Director's property purchase from company doesn't constitute deemed dividend under section 2(22)(e) unless actual advance (22)(e)

The ITAT Cochin held that amounts owed by an assessee-director to a company where he held substantial interest would not automatically constitute deemed dividend under section 2(22)(e). The tribunal distinguished between genuine trade transactions and loans/advances, ruling that purchase of property from the real estate company by the director as a customer, with subsequent full payment, did not qualify as deemed dividend. However, direct fund transfers and retention of customer payments by the director were deemed taxable advances. The matter was remanded to the AO for fresh determination following prescribed guidelines, with the appeal allowed for statistical purposes.

---

---

Issues Involved:
1. Validity of the addition by way of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.

Summary:

Issue: Validity of the Addition by Way of Deemed Dividend under Section 2(22)(e) of the Income Tax Act, 1961

The appeal by the assessee contests the order dated 20.01.2023 by the National Faceless Appeal Centre, Delhi (NFAC), which dismissed his appeal regarding the assessment under section 147 read with section 143(3) of the Income Tax Act, 1961 for Assessment Year 2011-12. The primary issue is the validity of the addition of Rs. 62,44,215 as deemed dividend under section 2(22)(e) of the Act.

The assessee, a Director in Shwas Homes Pvt. Ltd. (SHPL), did not file any return of income for the year under section 139 but admitted an income of Rs. 48,48,717 on account of remuneration from SHPL in a return filed on 25.01.2016 after being issued a notice under section 148(1) on 06.08.2014. The Revenue inferred the sum of Rs. 62.44 lakhs owed by him to SHPL as deemed dividend under section 2(22)(e) because his shareholding in SHPL exceeded 10%, and the company had reserves in excess of that sum. The assessee explained that the amount was due to the purchase of a Villa from the company and monies received from the company's customers on its behalf. However, both the assessing and first appellate authority found the explanation untenable, treating the amounts as loans or advances under section 2(22)(e).

Upon reviewing the ledger account, it was noted that the transactions included payments to the assessee through bank and cash, adjusted against monthly remuneration, and journal entries for monies received on the company's account. The Tribunal examined each transaction category separately to determine their implications under section 2(22)(e).

For the sale of the Villa, the Tribunal found that the company had correctly reflected the transactions in its accounts. The payment for the Villa was made in full by the end of the following year, and thus, it could not be regarded as a loan or advance attracting section 2(22)(e). The Tribunal noted that the company, being in the real estate business, had extended credit to the assessee in his capacity as a customer, and there was no evidence of under-selling or diversion of funds.

Regarding the current account, the Tribunal held that both direct transfers of funds by the company to the assessee and monies received from the company's customers qualified as loans or advances under section 2(22)(e). The Tribunal emphasized the need for authorization for the assessee to accept trade debts and the requirement to deposit such monies with the company immediately. Any debit balance in the account, even if adjusted later, would attract section 2(22)(e).

The Tribunal directed the matter back to the Assessing Officer (AO) for a fresh determination of deemed dividend under section 2(22)(e), with the assessee required to provide necessary details and working for verification. The AO was instructed to consider any new facts and take guidance from the Tribunal's order.

The appeal by the assessee was allowed for statistical purposes. The order was pronounced on October 30, 2023, under Rule 34 of The Income Tax (Appellate Tribunal) Rules, 1963.

---