Tribunal overturns tax assessment deeming shareholder advance as dividend, citing business transactions.

Commissioner of Income Tax Versus The India Fruits Limited

Commissioner of Income Tax Versus The India Fruits Limited - [2014] 369 ITR 581 (T&AP) Issues:
1. Whether the amount advanced to the shareholder can be considered as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961Rs.
2. Whether lending of the amount to the shareholder constitutes a substantial part of the business of the companyRs.

Analysis:

Issue 1: The appeal concerns the classification of an amount advanced to a shareholder as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Tribunal found mutual transactions between the parties in the normal course of business, with the subsidiary company having lending money as one of its business objectives. The Tribunal set aside the assessing officer's order based on these findings. The department argued that there was only one transaction in the year and lending money was not the subsidiary company's business. However, the Tribunal's decision was supported by the Supreme Court judgment in M. Janardhan Rao v. Joint Commissioner of Income Tax 273 ITR 50. The Tribunal's analysis of the statutory provisions and company documents favored the assessee's position, leading to the deletion of the addition as deemed dividend.

Issue 2: The second issue revolves around whether lending the amount to the shareholder constitutes a substantial part of the company's business. The Tribunal's findings indicated a significant credit balance owed by the assessee company to the subsidiary company, which exceeded the amount sought to be taxed as deemed dividend. The Tribunal observed that the subsidiary company advanced money for business purposes like purchasing raw materials and meeting trading liabilities. In contrast to the Walchand case, where isolated transactions were involved, the present case showed a running account with interest charged and a substantial credit balance. The Court upheld the Tribunal's decision, stating that there was no reason to interfere and ruled in favor of the assessee, dismissing the appeal with no costs.

In conclusion, the judgment delves into the intricacies of the Income Tax Act, analyzing the nature of transactions between companies and shareholders to determine the applicability of deemed dividend provisions. The Court's detailed examination of the facts and legal precedents led to a decision favoring the assessee, highlighting the importance of business practices and statutory compliance in tax assessments.