2024 (8) TMI 349 - AT - Income Tax

Company loans to directors for property purchase ruled commercial transactions, not deemed dividend under section 2(22)(e) (22)(e)

Smt. Rinku Chakraborthy Versus The Commissioner of Income Tax, Central Circle – 1 (1), Bangalore.

ITAT Bangalore ruled in favor of the assessee regarding deemed dividend addition under section 2(22)(e). The case involved a company providing ... Addition of deemed dividend u/s 2(22)(e) - nature of transaction between the assessee and shareholder - assessee along with other 5 Directors has received a loan and advance which was shown by the company as an advance for the purchase of property - whether the amount in question given by the company to the directors was representing the commercial transactions? - HELD THAT:- No adverse inference can be drawn against the assessee merely on the reasoning that when the money was advanced there was no formal agreement between the directors and the company - the company has not taken the 1st and 2nd floor on lease of the building which was constructed by the directors of the company. Thus, the excess amount received by the directors from the company roughly 30 lakhs of rupees which was shown as rental deposits again represents the commercial transaction between the assessee directors and the company. The directors including the assessee in the present case were acting in dual capacity as director and in personal capacity. As such there was no reason for the directors which prevented them to enter into the formal agreement at the time of giving the advances and therefore the money receipts, proposed agreement, minutes of the Board of Directors cannot be ignored while deciding the issue whether there was a commercial element between the transaction discussed above. Thus, we hold that there was a commercial transaction between the directors and the company. Hon’ble Delhi High Court in CIT v. Raj Kumar [2009 (5) TMI 17 - DELHI HIGH COURT] observed that Trade advances which are in the nature of money transacted to give effect to a commercial transaction would not fall within the ambit of the provisions of section 2(22)(e) of the Act. Thus, we hold that the transaction in dispute was a commercial transaction and therefore the same is outside the ambit of the provisions of deemed dividend as provided u/s 2(22)(e) - Decided in favour of assessee. Issues Involved:Appeal against order confirming addition on account of deemed dividend u/s 2(22)(e) of the Act for the assessment year 1995-96.Detailed Analysis:Issue 1: Allegation of Incorrect ConfirmationThe appellant contested the confirmation of the addition on account of deemed dividend u/s 2(22)(e) by the ld. CIT(A), arguing that the transaction between the assessee and shareholder was commercial in nature, not subject to the provision.Issue 2: Background of the TransactionThe appellant, an individual director and shareholder in a company, received a loan and advance from the company, which was shown as an advance for property purchase. The disagreement arose as the AO treated the advance as deemed dividend due to lack of a formal agreement at the time of the advance.Issue 3: CIT(A) Upholding AO's DecisionThe CIT(A) upheld the AO's decision, leading the appellant to appeal, supported by the argument that the transaction was commercial, evidenced by subsequent agreements and board meeting minutes.Issue 4: Arguments and CounterargumentsThe appellant argued that the advance was for a property transaction with the company, while the Revenue contended that the advance lacked a commercial connection due to timing discrepancies between the advance and the formal agreement.Issue 5: Tribunal's Analysis and Legal PrecedentsThe Tribunal analyzed the transaction, considering the subsequent formal agreement and the commercial nature of the transaction. Citing legal precedents, the Tribunal concluded that the transaction was indeed commercial, falling outside the ambit of deemed dividend under section 2(22)(e) of the Act.Conclusion:The Tribunal allowed the appeal, directing the AO to delete the addition, emphasizing the commercial nature of the transaction and the absence of deemed dividend implications. The judgment highlighted the significance of formal agreements and commercial intent in transactions to determine the applicability of deemed dividends.