafter has come to the conclusion that the amounts received by the assessee from M/s Ushodaya Enterprises is in regular course of trade, hence, outside the purview of section 2(22)(e) of the Act - Assessing Officer neither in course of the assessment proceeding nor in his remand report has brought any materials to establish the fact that the amount received was not in regular course of trade but in the nature of loan and advance as envisaged u/s 2(22)(e) of the Act - No reason to interfere with the order passed by the CIT(A) in all the assessment years under consideration and uphold the same – Decided against the Revenue. Issues Involved:1. Whether the amount received by the assessee qualifies as deemed dividend under Section 2(22)(e) of the Income Tax Act.2. Whether the assessee, not being a shareholder, can be taxed for deemed dividend.3. Whether the advances received were in the regular course of trade or in the nature of loans and advances.Issue-wise Detailed Analysis:1. Whether the amount received by the assessee qualifies as deemed dividend under Section 2(22)(e) of the Income Tax Act:The Department challenged the CIT(A)'s order deleting the addition made by the Assessing Officer (AO) by treating the amount received as deemed dividend under Section 2(22)(e) of the Act. The AO had observed that the assessee received advances from M/s Ushodaya Enterprises Ltd., which were adjusted against bills raised for services rendered. The AO noted that Ch. Ramoji Rao (HUF) held 90% share in both companies, and Ushodaya Enterprises Ltd. had accumulated profits. Thus, the AO considered the excess advances as deemed dividend under Section 2(22)(e). However, the CIT(A) held that the advances were in the form of a running account of commercial trade and did not fall within the purview of deemed dividend as per Section 2(22)(e).2. Whether the assessee, not being a shareholder, can be taxed for deemed dividend:The CIT(A) concluded that the addition could not be made as the assessee was not a shareholder of M/s Ushodaya Enterprises Ltd. This was supported by the decision of the Hon'ble Delhi High Court in CIT Vs. Ankitech P. Ltd. and the ITAT, Mumbai Special Bench in Bhaumik Colours (P) Ltd., which stated that for Section 2(22)(e) to apply, the recipient must be a shareholder of the payer company. The Tribunal found no infirmity in the CIT(A)'s order, noting that the Department did not controvert the fact that the assessee was not a shareholder. Hence, the advances could not be considered deemed dividend in the hands of the assessee.3. Whether the advances received were in the regular course of trade or in the nature of loans and advances:The CIT(A) elaborately examined the facts and concluded that the amounts received by the assessee from M/s Ushodaya Enterprises Ltd. were in the regular course of trade. The AO failed to provide evidence that the amounts were not in the regular course of trade but were loans and advances as per Section 2(22)(e). The Tribunal upheld the CIT(A)'s order, agreeing that the advances were part of regular trade transactions and thus outside the purview of deemed dividend under Section 2(22)(e).Conclusion:The Tribunal dismissed all the appeals filed by the Department, affirming the CIT(A)'s decision that the amounts received by the assessee from M/s Ushodaya Enterprises Ltd. were not deemed dividends under Section 2(22)(e) of the Act as the assessee was not a shareholder and the advances were part of regular trade transactions. The judgment emphasized the requirement that deemed dividends can only be taxed in the hands of shareholders, and not in the hands of non-shareholder entities receiving advances in the course of trade.