Tribunal ruling on trade advances & deemed dividends for Assessment Years 2008-09 & 2009-10

The Tribunal partially allowed the Revenue's appeal for the Assessment Year 2008-09, remanding the matter for verification of the amounts received as trade advances. For the Assessment Year 2009-10, the Tribunal allowed the assessee's appeal, concluding that the transactions were commercial in nature and not deemed dividends under Section 2(22)(e).

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Issues Involved:
1. Deletion of addition of Rs. 98 lakhs treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
2. Addition of Rs. 37 lakhs as deemed dividend under Section 2(22)(e) for the Assessment Year 2009-10.

Issue-wise Detailed Analysis:

1. Deletion of addition of Rs. 98 lakhs treated as deemed dividend under Section 2(22)(e):

The appeal was filed by the Assessing Officer against the order of CIT(A) which deleted the addition of Rs. 98 lakhs. The Assessing Officer had treated this amount as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The assessee argued that the amount was an advance against the sale of property and thus a business transaction, not falling under deemed dividend provisions.

The CIT(A) accepted the assessee's contention, noting that both the assessee and the company, M/s Competent Holdings Ltd., were engaged in real estate business and had entered into an "Agreement to Sale" for the property. The CIT(A) relied on the Delhi High Court’s decision in CIT vs. Ambassador Travels Pvt Ltd., which held that business transactions between a shareholder and a company do not attract Section 2(22)(e).

The Tribunal examined the facts, including the agreement dated 09.01.2008 and the payments made. It was noted that the company paid Rs. 98 lakhs as an advance for the property, which was later canceled through a "Memorandum of Understanding". The Tribunal agreed with the CIT(A) that the transaction was a business advance and thus outside the scope of deemed dividend under Section 2(22)(e). The Tribunal also referenced CBDT Circular No. 19/2017, which clarified that trade advances in the nature of commercial transactions do not fall within the ambit of Section 2(22)(e).

However, the Tribunal remanded the matter to the Assessing Officer for verification of the exact amounts received by the assessee as trade advances. The Tribunal directed that if the amounts were received pursuant to the agreement, they should not be treated as deemed dividend.

2. Addition of Rs. 37 lakhs as deemed dividend under Section 2(22)(e) for the Assessment Year 2009-10:

For the Assessment Year 2009-10, the assessee appealed against the addition of Rs. 37 lakhs as deemed dividend. The assessee contended that these were commercial transactions and not loans or advances covered under Section 2(22)(e).

The Tribunal noted that the assessee had an opening balance of Rs. 98 lakhs and received an additional Rs. 37 lakhs during the year. The assessee also repaid Rs. 75 lakhs. The Tribunal examined the transactions and found that the company had retained Rs. 60 lakhs as a security deposit for the use of the assessee's property.

The Tribunal concluded that the transactions were of a commercial nature, involving security deposits and rent, and thus did not fall under the scope of deemed dividend under Section 2(22)(e). The Tribunal allowed the assessee's appeal, holding that the addition of Rs. 37 lakhs could not be made under Section 2(22)(e).

Conclusion:

The Tribunal partially allowed the Revenue's appeal for the Assessment Year 2008-09, remanding the matter for verification of the amounts received as trade advances. For the Assessment Year 2009-10, the Tribunal allowed the assessee's appeal, concluding that the transactions were commercial in nature and not deemed dividends under Section 2(22)(e).

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