2024 (1) TMI 1071 - AT - Income Tax

Interest-bearing advances from company to shareholder with TDS deductions not deemed dividend under section 2(22)(e) (22)(e)

Deevik Garg Versus ACIT Circle – 38 (1) New Delhi

ITAT Delhi held that advances from a company to a shareholder carrying interest charges do not constitute deemed dividend under section 2(22)(e). The ... Deemed dividend u/s 2(22)(e) - transactions of advancing of money by the company to appellant and earning interest on it is not amounted to business transactions - HELD THAT:- The factum of interest and deduction of TDS thereon is also reflected in the ledger account and the confirmation thereof by the corresponding party. Hence, the advances made by the lender company to the assessee is not a loan/advance simplicitor but is beset with the character of quid pro quo owing the charge of interest for the benefit of lender company. In the circumstances, in the case of Pradip Kumar Malhotra [2011 (8) TMI 16 - CALCUTTA HIGH COURT] has observed that advances given by lender firm was not for the individual benefit of the share holder but for business purposes and therefore, such transaction could not fall within the sweep of deeming fiction created under section 2(22)(e) of the Act. This reason, on a standalone basis, is sufficient to exclude the applicability of section 2(22)(e) of the Act on the money received by the assessee. Similar view has been expressed in PCIT vs. Mohan Bhagwatprasad Agrawal [2020 (1) TMI 1139 - GUJARAT HIGH COURT] and JAYSON INDUSTRIES [2022 (8) TMI 217 - ITAT DELHI] We see considerable force in the plea of the assessee for exclusion of loan and advances in question from the ambit of deeming fiction provided in section 2(22)(e) of the Act. Appeal of assessee allowed. Issues involved:The appeal against the first appellate order concerning the assessment order under Section 143(3) of the Income Tax Act, 1961 for Assessment Year 2012-13.Issue 1: Applicability of Section 2(22)(e) of the Income Tax ActThe Assessing Officer invoked Section 2(22)(e) of the Act, making an addition in the hands of the assessee due to loans and advances received from a company where the assessee held shares. The CIT(A) upheld this addition, leading to the appeal before the Tribunal.Details: The assessee argued against the application of Section 2(22)(e) based on the commercial nature of the transactions, payment of interest on the loans/advances, and the principle of consistency due to a previous assessment. The Tribunal agreed with the assessee, noting that the transactions were commercial in nature, and the advances were not for individual benefit but for business purposes, as supported by legal precedents. Consequently, the Tribunal set aside the CIT(A)'s order and quashed the additions made under Section 2(22)(e) of the Act.Final Decision:The Tribunal allowed the appeal of the assessee, setting aside the CIT(A)'s order and quashing the additions made under Section 2(22)(e) of the Income Tax Act. The order was pronounced on 19.01.2024.