TaxTMI 
TaxTMI 
2017 (5) TMI 247
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....11 was served on the assessee. In response to notice, the authorized representative of the assessee appeared from time to time and furnished the details as called for. During the course of assessment proceedings, the A.O. noticed that the assessee is a Director and substantial shareholder in the company M/s. Alfa Electronics Services Private Limited. The company is having accumulated profit of Rs. 51,14,597/- as on 31.3.2009. The A.O. further noticed that the company has advanced an amount of Rs. 88,57,000/- to the assessee. Therefore, called upon the assessee to explain as to why the loan received from the company should not be assessed as deemed dividend u/s 2(22)(e) of the Act. 3. In response to show cause notice, the assessee has submitted that the amount received from the company was not gratuitous payments that were extended just on the basis of the shareholding of the assessee. The amounts were advanced in order to gain a long term advantage for the company in the form of an unrestricted over draft facility from Axis Bank as against the existing cash credit availed from State Bank of India that was subject to so many restrictions. The assessee has planned to shift the over ....
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....well as mortgage loan availed on the properties held by the assessee in his individual capacity, which were given as collateral security for the purpose of obtaining over draft loan from the banks. The assessee further submitted that the company has availed over draft loan from State Bank of India on the basis of collateral security of properties held by the assessee and planned to shift over draft loan to Axis Bank which is impossible unless the loan outstanding in the name of the assessee is cleared. The company has advanced amount to the assessee for the purpose of clearing loan outstanding in the name of the assessee, out of which the company has benefitted by mortgaging the property to the Axis bank for obtaining higher credit limit, therefore, the payments cannot be considered as gratuitous payments, coming within the meaning of deemed dividend as defined u/s 2(22)(e) of the Act. In this regard, furnished necessary details of loan sanction letters from banks and also details of property mortgaged to the banks to prove that the properties of the assessee have been mortgaged to the banks for obtaining over draft loans. The assessee also relied upon the decision of Hon'ble Kolka....
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....rpose of computation of deemed dividend u/s 2(22)(e) of the Act, the accumulated profit of the company should be worked out up to the date of each payment/advance of loan and would not include current year's profit. Therefore, directed the A.O. to recompute the deemed dividend to the extent of accumulated profit up to the date of each advancement of loan without including current year's business profit. Aggrieved by the CIT(A) order, the assessee, as well as the revenue are in appeal before us. 8. The Ld. A.R. for the assessee submitted that the Ld. CIT(A) is not justified in holding that the advance of Rs. 51,44,597/- received by the assessee from M/s. Alfa Electronics Services Pvt. Ltd. falls within the scope of deemed dividend as defined u/s 2(22)(e) of the Act. The Ld. CIT(A) is not justified in not appreciating the fact that the advance received by the assessee from the company was for a consideration out of commercial expediency and was not gratuitous payment. The A.R. further submitted that the assessee has received the amount from the company for the interim arrangement of clearing loan outstanding in the name of the assessee on the properties mortgaged for obtaining an ov....
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....The Ld. D.R. referring to the decision of Hon'ble Supreme Court, in the case of CIT Vs. Damodaran reported in 121 ITR 572 submitted that the CIT(A) ought to have appreciated that accumulated profits for the purpose of deemed dividend u/s 2(22)(e) of the Act would also include current year's profit. 10. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. made addition towards deemed dividend u/s 2(22)(e) of the Act, towards loans received by the assessee from the company. According to the A.O., as per the provisions of section 2(22)(e) of the Act, any loan or advance falls within the meaning of deemed dividend as defined u/s 2(22)(e) of the Act, to the extent of accumulated profits of the company. The A.O. further observed that unless the assessee proves that the advance or loan was made in the ordinary course of its business, where lending of money is substantial part of the company, all loans and advances would fall under the definition of 'deemed dividend'. The section does not provide for any exceptions in the cases narrated by the assessee. It is the contention of the assessee that advances re....
