2007 (9) TMI 460 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Assessee is a director holding beneficial shares of M/s. HDPPL entailing voting powers exceeding 10 per cent - HELD THAT - The revenue authorities have applied the provisions of section 2(22)(e) on the ground that the assessee is holding the beneficial shares of M/s. HDPPL and that he has derived an indirect benefit from the said transaction. It is not the case of the revenue that M/s. HDPPL has not carried out any job work for the assessee or his proprietary concern. There is also no finding by the revenue authorities that the assessee has never paid this outstanding amount to M/s. HDPPL. It can, thus, be said that this outstanding amount is on account of a transaction entered into during the regular course of business between M/s. HDPPL and M/s. Piryadarshini Prints. There is no prohibition against any business transaction between a shareholder and his company. In the case of Lakra Bros. 2006 (4) TMI 190 - ITAT CHANDIGARH-A , held that advances made during the ordinary course of business for business expediencies do not constitute loan for purposes of section 2( 22 )( e ) and cannot be taxed as deemed dividend. In the case on hand also nothing has been brought out by the Assessing Officer that the said transaction has been entered into for the benefit of the assessee and that it is not out of regular course of business of M/s. HDPPL. In view of the same, we are satisfied that the case of Lakra Bros. (supra), is very much applicable to the case on hand and respectfully following the said decision, this ground of appeal of the assessee is allowed. In the result, assessee s appeal is partly allowed.

Summary

Issues:
1. Taxability of a sum under section 2(22)(e) of the Income-tax Act.
2. Treatment of unquantified sales tax refund as income.

Issue 1:
The appeal addressed the taxability of a sum under section 2(22)(e) of the Income-tax Act. The assessee, engaged in printing business, had a debit balance towards outstanding labor charges payable to a company in which the assessee was a director holding beneficial shares. The Assessing Officer treated this balance as deemed dividend under section 2(22)(e). The Addl. CIT upheld this treatment, considering the balance payable for job work done by the company for the assessee's proprietary concern. The CIT(A) confirmed this decision. The assessee argued that the transaction was legitimate business activity and not a benefit derived from shareholding. Citing a precedent, the assessee contended that advances for business expediencies do not constitute a loan under section 2(22)(e). The tribunal agreed, stating that the transaction was part of regular business and not for the benefit of the shareholder. Relying on the legal fiction in section 2(22)(e), the tribunal allowed the appeal, emphasizing that the provision should not be extended beyond legislative intent.

Issue 2:
Regarding the treatment of an unquantified sales tax refund as income, the assessee did not press this ground during the hearing, leading to its dismissal. This issue was not further elaborated upon in the judgment as it was not pursued by the assessee.

In conclusion, the Appellate Tribunal ITAT Mumbai ruled in favor of the assessee, allowing the appeal partially concerning the taxability of the sum under section 2(22)(e) of the Income-tax Act. The judgment emphasized the importance of interpreting legal fictions within the bounds of legislative intent and precedent, ultimately determining that the transaction in question did not constitute deemed dividend under the Act.