2006 (4) TMI 190 - AT - Income Tax

Tribunal Upholds Deletion of Rs. 17L Deemed Dividend Addition, Recognizes Legitimate Business Advances.

The ITAT dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the Rs. 17,09,299 addition as deemed dividend under Section 2(22)(e) of ... Deemed dividend under s. 2(22)(e) - advance or loan to a shareholder - payment on behalf of or for individual benefit of shareholder - accumulated profits - ordinary course of business - strict interpretation of deeming provisionDeemed dividend under s. 2(22)(e) - advance or loan to a shareholder - ordinary course of business - Whether amounts advanced by M/s Ariel Exports (P) Ltd. to the assessee firm are taxable as deemed dividend under s. 2(22)(e) of the Income tax Act, 1961. - HELD THAT: - The Tribunal examined the statutory scope of sub clause (e) and reiterated that s. 2(22)(e) is a deeming provision which must be strictly construed. The provision applies where a closely held company makes an advance or loan to a shareholder or to a concern in which the shareholder has substantial interest, to the extent the company possesses accumulated profits, and provided the payment is not in the ordinary course of business. On the facts the firm received advances from a sister concern which were shown in the books as business advances in the context of marketing, exhibition and appointment of dealers; the exhibition was held and supporting documents and photographs were placed on record. The Tribunal accepted the learned CIT(A)'s finding that the transactions were made in the ordinary course of business for commercial expediency, were not outgoing cash loans conferring individual benefit on the partners, and included notional/book transfers incidental to the business arrangements. The Revenue did not contest the satisfaction of the threshold conditions except contending that condition (iv) (not being in the ordinary course of business) was met; the Tribunal found no specific defect in the CIT(A)'s conclusion that condition (iv) was not satisfied and accordingly the deeming fiction of s. 2(22)(e) could not be invoked. [Paras 6, 7, 13]Addition under s. 2(22)(e) deleted; CIT(A)'s order upholding that the advances were in the ordinary course of business is affirmed.Final Conclusion: Revenue's appeal dismissed; the Tribunal upholds the CIT(A)'s deletion of the addition made under s. 2(22)(e) on the ground that the advances were in the ordinary course of business and not loans or payments conferring individual benefit on the shareholders. Issues Involved:1. Deletion of addition on account of deemed dividend under Section 2(22)(e) of the IT Act, 1961.2. Whether the amount advanced by M/s Ariel Exports (P) Ltd. to the assessee-firm constitutes deemed dividend.Detailed Analysis:1. Deletion of addition on account of deemed dividend under Section 2(22)(e) of the IT Act, 1961:The Revenue challenged the order of the CIT(A) dated 9th July 2004, which deleted the addition of Rs. 17,09,299 made by the AO on account of deemed dividend under Section 2(22)(e) of the IT Act, 1961. The AO had added Rs. 17,09,299 to the income of the assessee, considering it as deemed dividend from M/s Ariel Exports (P) Ltd. The CIT(A) deleted this addition, leading to the Revenue's appeal.2. Whether the amount advanced by M/s Ariel Exports (P) Ltd. to the assessee-firm constitutes deemed dividend:The assessee showed an income of Rs. 9,99,126 in its return filed on 24th Oct. 2001, declaring a deduction of Rs. 82,300 under Section 80HHC. M/s Ariel Exports (P) Ltd. advanced money to the assessee, resulting in a credit balance in the account of M/s Ariel Exports (P) Ltd. in the books of the assessee-firm for a substantial period. The AO considered the amount of Rs. 19,48,000 advanced by M/s Ariel Exports (P) Ltd. as for the benefit of the assessee-firm, where two partners held more than 10% holdings in the said company. Consequently, the AO issued a show-cause notice to the assessee on 20th Jan. 2004, questioning why the payment of Rs. 17,09,299 should not be considered for addition under Section 2(22)(e) of the Act.During the hearing, the Revenue argued that M/s Ariel Exports (P) Ltd. is a sister-concern of the assessee and that the dividend includes 'any payment by a company, not being a company in which the public are substantially interested or any sum made after 31st of May, 1997 by way of advance or loan to a shareholder being a person who is the beneficial owner of shares.' The Revenue supported the AO's order, emphasizing the conditions laid down under Section 2(22)(e) of the Act.On the other hand, the assessee's counsel argued that no discrepancy was found in the books of account of the assessee and that sales of the assessee-firm were duly accepted. The counsel contended that the advances were made for legitimate business transactions, including marketing and exhibition expenses, and not for the individual benefit of the shareholders. The counsel supported the CIT(A)'s order.The Tribunal analyzed Section 2(22)(e) of the Act, which defines deemed dividend and concluded that the amount advanced by M/s Ariel Exports (P) Ltd. was not for the individual benefit of the shareholders but for business purposes. The Tribunal noted that the exhibition was held, and the advances were used for business activities such as marketing new products and appointing dealers. The Tribunal also considered various judicial pronouncements, including the Hon'ble Bombay High Court's decision in Sadhna Textile Mills (P) Ltd. vs. CIT and the Hon'ble Delhi High Court's decision in R. Dalmia vs. CIT, which supported the assessee's case.The Tribunal upheld the CIT(A)'s conclusion that the AO stretched the definition of Section 2(22)(e) to include legitimate business transactions and that the amount in question was given for business expediencies, not as a loan or advance for individual benefit. The Tribunal found no specific defect in the CIT(A)'s conclusion and dismissed the Revenue's appeal.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that deleted the addition of Rs. 17,09,299 on account of deemed dividend under Section 2(22)(e) of the IT Act, 1961. The Tribunal concluded that the advances made by M/s Ariel Exports (P) Ltd. to the assessee-firm were for legitimate business purposes and not for the individual benefit of the shareholders.