2021 (12) TMI 1335 - AT - Income Tax

ITAT excludes journal entries from deemed dividend calculation under Income Tax Act

DCIT-CC-3 (1), Central Range-3, Mumbai Versus Yogesh Jogindernath Mehra

The ITAT upheld the CIT(A)'s decision to exclude journal entries from the computation of deemed dividend under Section 2(22)(e) of the Income Tax Act. The ... Deemed dividend u/s 2(22)(e) - transactions of loans/advances are made through journal entries even when the loans/advances were reflected in the balance sheets of the respective companies - HELD THAT:- On appraisal of the mentioned finding, we noticed that the CIT(A) has directed the AO to verify the ledger account of M/s. WWIL/EIL in the books of six related group of companies and re-compute the amount of deemed dividend u/s 2(22)(e) after excluding the amounts related to journal entries and considering only those amounts wherein actual payments have been made/received. We nowhere found these directions as illegal or against law and facts. The facts are not distinguishable at this stage. Moreover, we noticed that the issue has duly been covered by the decision of the Hon’ble ITAT in the assessee’s own case for the A.Y. 2007-08 & 2009-10 [2021 (8) TMI 894 - ITAT MUMBAI] Therefore, taking into account of all the facts and circumstances, we are of the view that the CIT(A) has passed the order judiciously and correctly which is not liable to be interfered with at this appellate stage. Accordingly, we affirm the finding of the CIT(A) on this issue and decide these issues in favour of the assessee against the revenue. Issues Involved:1. Deletion of addition made on account of deemed dividend under Section 2(22)(e) of the Income Tax Act.2. Direction to the Assessing Officer (AO) to verify ledger accounts and recompute deemed dividend excluding journal entries.Issue-wise Analysis:1. Deletion of Addition Made on Account of Deemed Dividend under Section 2(22)(e):The primary issue revolves around the deletion of an addition of Rs. 1,62,20,313 made on account of deemed dividend. The revenue challenged the CIT(A)'s decision that the provisions of Section 2(22)(e) do not apply to transactions made through journal entries. The CIT(A) referenced the Supreme Court's explanation in Navnitlal C. Javeri (56 ITR 198) and the Jurisdictional High Court's ruling in P.K. Badiani (76 ITR 369), which clarified the intent behind Section 2(22)(e). The provision was enacted to prevent companies from avoiding tax by giving loans to shareholders instead of dividends, which were taxable. However, the CIT(A) found that the transactions in question were not actual business transactions but were entered into to circumvent land holding restrictions. The CIT(A) also noted that most transactions were through journal entries, not actual payments, citing the Kerala High Court in P.V. John (181 ITR 1) and the Jurisdictional High Court in Parle Plastics Ltd. (332 ITR 63), which held that Section 2(22)(e) requires actual payment, not notional payments or book entries.2. Direction to the AO to Verify Ledger Accounts and Recompute Deemed Dividend Excluding Journal Entries:The CIT(A) directed the AO to verify the ledger accounts of M/s WWIL/EIL in the books of the six related group companies and recompute the deemed dividend amount after excluding journal entries and considering only actual payments. This direction was based on the principle that the provisions of Section 2(22)(e) apply only to actual payments, not journal entries. The CIT(A) relied on various judicial precedents, including the Madras High Court's rulings in G.R. Govindarajalu Naidu (90 ITR 13) and G. Venkataraman (101 ITR 673), which held that the words 'payment by way of a loan or advance' denote actual payment and do not include notional payments by way of book entries. The CIT(A) also referenced the CBDT Circular No. 19/2017, which clarified that trade advances in the nature of commercial transactions do not fall within the ambit of 'loans/advances' under Section 2(22)(e).Judgment:The ITAT upheld the CIT(A)'s decision, noting that the directions to the AO were neither illegal nor against the law. The ITAT also referenced its own decisions in the assessee's case for previous assessment years (2007-08, 2008-09, and 2009-10), where similar issues were decided in favor of the assessee. The ITAT concluded that the money advanced was used for business purposes and commercial considerations, and therefore, could not be treated as deemed dividend under Section 2(22)(e). The appeal filed by the revenue was dismissed, affirming the CIT(A)'s order.Conclusion:The ITAT dismissed the revenue's appeal, upholding the CIT(A)'s decision to exclude journal entries from the computation of deemed dividend and directing the AO to verify actual payments. The judgment emphasized that Section 2(22)(e) applies only to actual payments and not to notional payments or book entries.