Tribunal rules in favor of assessee, deletes deemed dividend addition under Income-tax Act

The Tribunal ruled in favor of the assessee, deleting the addition of Rs. 28,46,927/- as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961, and allowed the appeal.

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Issues Involved:
1. Addition of Rs. 28,46,927/- as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Addition of Rs. 28,46,927/- as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.

The assessee filed an appeal against the order of the CIT(A)-XXIII, New Delhi, which added Rs. 28,46,927/- as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961. The primary contention of the assessee was that he maintained a running account with Orient Carpet Gallery Pvt. Ltd. (OCG), where he was a shareholder. At the beginning of the year, the assessee had a credit balance of Rs. 3,28,78,073/- in the company, indicating that the company owed him money. Throughout most of the year, the assessee was to receive money from the company. However, on receiving two cheques of Rs. 5 lakhs and Rs. 25 lakhs on 01.02.2006 and 11.02.2006 respectively, the balance temporarily shifted, showing a credit balance of Rs. 28,46,927/- for the company with the assessee for a brief period of sixteen days. The assessee argued that this temporary credit balance should not be considered as a loan or advance, which could be treated as deemed dividend under Section 2(22)(e).

The Departmental Representative (DR) contended that each transaction should be considered in isolation for the purposes of Section 2(22)(e). The DR highlighted that the credit balance of Rs. 28,46,927/- was indeed a loan or advance, fulfilling the conditions for deemed dividend under Section 2(22)(e), and thus, the addition was rightly made by the Assessing Officer and sustained by the CIT(A).

Upon examining the account details, the Tribunal observed that there was a consistent running account between the assessee and OCG, with regular receipts and payments. For most of the year, there was a substantial debit balance, indicating that the company owed money to the assessee. The credit balance of Rs. 28,46,927/- occurred only for a short span of 17 days, whereas the debit balance remained in crores for several months. The Tribunal concluded that such a temporary and meager credit balance in a running account, where there was a substantial debit balance for most of the year, could not be considered as a loan or advance to attract the provisions of Section 2(22)(e).

In light of these observations, the Tribunal held that the application of Section 2(22)(e) was incorrect in this case and deleted the addition of Rs. 28,46,927/- made by the Assessing Officer. Consequently, the appeal of the assessee was allowed.

Conclusion:
The Tribunal ruled in favor of the assessee, deleting the addition of Rs. 28,46,927/- as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961, and allowed the appeal. The decision was pronounced in the open Court on 28.10.2016.

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