2016 (10) TMI 544 - AT - Income Tax

Tribunal deems intercompany transfer as dividend under Income Tax Act

The Tribunal upheld the reassessment proceedings under Section 143(3) read with Section 147 of the Income Tax Act and confirmed the addition of Rs. ... Dividend dividend u/s 2(22)(e) - Held that:- In this case, assessee directly withdrew the money from another company and said outstanding amount to M/s. Amit Cottons Pvt. Ltd., was settled by way of transfer entries between the two companies but ultimately, as per the provisions of Section 2(22)(e), it is paid on behalf of assessee by such company. Therefore, it is within the purview of the provisions of Section 2(22)(e). In view of that, we affirm the order of CIT(A) to the extent of amount confirmed u/s. 2(22)(e) in the order. Assessee’s grounds are accordingly rejected. Issues Involved:1. Legality of the reassessment proceedings under Section 143(3) read with Section 147 of the Income Tax Act.2. Applicability of Section 2(22)(e) of the Income Tax Act concerning the deemed dividend of Rs. 50 Lakhs.Issue-wise Detailed Analysis:1. Legality of the reassessment proceedings under Section 143(3) read with Section 147:The assessee contended that the invocation of jurisdiction under Section 147 was erroneous as the requisite conditions were not fulfilled, thereby vitiating the entire reassessment proceedings. The reassessment was initiated based on the observation that the company M/s. K.G.F. Cottons Pvt. Ltd. had advanced Rs. 1,24,92,795/- to the assessee, who held more than 10% shareholding in the company. The Assessing Officer (AO) considered this amount as deemed dividend under Section 2(22)(e) and issued a notice under Section 148 to bring this amount to tax. The CIT(A) partially accepted the assessee's contention by excluding the opening balance of Rs. 82,00,063/- from the deemed dividend but confirmed the addition of Rs. 50 Lakhs.2. Applicability of Section 2(22)(e) concerning the deemed dividend of Rs. 50 Lakhs:The primary issue was whether the Rs. 50 Lakhs received from M/s. Amit Cottons Pvt. Ltd., and transferred as a liability to M/s. K.G.F. Cottons Pvt. Ltd., could be considered as deemed dividend under Section 2(22)(e). The assessee argued that since the amount was not directly paid by M/s. K.G.F. Cottons Pvt. Ltd. but was a transfer entry, it should not be treated as deemed dividend. The CIT(A) rejected this argument, stating that the source of the loan (another company or bank) is immaterial and the relevant factor is that M/s. K.G.F. Cottons Pvt. Ltd. advanced the loan to the assessee.The Tribunal upheld the CIT(A)'s decision, emphasizing that the provisions of Section 2(22)(e) cover indirect payments made for the benefit of the shareholder. The Tribunal noted that the Rs. 50 Lakhs was drawn by the assessee from M/s. Amit Cottons Pvt. Ltd. and the liability was transferred to M/s. K.G.F. Cottons Pvt. Ltd. through journal entries. This constituted a constructive payment to the assessee, falling within the scope of Section 2(22)(e). The Tribunal referred to the wide definition of 'dividend' under Section 2(22)(e), which includes any payment by a company on behalf of or for the individual benefit of a shareholder holding not less than 10% of the voting power.The Tribunal also distinguished the case from the decision in CIT Vs. Smt. Savithiri Sam [236 ITR 1003] (Mad), where the facts were different, and the transfer entry was related to the debit balance of the deceased husband's estate. In the present case, the assessee directly withdrew the money, and the liability was settled through transfer entries, making it a deemed dividend under Section 2(22)(e).Conclusion:The Tribunal dismissed the assessee's appeal, affirming the CIT(A)'s order to the extent of confirming Rs. 42,92,164/- as deemed dividend under Section 2(22)(e). The reassessment proceedings and the applicability of Section 2(22)(e) were upheld, and the assessee's grounds were rejected.