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....h falls within the definition of 2(22)(e) of the Act. 12. Having heard both sides, we find force in the arguments of the assessee for the reason that the assessee has given his personal properties as collateral security to the over draft loan availed by the company. It is also an admitted fact that the assessee is having a housing loan as well as mortgage loan on the said properties. Unless the housing loan as well as mortgage loan is cleared, the assessee cannot pledge his properties to over draft loan availed by the company from Axis bank Limited. The assessee also proved with necessary evidences that the company has got a long term advantage in the form of enhanced credit limit from Axis bank. Therefore, we are of the view that the A.O. as well as the CIT(A) were erred in considering the advance received by the company as gratuitous payment, which falls under the definition of 'deemed dividend' as defined u/s 2(22)(e) of the Act. 13. It is pertinent to discuss the case law relied upon by the assessee. The assessee has relied upon the decision of Hon'ble High Court of Kolkata, in the case of Pradeep Kumar Malhotra Vs. CIT (2011) 338 ITR 588, wherein the Hon'ble High Court held ....
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.... the decision of Hon'ble High Court of Kolkata, in the case of Pradeep Kumar Malhotra Vs. CIT (supra) has held that any advance received by the assessee from the company for mutual benefit of the company to get business advantage are not falls within the meaning of 'deemed dividend' as defined u/s 2(22)(e) of the Act. The relevant portion of the order is extracted below: "17. Having heard both the parties and having considered the materials available on record, we find that the A.O. has made additions towards loans and advances under the provisions of section 2(22)(e) of the Act, on the ground that transaction between the assessee and his company is coming within the definition of loans and advances. The assessee claims that transaction between himself and his company is not a gracious payment which is coming within the meaning of loans and advances as defined u/s 2(22)(e) of the Act. The CIT(A) after considering the explanation furnished by the assessee and also following the decision of Kolkata High Court, in the case of Pradip Kumar Malhotra Vs. CIT, held that the transaction between the assessee and his company are not gracious payment which is coming within the meaning of loa....
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....measuring 1485 sq.ft. situated at MMTC colony, Seethammadhara, Vizag in the name of Hari Prasad Bhararia. 12.11.2010 Axis Bank Ltd. Ramnagar, Vizag M/s. Sampath Vinayak Steels Pvt. Ltd. 400 lakhs (1) 4 storyed building on 555 sq.yds. situated at Rajendranagar, Vizag in the name of (a) Hari Prasad Bhararia (b) Shivlal Bhararia (brothers) (2) VUDA Apartment admeasuring 1485 sq.ft. situated at MMTC colony, Seethammadhara, Vizag in the name of Hari Prasad Bhararia. Even till date, the Axis Bank has granted cash credit facility to the said company on the basis of the collateral security provided by the properties and also the personal guarantee of the appellant and his family members (latest sanction letter being 6.3.2013). 7.3 It is noted that the facts in the case of Pradip Kumar Malhotra vs CIT (supra) are akin to the facts under reference which is given below. "The phrase "by way of advance or loan" appearing sub-clause(e) of section 2(22) of the Income tax Act, 1961 must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of divi....
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....holder is not a gratuitous loan or advance given by the Company and does not come under the purview of section 2(22)(e). In view of the above, the addition made on account of deemed dividend by the Assessing Officer is ordered to be deleted for AYs 2005-06 to 2011-12. Since the issue is decided in favour of the appellant, the matter relating to the appellant's remuneration does not arise." 18. The CIT(A) has considered the issue in detail and held that the transaction between the assessee and his company are not coming within the meaning of loans and advances as defined u/s 2(22)(e) of the Act. The facts remain unchanged. The revenue has failed to brought on record any evidences to prove that the findings of the fact recorded by the CIT(A) is incorrect. Therefore, we are of the view that the CIT(A) has rightly deleted additions made towards deemed dividend under the provisions of section 2(22)(e) of the Act. We do not see any reason to interfere with the order of the CIT(A). Hence, we inclined to uphold the CIT(A) order and dismiss the appeal filed by the revenue." 15. Considering the facts and circumstances of this case and also respectfully following the decision of Hon'ble K....