2016 (3) TMI 649 - AT - Income Tax

Tribunal allows appeals on deemed dividend, ruling transactions were business-related

The Tribunal allowed the appeals of both assessees, deleting the additions made under Section 2(22)(e) for both the Rs. 20,00,000 received from M/s. GAD ... Deemed dividend under section 2(22)(e) - Nature of payment - loan or advance vis-a -vis business reimbursement - Mutual, open, current and running account - Beneficial ownership and allocation of deemed dividend by shareholdingDeemed dividend under section 2(22)(e) - Nature of payment - loan or advance vis-a -vis business reimbursement - Mutual, open, current and running account - Whether the amount of Rs. 20,00,000 received by the assessee from M/s. GAD Fashions (India) Pvt. Ltd. is a deemed dividend under section 2(22)(e) or a business reimbursement/transaction not attracting the deeming provision. - HELD THAT: - The Tribunal found on the material on record that the payment to the assessee was in the context of the assessee having earlier advanced funds to M/s. Manpasand Textile Processors Pvt. Ltd. on behalf of M/s. GAD Fashions (India) Pvt. Ltd. for business purposes and that the subsequent receipt by the assessee from GAD Fashions was by way of reimbursement within a mutual, open, current and running account. The authorities below had treated the amount as a loan/advance and therefore a deemed dividend under section 2(22)(e). The Tribunal, however, examined documentary evidence of business dealings, job work transactions and the pattern of advances and repayments and concluded that the transaction was commercial accommodation/reimbursement and not a loan or advance of the character contemplated by the deeming fiction. Consequently the essential character required to attract section 2(22)(e) was not made out and the addition was reversed. [Paras 5]Addition of Rs. 20,00,000 treated as deemed dividend is deleted; Ground No.1 allowed.Deemed dividend under section 2(22)(e) - Beneficial ownership and allocation of deemed dividend by shareholding - Mutual, open, current and running account - Whether the amount of Rs. 20,00,000 advanced by M/s. Ecotunes India (P) Ltd. to M/s. GAD Fashions (India) Pvt. Ltd. gives rise to a deemed dividend to be taxed in the hands of the assessee (and, if so, whether the addition should be limited or apportioned). - HELD THAT: - The AO treated the full loan as deemed dividend and apportioned it among common shareholders; the CIT(A) partly confirmed an apportioned addition based on shareholding. The Tribunal, applying the same factual matrix as to the nature of transactions between the companies, found that the transfers between Ecotunes and GAD Fashions constituted mutual, temporary accommodation/current accounts and were not loans or advances of the character attracting section 2(22)(e). Given that the underpinning factual character of the transaction was not that of a loan/advance but of inter-company/business receipts and transfers supported by the accounts, the deeming provision did not apply and no further addition arose in the hands of the assessee. [Paras 6]Addition made in respect of the transfer from M/s. Ecotunes India (P) Ltd. to M/s. GAD Fashions (India) Pvt. Ltd. is deleted; Ground No.2 allowed.Deemed dividend under section 2(22)(e) - Nature of payment - loan or advance vis-a -vis business reimbursement - Mutual, open, current and running account - Whether the identical transactions in the case of the co-shareholder assessee give rise to deemed dividend under section 2(22)(e). - HELD THAT: - The Tribunal applied the same factual and legal analysis to the appeal of Shri Ashok Singhi as to Shri Nilesh Singhi, finding that the sums involved represented business-driven payments and repayments - including advances by the assessee to a job-worker on behalf of GAD Fashions and subsequent reimbursements - and that the transactions were commercial/current account dealings rather than loans/advances attracted by the deeming fiction. Documentary material filed before the authorities supported this commercial character and the Tribunal held that the revenue could not re-characterise the business arrangements as loans merely to invoke section 2(22)(e). [Paras 7]Both grounds in the