Tribunal rules in favor of assessee: Family repayments not deemed dividends

The Tribunal ruled in favor of the assessee, holding that funds advanced by the company and promptly repaid by the assessee's family members did not qualify as loans or advances under Section 2(22)(e) of the Income Tax Act. The Tribunal directed the Assessing Officer to delete the additions made towards deemed dividends, thereby allowing the assessee's appeal. The decision was issued on February 22, 2023, in Chennai.

---

---

Issues Involved:

1. Application of Section 2(22)(e) of the Income Tax Act.
2. Source of investment for property purchase.
3. Repayment of funds advanced by the company.
4. Role of the company as a facilitator or lender.
5. Applicability of CBDT Circular No. 19/2017.

Issue-wise Detailed Analysis:

1. Application of Section 2(22)(e) of the Income Tax Act:

The core issue revolves around the applicability of Section 2(22)(e) of the Income Tax Act, which deals with deemed dividends. The Assessing Officer (AO) observed that the assessee, holding 29.17% shares in M/s. Integrated Enterprise India Ltd. (IEIL), received funds from IEIL for purchasing a property. The AO concluded that these funds should be treated as deemed dividends under Section 2(22)(e), even though the funds were repaid shortly thereafter. The AO relied on precedents, including the Supreme Court's decision in P. Sarada (229 ITR 444), which held that repayment does not alter the fact of receipt of deemed dividends.

2. Source of Investment for Property Purchase:

The assessee, along with his mother, purchased a property for Rs. 7,19,44,048/-. The AO questioned the source of the investment, noting that the assessee's mother paid Rs. 2.75 crores from the sale of shares, while IEIL paid Rs. 3,10,22,424/- directly to the builder. The AO rejected the assessee's explanation that the funds from IEIL were repaid promptly, treating the transaction as a loan or advance.

3. Repayment of Funds Advanced by the Company:

The assessee argued that the funds advanced by IEIL were repaid by his mother and other family members from their bank accounts within a short period, often on the same day or within a month. The Tribunal found that these repayments were made without leaving any outstanding balance in the company's books, indicating that the transactions were not loans or advances but rather temporary arrangements.

4. Role of the Company as a Facilitator or Lender:

The assessee contended that IEIL acted merely as a facilitator to ensure timely payment to the builder. However, the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] dismissed this argument, citing a lack of evidence to support the claim that IEIL was an escrow agent. The Tribunal, however, accepted that the company's role was limited to facilitating the transaction, given the prompt repayment by the assessee's family members.

5. Applicability of CBDT Circular No. 19/2017:

The assessee also argued that the transaction should be considered a trade advance, which would not fall under Section 2(22)(e) as per CBDT Circular No. 19/2017. The CIT(A) dismissed this argument, stating that the assessee failed to prove the transaction met the criteria for a trade advance. The Tribunal, however, found that the transactions were more akin to a running current account and not loans or advances, thus not attracting Section 2(22)(e).

Conclusion:

The Tribunal concluded that the funds advanced by IEIL, repaid promptly by the assessee's family members, did not constitute loans or advances under Section 2(22)(e). The Tribunal directed the AO to delete the additions made towards deemed dividends, allowing the assessee's appeal. The order was pronounced on February 22, 2023, in Chennai.

---