Advances from M/s Ushodaya not deemed dividends under IT Act

The ITAT upheld the CIT(A)'s decision that the advances received by the assessee from M/s Ushodaya Enterprises Ltd. did not qualify as deemed dividend under section 2(22)(e) of the Income Tax Act. Since the assessee was not a shareholder of the company, the deemed dividend provisions could not be applied. The ITAT dismissed the Department's appeals and upheld the CIT(A)'s order, emphasizing that the advances were part of regular trade transactions, not loans, and therefore not subject to deemed dividend taxation.

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Issues Involved:
1. Whether the amount received by the assessee from M/s Ushodaya Enterprises Ltd. qualifies as deemed dividend under section 2(22)(e) of the Income Tax Act.
2. Whether the assessee, not being a shareholder of M/s Ushodaya Enterprises Ltd., can be taxed under the provisions of deemed dividend.

Issue-wise Detailed Analysis:

1. Qualification of Amount as Deemed Dividend under Section 2(22)(e):
The core issue revolves around whether the advances received by the assessee from M/s Ushodaya Enterprises Ltd. can be classified as deemed dividend under section 2(22)(e) of the Income Tax Act. The Assessing Officer (AO) had treated the advances as deemed dividend, asserting that the excess advances received against services rendered fell within the purview of section 2(22)(e). However, the assessee contended that these advances were trade credits adjusted against bills for services rendered, not loans.

The CIT(A) examined the nature of these advances and concluded that they were part of a running account of commercial trade. Therefore, they did not fall within the scope of deemed dividend as per section 2(22)(e). The CIT(A) referred to previous findings in the assessee's appeals for earlier assessment years (2006-07 and 2009-10), which supported this view.

2. Taxability of Non-Shareholder under Deemed Dividend Provisions:
A significant point of contention was whether the assessee, who is not a shareholder of M/s Ushodaya Enterprises Ltd., could be subjected to tax under the deemed dividend provisions. The CIT(A) noted that the assessee was not a shareholder of the lender company, M/s Ushodaya Enterprises Ltd. This fact was crucial because section 2(22)(e) of the Act specifies that deemed dividend provisions apply to payments made to shareholders.

The ITAT upheld the CIT(A)'s decision, referencing the Hon'ble Delhi High Court's ruling in CIT Vs. Ankitech P. Ltd. and the ITAT Mumbai Special Bench's decision in Bhaumic Colours (P) Ltd., which clarified that deemed dividend provisions do not extend to non-shareholders. The legal fiction created by section 2(22)(e) applies to the definition of dividend but does not extend to treating non-shareholders as shareholders for tax purposes.

Conclusion:
The ITAT, after considering the rival submissions and perusing the records, found no infirmity in the CIT(A)'s order. The advances received by the assessee from M/s Ushodaya Enterprises Ltd. were part of regular trade transactions and not loans or advances as envisaged under section 2(22)(e). Moreover, since the assessee was not a shareholder, the deemed dividend provisions could not be applied.

The appeals filed by the Department were dismissed, and the CIT(A)'s order deleting the addition made by the AO was upheld. The ITAT's decision was consistent with previous rulings in the assessee's own case for earlier assessment years, reinforcing that the advances in question did not qualify as deemed dividend under section 2(22)(e) of the Act.

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