2018 (11) TMI 553 - AT - Income Tax

Tribunal rules trade advances, not loans, in tax appeal case.

The Tribunal held that the payments received by the assessee from M/s. Malpani Cottons Pvt. Ltd. were trade advances related to business dealings, not ... Deemed dividend addition u/s 2(22)(e) - AO noticed that the assessee has received loan/advance from M/s. Malpani Cottons Pvt. Ltd., Adilabad wherein assessee is having 12.42% of the share holding in Malpani Cottons Pvt. Ltd. and the company is not a company in which public are substantially interested - Held that:- To attract the deemed dividend provision, it should be otherwise around. Further, we noticed that the opening balance stood as on 01-04-2003 was ₹ 1,05,15,883/- as debit balance which means assessee owes to the company and at the end of the year, closing balance stood at ₹ 85,56,232/- debit balance which means still assessee owes to the company. while comparing opening and closing balances, it is noticed that about ₹ 20 Lakhs was reduced that means assessee has repaid ₹ 20 Lakhs to the company. It clearly shows that assessee has not taken any fresh loan from the company during the current assessment year. On the other hand, to invoke Section 2(22)(e) of the Act during this year, assessee should have received loans or advances and pays the same subsequently. In the given case, no such things were noticed. Therefore, in our considered view, assessee is having business connection and in that process, assessee may have received certain advances which can be treated as ‘trade advances’. Therefore, we cannot cherry pick certain transactions and term them as ‘loans and advances’ in order to invoke the provisions of Section 2(22)(e) of the Act. Therefore, the ground raised by assessee is allowed. Issues Involved:1. Whether the payments received by the assessee from M/s. Malpani Cottons Pvt. Ltd. are to be treated as 'deemed dividend' under Section 2(22)(e) of the Income Tax Act.Issue-wise Detailed Analysis:1. Nature of Transactions Between Assessee and M/s. Malpani Cottons Pvt. Ltd.:The assessee, holding a 12.42% share in M/s. Malpani Cottons Pvt. Ltd., engaged in regular business transactions with the company, involving the purchase of cotton seeds and the sale of cotton seed oil. The transactions were recorded in a running account, reflecting the mutual business dealings. The assessee argued that these transactions were purely business-related and not loans or advances, thus not attracting the provisions of Section 2(22)(e).2. Assessing Officer's Stand:The Assessing Officer (AO) consolidated the accounts maintained by the company to determine the exact credit/debit balance. The AO concluded that the consolidated accounts included both business transactions and loan transactions, thereby treating certain payments as 'deemed dividend.' The AO separated the business transactions from the advances and made an addition under Section 2(22)(e).3. CIT(A)'s Findings:The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's findings, confirming the addition of Rs. 2,62,26,581 as deemed dividend. The CIT(A) noted specific payments made towards purchases but still included them in the computation of deemed dividend, treating them as loans.4. Assessee's Appeal:The assessee argued that the payments received were related to the business connection with the company and not separate loan or advance transactions. The assessee provided a detailed chart separating purchase-related payments and sales-related receipts, emphasizing that the payments were trade advances and not loans.5. Tribunal's Observations:The Tribunal acknowledged the regular business connection between the assessee and the company. It observed that the bulk amounts paid and received by the assessee were initially paid as advances and subsequently received back, indicating trade advances rather than loans. The Tribunal noted that the opening and closing balances showed a reduction, implying that the assessee repaid amounts to the company rather than receiving fresh loans.6. Interpretation of Section 2(22)(e):The Tribunal emphasized that for Section 2(22)(e) to apply, the assessee should have received loans or advances and repaid them subsequently. In this case, the transactions were mutual and business-related, not fitting the criteria of loans or advances under Section 2(22)(e). The Tribunal cited various judicial pronouncements supporting the view that trade advances for business transactions do not fall under the purview of deemed dividend.Conclusion:The Tribunal concluded that the advances received by the assessee were trade advances related to the business connection with the company. Therefore, these transactions could not be treated as loans or advances under Section 2(22)(e). The appeal of the assessee was allowed, and the addition made by the AO and upheld by the CIT(A) was deleted. The order was pronounced in the open court on 9th November 2018.