2023 (1) TMI 859 - AT - Income Tax

Interpretation of Income Tax Act: Business loans /= deemed dividends

The judgment focused on the interpretation of section 2(22)(e) of the Income Tax Act regarding deemed dividend income. The court ruled in favor of the ... Deemed dividend addition u/s 2(22) - day on which BTB Retail Pvt. Ltd., advances to assessee the company was having reserve & surplus more than the amount advanced, therefore the A.O. was right in holding that all the conditions stipulated u/s. 2(22)(e) are fulfilled to the impugned loan/advance given to the assessee - HELD THAT:- We may note that the assessee has repaid an amount of Rs. 50,00,000/- during the relevant financial period leaving balance of Rs. 44,00,000/-only. In the present it is also not dispute that the company has paid market rate of interest by the assessee on the amount of advance and in the real sense the assessee did not drive any benefit from the funds of the company so as to attract rigour of the provision of section 2(22)(e) of the Act, it is clearly observed that the transaction of loan to which the assessee provided collateral security to M/s. BTB Marketing Pvt. Ltd., and BTB Retail Pvt. Ltd., to secure capital for expansion of company business, and the transaction was pure of commercial transaction under running account. These facts have not been controverted by the Authorities below or Ld. Sr. DR before us. Therefore, as per judgment of Pradip Kumar Malhotra[2011 (8) TMI 16 - CALCUTTA HIGH COURT] wherein it was held that the phrase “by way of advance or loan” appearing in section 2(22)(e) of the Act must constitute to mean impugned advances or loans, which is enjoyed by the shareholder for merely because on account of being a partner or a Director in the company, which the beneficiary owner of shares. A position differs if such loan or advances given to such shareholder as a consequence of any further consideration, which is beneficial to the company received from such shareholder then in such advance or loan cannot be said to be deemed dividend within the ambit of section 2(22)(e) - Identical and similar situation is present in the case in hand. Therefore addition made by the A.O. and confirmed by the Ld. CIT(A) cannot be held as sustainable and thus we direct the A.O. to delete the same. Appeal of the assessee is allowed. Issues:- Ex parte assessment and denial of opportunity to the assessee- Validity of proceedings initiated under section 147 of the Income Tax Act- Addition made on account of Deemed Dividend- Loan advanced for Business Purpose and interest charged on the same- Timing of passing the Assessment Order in relation to objections disposal- Defective reasons recorded for reopening proceedings- Limitation on the addition for deemed dividend- Applicability of deemed dividend provisions in the current year- Judicial interpretation of section 2(22)(e) of the Income Tax Act- Application of commercial transaction principles to loan transactions- Comparison with relevant case laws to support argumentsAnalysis:1. The appeal raised concerns about an ex parte assessment, denial of opportunity, validity of proceedings under section 147, addition on account of Deemed Dividend, loan advanced for Business Purpose, timing of Assessment Order, defective reasons for reopening, limitations on deemed dividend addition, and applicability of provisions in the current year.2. The counsel argued that the loan was taken against collateral security, with interest charged, and detailed the financial transactions between the companies involved, challenging the addition made by the Assessing Officer and upheld by the CIT(A).3. The counsel relied on case laws to argue that section 2(22)(e) does not apply to non-gratuitous advances to substantial shareholders and that certain shareholder classes fall outside the purview of the section, emphasizing that the transactions were part of a commercial running account.4. The Senior DR supported the assessment, citing that the conditions under section 2(22)(e) were met, leading to the loan being treated as deemed dividend income.5. The counsel countered, citing judgments that deemed dividend provisions apply to gratuitous advances, not those given for business interests, and that the loan transactions were part of a commercial arrangement, not attracting the provisions.6. The judgment analyzed the legal interpretation of section 2(22)(e), emphasizing that loans given for business interests do not fall under deemed dividends, and directed the Assessing Officer to delete the addition made.7. The judgment highlighted the distinction between loans for business purposes and gratuitous advances, following the principles established in relevant case laws, ultimately allowing the assessee's appeal and setting aside the addition as deemed dividend income.8. The judgment concluded by affirming the decision to delete the addition, based on the commercial nature of the transactions and the absence of benefits derived by the assessee, in line with the legal interpretation provided by the Calcutta High Court and relevant case laws.This detailed analysis of the judgment covers the various issues raised in the appeal and provides a comprehensive understanding of the legal arguments and interpretations involved in the case.