2008 (9) TMI 618 - AT - Income Tax

Deemed dividend - Whether amounts were advanced by the company for its business purposes? - HELD THAT - Keeping in view of the decision of co-ordinate Bench in the case of Lakra Bros. 2006 (4) TMI 190 - ITAT CHANDIGARH-A and the facts of the present case, it is observed that the transaction was in the ordinary course of the business of the company, there was no intention of the company to give a loan or advance to the assessee for his individual benefit. It has been demonstrated before us that in the bank account of the assessee in which the said amount was credited was always having balance of more than said amount, so even for a short period assessee has not derived any benefit or it cannot be said that the said amount was given to the assessee by the company for his individual benefit. The amount was lying in the bank account of the assessee which was not utilized at all for any purpose. It is, therefore, clear that the real intention of the company was to purchase the premises and there was no other hidden purpose. It also cannot be the case of revenue that returning of the amount was afterthought as the amount was returned by the assessee within a short span of a week. There is no material on record to suggest that the transaction of the company with the assessee was in any way arranged to give any benefit to the assessee. Therefore, applying the ratio of decision in the case of Lakra Bros. (supra) the amount could not be considered to be deemed dividend in the hands of the assessee. The provisions of section 2(22)( e ) were not applicable. Hence, the addition made on account of applicability of section 2(22)( e ) is deleted and the appeal filed by the assessee is allowed.

Issues Involved:
1. Interpretation of Section 2(22)(e) of the Income-tax Act.
2. Determination of whether the sum of Rs. 30,00,000 received by the assessee constitutes a "deemed dividend".
3. Examination of the nature of the transaction as a loan or advance.
4. Consideration of the business purpose and benefit to the shareholder.
5. Applicability of judicial precedents and case law.

Detailed Analysis:

1. Interpretation of Section 2(22)(e) of the Income-tax Act:

The primary issue revolves around the interpretation of Section 2(22)(e) of the Income-tax Act, which defines "deemed dividend". The section stipulates that any payment by a company, not being a company in which the public are substantially interested, by way of advance or loan to a shareholder holding not less than 10% of the voting power, or to any concern in which such shareholder is a member or partner, to the extent the company possesses accumulated profits, shall be treated as deemed dividend.

2. Determination of whether the sum of Rs. 30,00,000 received by the assessee constitutes a "deemed dividend":

The assessee, a Director in M/s. Alliance Merchandising Co. Pvt. Ltd., received Rs. 30 lakhs from the company. The Assessing Officer treated this amount as a loan or advance under Section 2(22)(e), thus considering it as deemed dividend. However, the assessee argued that the amount was an "imprest" for a specific business purpose of purchasing an office complex, and not a loan or advance.

3. Examination of the nature of the transaction as a loan or advance:

The CIT(A) upheld the Assessing Officer's decision, concluding that the payment was an advance within the meaning of Section 2(22)(e). The CIT(A) noted that the transaction met all conditions necessary for it to be considered a deemed dividend:
- Payment by a company not substantially interested by the public.
- Payment by way of advance or loan.
- Recipient being a shareholder with beneficial ownership of at least 10% voting power.
- Loan or advance to the extent of the company's accumulated profits.

4. Consideration of the business purpose and benefit to the shareholder:

The assessee contended that the amount was given for a specific business purpose and not for personal benefit. The transaction was supported by Board resolutions and was intended for acquiring a property for the company. The assessee argued that the bank account always had a balance exceeding Rs. 30 lakhs, indicating no personal benefit was derived.

5. Applicability of judicial precedents and case law:

The assessee relied on the decision in CIT v. Ambassador Travels (P.) Ltd. and other cases, which held that transactions in the ordinary course of business do not constitute loans or advances under Section 2(22)(e). The Tribunal noted that the transaction was in the ordinary course of business and did not confer any individual benefit to the shareholder. The Tribunal distinguished the present case from Ms. P. Sarada v. CIT, where the facts indicated personal benefit to the shareholder.

Conclusion:

The Tribunal concluded that the amount of Rs. 30 lakhs given to the assessee was not a loan or advance for personal benefit but was an imprest for a specific business purpose. The transaction was supported by Board resolutions and was in the ordinary course of business. Therefore, the provisions of Section 2(22)(e) were not applicable, and the addition made by the Assessing Officer was deleted. The appeal filed by the assessee was allowed.

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