ITAT rules in favor of assessee on deemed dividend issue

The ITAT upheld the CIT(A)'s decision to delete the addition of deemed dividend under Section 2(22)(e) of the Income Tax Act. The ITAT found that the outstanding liability of the assessee to the company did not fall within the purview of deemed dividend as there were commercial transactions and business relationships between the parties. The ITAT cited relevant case laws and a CBDT circular to support its decision. Additionally, the appeal of the Revenue regarding the disallowance of sales promotion expenses was dismissed, affirming the CIT(A)'s order.

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Issues Involved:
1. Deletion of addition towards deemed dividend under Section 2(22)(e) of the Income Tax Act.
2. Disallowance of sales promotion expenses.

Detailed Analysis:

1. Deletion of Addition towards Deemed Dividend under Section 2(22)(e):

Facts of the Case:
The assessee, an individual and a substantial shareholder (77.5%) in M/s. Samba Publishing Co. Pvt. Ltd., filed her return of income for the assessment year 2014-15. The case was selected for scrutiny, and the Assessing Officer (AO) made an addition of Rs. 2,77,98,930 towards deemed dividend under Section 2(22)(e) of the Act.

Assessment Proceedings:
During the scrutiny assessment, the AO observed that the assessee owed Rs. 15,47,28,852 to M/s. Samba Publishing Co. Pvt. Ltd. as on 31.03.2014. The AO inferred that the company allowed the assessee to enjoy the money collected from her debtors instead of advancing loans directly. Consequently, the AO invoked Section 2(22)(e) of the Act, rejecting the assessee's contention that the transactions were due to commercial exigency.

Appeal to CIT(A):
The CIT(A) analyzed the issue and made several findings:
- The CBDT Circular No.19/2017 excludes trade advances arising out of commercial transactions from the purview of Section 2(22)(e).
- The AO failed to recognize the business relationship between the assessee and M/s. Samba Publishing Co. Pvt. Ltd.
- The assessee had imported and installed printing machines in the company's premises and waived printing charges due to declining revenue from printing activities.
- The assessee canvassed printing jobs for the company and transferred assets to it.
- The premises of the assessee were utilized by the company for a nominal rent.

CIT(A) relied on several judicial decisions:
- ITAT Chennai Bench in Farida Holding Pvt. Ltd. vs. DCIT and ACIT vs. Smt. G. Sreevidya.
- Madras High Court in CIT vs. C. Subba Reddy and CIT vs. Farida Holdings P. Ltd.
- Gujarat High Court in Gujarat Mall Management Co. P. Ltd. vs. ITO.

These decisions emphasized that where there is unity of management and control, Section 2(22)(e) does not apply to running accounts between entities in the ordinary course of business transactions.

Conclusion by CIT(A):
The CIT(A) concluded that the outstanding liability payable by the assessee to M/s. Samba Publishing Co. Pvt. Ltd. could not be treated as deemed dividend under Section 2(22)(e). The addition was deleted, and the assessee's ground on this issue was allowed.

ITAT's Decision:
The ITAT upheld the CIT(A)'s order, noting the commercial factors between the assessee and M/s. Samba Publishing Co. Pvt. Ltd. The ITAT agreed that the business transactions were intermingled, and both entities worked together to develop a common business. The CBDT circular and relevant case laws applied to the assessee's case, and therefore, the provision of Section 2(22)(e) could not be invoked.

2. Disallowance of Sales Promotion Expenses:
The judgment does not provide detailed analysis on this issue, as the primary focus was on the deemed dividend addition under Section 2(22)(e).

Final Order:
The appeal of the Revenue was dismissed, and the order of the CIT(A) was upheld.

Order Pronouncement:
The order was pronounced on the 12th of June, 2018 at Chennai.

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