Tribunal affirms commercial trade advance not deemed dividend under Income Tax Act

The Tribunal upheld the CIT(A)'s decision, ruling that the transaction was a commercial trade advance and not a deemed dividend under section 2(22)(e) of the Income Tax Act. The appeal by the Revenue was dismissed, affirming that the provisions of section 2(22)(e) did not apply in this case. The Tribunal emphasized that advances made for business purposes, such as the purchase of property, do not fall within the scope of deemed dividend provisions.

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Issues Involved:
1. Deletion of additions made under section 2(22)(e) of the Income Tax Act.
2. Nature of the transaction between the assessee and M/s AMP Motors Pvt. Ltd.
3. Applicability of deemed dividend provisions.

Issue-Wise Detailed Analysis:

1. Deletion of Additions Made Under Section 2(22)(e):
The Revenue contended that the CIT(A) erred in deleting the additions made under section 2(22)(e) of the Income Tax Act, 1961, amounting to Rs. 1.5 crore. The AO argued that the assessee, a major shareholder in M/s AMP Motors Pvt. Ltd., received a loan of Rs. 1.5 crore, which should be treated as deemed dividend under section 2(22)(e). The AO held that the transaction was an attempt to divert the profits of the company in the guise of providing loans/advances to the assessee.

2. Nature of the Transaction:
The assessee submitted that the amount of Rs. 1.5 crore was an advance towards the sale of property under a Memorandum of Understanding (MOU) dated 05.10.2014. The assessee provided evidence, including the ledger account and the MOU, indicating that the transaction was for the purchase of property and not a loan or advance. The CIT(A) accepted the assessee's contention, noting that the amount was returned within the same financial year, resulting in a credit balance.

3. Applicability of Deemed Dividend Provisions:
The CIT(A) and the Tribunal examined whether the transaction could be considered a deemed dividend under section 2(22)(e). The Tribunal noted that the MOU specified the payment terms for the property sale, and the transaction was duly recorded in the company's ledger. It was held that the advance was a trade advance for a commercial transaction, not a loan or advance simpliciter. The Tribunal referenced the CBDT Circular No. 19/2017 and judicial precedents, including CIT vs. Raj Kumar (2009) 318 ITR 462 (Del), which state that trade advances cannot be treated as deemed dividends.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the transaction was a commercial trade advance and not a deemed dividend under section 2(22)(e). The appeal by the Revenue was dismissed, affirming that the provisions of section 2(22)(e) were not applicable in this case. The Tribunal emphasized that advances made for business purposes, such as the purchase of property, do not fall within the ambit of deemed dividend provisions. The order was pronounced on 29th August 2022.

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