2015 (12) TMI 1371 - AT - Income Tax

Tribunal rules transaction not deemed dividend under Income Tax Act

Asstt. Commissioner of Income Tax Versus Smt. Dina Sudhir Shah

Asstt. Commissioner of Income Tax Versus Smt. Dina Sudhir Shah - TMI Issues Involved:1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961 to the transaction between M/s Ace Divine Jewellery Pvt Ltd (ADJPL) and M/s Dinurje Jewellery Pvt Ltd (DJPL).2. Determination of whether the transaction was a loan/advance or a commercial transaction.3. Assessment of deemed dividend in the hands of the assessee.Issue-wise Detailed Analysis:1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961:The revenue was aggrieved by the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] in cancelling the assessment of deemed dividend made under section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) had received information that M/s ADJPL had given a loan of Rs. 4.64 crores to M/s DJPL and noted that M/s ADJPL had accumulated profits of Rs. 6.87 crores. The AO concluded that since the assessee held more than 20% shares in both companies, the provisions of section 2(22)(e) were applicable, and assessed the loan amount as deemed dividend.2. Determination of whether the transaction was a loan/advance or a commercial transaction:During the appellate proceedings, the assessee argued that the amount of Rs. 4.64 crores was given by ADJPL to DJPL as an advance towards the purchase of property, supported by a Memorandum of Understanding (MOU) executed on 19.5.2008. The assessee contended that the payment was for a commercial transaction and not a loan or advance, thus section 2(22)(e) should not apply. The CIT(A) found this explanation convincing and cancelled the assessment of deemed dividend.The revenue argued that the payment should be considered a loan transaction as the property was not ultimately purchased and the advance amount might have been repaid. However, the assessee maintained that the provisions of section 2(22)(e) apply only to loans or advances, not to commercial transactions. The assessee provided evidence that the amount was an advance for the purchase of a flat, which was later cancelled due to market conditions and the shifting of the Diamond Bourse, leading to the repayment of the amount.3. Assessment of deemed dividend in the hands of the assessee:The CIT(A) relied on various case laws, including the Delhi High Court's judgment in CIT Vs. Rajkumar (318 ITR 462), which held that trade advances given in connection with a commercial transaction do not fall within the ambit of section 2(22)(e). The CIT(A) also referred to the decision in CIT Vs. Creative Dyeing and Printing P Ltd (318 ITR 476), where an advance given for a modernization project was considered a business transaction and not assessable as deemed dividend.The CIT(A) concluded that the amount given by ADJPL to DJPL was in connection with a commercial transaction involving the purchase of property, and not a loan or advance. The explanations provided by the assessee were supported by documentary evidence, and the AO could not contradict these facts in the remand report. Therefore, the CIT(A) held that the provisions of section 2(22)(e) were not applicable to the transaction.Conclusion:The Tribunal upheld the order of the CIT(A), concluding that the transaction between ADJPL and DJPL was a commercial transaction and not a loan or advance. Consequently, the provisions of section 2(22)(e) were not applicable, and the assessment of deemed dividend was cancelled. The appeal filed by the revenue was dismissed.