appeal of Shri Ashok Singhi are allowed and the additions treated as deemed dividend are deleted.Final Conclusion: The Tribunal reversed the orders of the lower authorities and held that the impugned transfers were commercial reimbursements/temporary inter-company/current account transactions and not loans or advances attracting the deeming provision of section 2(22)(e); the additions in the appeals of both assessees for assessment year 2008-09 are deleted and both appeals are allowed. Issues Involved:1. Treatment of Rs. 20,00,000 received from M/s. GAD Fashions (India) Pvt. Ltd. as deemed dividend under Section 2(22)(e).2. Addition of Rs. 4,42,800 by treating the amount given by M/s. Ecotunes India (P) Ltd. to M/s. GAD Fashions (India) Pvt. Ltd. as deemed dividend under Section 2(22)(e).Detailed Analysis:Issue 1: Treatment of Rs. 20,00,000 as Deemed Dividend under Section 2(22)(e)The Assessing Officer (AO) observed that the assessee derived income from salary from M/s. GAD Fashions (India) Pvt. Ltd. and M/s. R Fashions, holding 26.13% shares in M/s. Ecotunes India Pvt. Ltd. and 22.14% shares in M/s. GAD Fashions (India) Pvt. Ltd. for the assessment year 2008-09. The AO noted that an advance of Rs. 20,00,000 was made to the assessee by M/s. GAD Fashions (India) Pvt. Ltd., and since the assessee had more than 10% shareholding, the transaction was covered under the definition of deemed dividend as per Section 2(22)(e) of the I.T. Act, 1961. The AO treated the amount as deemed dividend and made an addition of Rs. 20,00,000 to the assessee's income.The assessee contended that the amount was not a loan or advance but a reimbursement for advances made to M/s. Manpasand Textiles Processors Pvt. Ltd. on behalf of M/s. GAD Fashions (India) Pvt. Ltd. The CIT(A) confirmed the AO's addition, stating that the payment was covered under Section 2(22)(e) as the assessee was a substantial shareholder and the transaction did not have sufficient business justification.Upon appeal, it was found that the transaction was not a loan or advance but a reimbursement for business-related payments. The Tribunal observed that the amount was paid by the assessee to M/s. Manpasand Textiles Processors Pvt. Ltd. considering the business interest of M/s. GAD Fashions (India) Pvt. Ltd. The Tribunal concluded that the transaction was a mutual, open, current, and running account, not a loan or advance as envisaged under Section 2(22)(e). Therefore, the addition of Rs. 20,00,000 as deemed dividend was deleted.Issue 2: Addition of Rs. 4,42,800 as Deemed Dividend under Section 2(22)(e)The AO observed that M/s. Ecotunes India Pvt. Ltd. advanced Rs. 20,00,000 to M/s. GAD Fashions (India) Pvt. Ltd., and since the assessee had substantial shareholding in both companies, the transaction was treated as deemed dividend. The AO distributed the deemed dividend amount of Rs. 20,00,000 equally among the three directors, resulting in an addition of Rs. 6,66,666 to the assessee's income.The CIT(A) partly allowed the assessee's appeal, confirming the addition of Rs. 4,42,800 (22.14% of Rs. 20,00,000) based on the assessee's shareholding in M/s. GAD Fashions (India) Pvt. Ltd. The CIT(A) relied on the decision of the Hon'ble Rajasthan High Court in the case of CIT vs. Hotel Hill Top, which held that deemed dividend should be taxed in the hands of the shareholders proportionate to their shareholding.The assessee argued that the transaction between M/s. Ecotunes India Pvt. Ltd. and M/s. GAD Fashions (India) Pvt. Ltd. was a mutual, open, current, and running account, not a loan or advance. The Tribunal found that the transaction was not in the nature of a loan or advance as envisaged under Section 2(22)(e) and did not warrant any addition in the hands of the assessee. Consequently, the addition of Rs. 4,42,800 was deleted.Conclusion:The Tribunal allowed the appeals of both assessees, deleting the additions made under Section 2(22)(e) for both the Rs. 20,00,000 received from M/s. GAD Fashions (India) Pvt. Ltd. and the Rs. 4,42,800 treated as deemed dividend from M/s. Ecotunes India Pvt. Ltd. The Tribunal concluded that the transactions were not loans or advances but business-related transactions, and thus, Section 2(22)(e) was not applicable.