2014 (4) TMI 891 - AT - Income Tax

Assessing substance over formality: Tribunal upholds CIT(A)'s decision on income tax treatment

The DCIT Central Circle -1 Versus Shri Om Prakash Soni, M/s Shri Ram Gum & Chemicals

The Tribunal dismissed the revenue's appeal and the assessee's cross objection, affirming the CIT(A)'s decision. The judgment emphasized assessing the ... Deemed dividend u/s 2(22)(e) of the Act – Loans and advances made by the company to the firm – Held that:- No amount was advanced by the firm to the partners and there was credit balance in the accounts of the partner and at no point of time there was debit balance in the account of the partners from the bank book - there were transactions between the firm and company in the ordinary course of business and no amount received by the firm had been utilized in giving advance to any of the partners, including this assessee - CIT(A) has concluded that the firm in the present year as well as in the previous year has received trade advances from the company for supply of particular type of guwar gum powder – thus, the transactions between the company and firm are business transactions and amounts advanced by this company to the firm is only advance for business purpose and not as loan. Assessee rightly contended that the nature of the transactions has to be decided on the basis of true nature of transactions and not as per nomenclature given in the books – Relying upon Prakash Cotton Mills P. Ltd. Vs. CIT [1993 (4) TMI 3 - SUPREME Court] - the transactions were for the benefit of the shareholders who were also partners in the firm - it cannot be said that the amounts constitute a dividend even under the deeming provisions – the provisions of section 2(22)(e) of the Act are not attracted - the payments were normal business transactions –thus, there is no infirmity in the order of the CIT(A) – Decided against Revenue. Issues:Determining applicability of section 2(22)(e) of the Income-tax Act, 1961 on transactions between a company and a firm involving a common shareholder.Analysis:The case involved an appeal by the revenue and a cross objection by the assessee against the order of the CIT(A) for the assessment year 2003-2004. The revenue contended that a loan taken by a firm from a company, where the assessee held substantial interest in both, fell under section 2(22)(e) of the Act. However, the assessee argued that the transaction was part of ordinary business dealings between the firm and the company. The Tribunal found that the assessee had not received any loan directly or indirectly from either entity. The CIT(A) had also noted that the firm received trade advances from the company for business purposes, and the nature of the transactions was crucial, not just the nomenclature used in the books. Citing relevant case law, the Tribunal upheld the CIT(A)'s decision, emphasizing that transactions for commercial expediency during the normal course of business did not qualify as deemed dividends under section 2(22)(e).In a related matter, the Tribunal referenced a previous order by the CIT(A) in the case of the company, which clarified that the payments were normal business transactions and not deemed dividends under section 2(22)(e). The ITAT's order highlighted that the transactions were for business purposes, emphasizing that the payments were not diverted through indirect means to reach the assessee. The Tribunal concurred with the CIT(A) and dismissed the revenue's appeal, noting that the payments were part of routine business dealings between the company and the firm.Ultimately, the Tribunal dismissed the revenue's appeal and the assessee's cross objection, affirming the CIT(A)'s decision based on the nature of the transactions and consistent application of legal principles. The judgment underscored the importance of assessing the substance of transactions over mere formality and upheld that transactions for commercial expediency in the normal course of business did not attract the provisions of section 2(22)(e) of the Income-tax Act, 1961.