2009 (1) TMI 534 - HC - Income Tax

Deemed dividend - Held that - Whether the amount was dividend under section 2(22)(e ) or not is a question of law. An assessee is not expected to be well versed in law when it comes to dealing with the interpretation of a deeming provision. Therefore in such a situation a surrender made by the assessee under mistaken impression of law cannot be the sole ground for making the addition. It is a trite law to say that the principle of estoppel originated in the last contract and it has no application in the realm of fiscal statute where the question has to be decided on proper appreciation of fact and the interpretation of law. Thus the amount was received by the assessee as advance for supply of zippers and it was a commercial transaction. It could also not be said that any benefit accrued to the assessee. Accordingly it is held that the learned CIT (Appeals) erred in sustaining the aforesaid addition.

Issues Involved:
1. Addition of Rs. 25 lakhs as deemed dividend under section 2(22)(e) of the Income-tax Act for the assessment year 1999-2000.
2. Addition of Rs. 13 lakhs as deemed dividend under section 2(22)(e) of the Income-tax Act for the assessment year 2000-01.

Detailed Analysis:

Issue 1: Addition of Rs. 25 lakhs as deemed dividend for the assessment year 1999-2000

The assessee filed her return of income on 23-12-1999, declaring a total income of Rs. 8,07,524, which was processed under section 143(1) of the Act. During the assessment proceedings for the assessment year 2001-02, it was observed that the assessee received Rs. 5 lakhs from Kaks Bills Pvt. Ltd. ("Kaks"), where she was a director holding 19.72% shareholding. The Assessing Officer (AO) deemed this amount as income under section 2(22)(e) of the Income-tax Act, 1961, which was not declared by the assessee. Further, it was found that the assessee received Rs. 25 lakhs from Kaks in the year 1999-2000, which was not declared as income, leading the AO to issue a notice under section 148 for escaped assessment.

During reassessment, the assessee explained that the Rs. 25 lakhs was an advance for the supply of zippers, which were imported but rejected due to quality issues, and the amount was refunded. The AO, unsatisfied with the explanation, recorded the statement of the assessee under oath, where she agreed to treat the amount as deemed dividend to avoid further litigation. Consequently, Rs. 25 lakhs was added to her income, and penalty proceedings were initiated under section 271(1)(c).

The matter was appealed, and the CIT (Appeals) upheld the addition based on the assessee's surrender of the amount. However, the assessee argued that the surrender did not inherently mean it was income under section 2(22)(e) and that the advance was a business transaction, not a loan or dividend.

The Tribunal noted that in a similar case for the assessment year 2001-02, the advance was deemed a commercial transaction, not dividend, as it was refunded within two days. The Tribunal emphasized that section 2(22)(e) applies only when the shareholder benefits from the company's funds, which was not the case here.

The Tribunal found substantial evidence that the transaction was commercial, involving confirmed orders and import of materials, which were rejected due to quality issues. There was no indication that the advance was a device to divert company funds for the director's benefit.

The Tribunal considered relevant case laws, including Ardee Finvest (P.) Ltd. v. Dy. CIT and Nandlal Kanoria v. CIT, which supported the view that commercial transactions involving advances for business purposes do not constitute deemed dividends under section 2(22)(e).

The Tribunal concluded that the advance was for a commercial transaction, not for the benefit of the assessee, and thus not taxable as deemed dividend. The addition of Rs. 25 lakhs was accordingly deleted.

Issue 2: Addition of Rs. 13 lakhs as deemed dividend for the assessment year 2000-01

The facts for the assessment year 2000-01 were similar to those of 1999-2000, differing only in the amount involved. The Tribunal reiterated that the advance of Rs. 13 lakhs was also for a commercial transaction involving the import of zippers, which were rejected due to quality issues. The CIT (Appeals) had sustained the addition, but the Tribunal found that the nature of the transaction was identical to the previous year and thus not taxable as deemed dividend.

Conclusion:

The Tribunal allowed both appeals, deleting the additions of Rs. 25 lakhs for the assessment year 1999-2000 and Rs. 13 lakhs for the assessment year 2000-01, concluding that these amounts were advances for commercial transactions, not deemed dividends under section 2(22)(e) of the Income-tax Act.

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