2011 (5) TMI 857 - AT - Income Tax

Deemed Dividend u/s 2(22)(e) - Loan was given to the partnership firm in which the shareholders were having substantial interest through a conduit, i.e., M/s. Power Service Corporation - As the money was returned on the very same day to the company, thus, the amount is deemed dividend u/s 2(22)(e) HELD THAT - When there is no net outflow, there is no intention to give the money as a loan or an advance. If the intention was to give a loan or an advance, the question of the money being returned to assessee, on the same day does not arise. The co-ordinate Bench of the Tribunal in case of G.M.J. THAMPY VERSUS ASSTT. COMMISSIONER OF INCOME-TAX 2010 (8) TMI 1017 - ITAT MUMBAI held that Relying on the findings of COMMISSIONER OF INCOME TAX VERSUS SHRI RAJ KUMAR 2009 (5) TMI 17 - DELHI HIGH COURT , we are of the opinion that the word 'advance' which appears in the company of the word 'loan' could only mean such advance which carries with it an obligation of repayment. Trade advance which are in the nature of money transacted to give effect to commercial transaction would not, in our view, fall within the ambit of the provisions of section 2(22)(e) Hence, in view of the finding of the Revenue that the transaction is not a genuine advance for purchase of goods, we have to take the conclusion to the logical end and hold that, in such a view of the matter, it is also not a loan or as advance, so as to attract section 2(22)(e) Looking at the issue from any angle, if it is said that this is a trade advance given to M/s. Power Service Corporation, which had ultimately supplied machinery to the assessee, then, such an advance cannot be termed as a loan so as to bring it within the ambit of section 2(22)(e) - Therefore, we delete the addition in the hands of the assessee.

Summary

Issues Involved:
1. Validity of reopening of assessment under section 147 of the Income-tax Act.
2. Validity of an addition of Rs. 1,40,00,000 as deemed dividend under section 2(22)(e) of the Income-tax Act.
3. Violation of principles of natural justice.
4. Levy of interest under sections 234B and 234C of the Income-tax Act.

Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147:
The assessee did not press this issue. Consequently, the ground was dismissed as "not pressed."

2. Validity of Addition as Deemed Dividend under Section 2(22)(e):
The core issue revolves around whether the transaction between M/s. Swati Energy and Projects P. Ltd. and M/s. Power Service Corporation was genuine and whether the amount given to M/s. Power Service Corporation was a loan.

- Facts and Findings:
- M/s. Swati Energy and Projects P. Ltd. gave Rs. 1,40,00,000 to M/s. Power Service Corporation, which was immediately transferred to M/s. Sujyoti Enterprises and then returned to M/s. Swati Energy and Projects P. Ltd. on the same day.
- The Assessing Officer concluded that the amount was not a purchase advance but money parked indirectly in the business controlled by the assessee.
- The Commissioner (Appeals) supported this view, stating that the transaction was a loan bearing interest and not an advance for material supplied.
- The Tribunal noted that the transaction was circuitous, with no net outflow of funds from M/s. Swati Energy and Projects P. Ltd. on the same day.

- Legal Reasoning:
- Section 2(22)(e) is intended to curb the practice of companies with accumulated profits giving loans to shareholders to avoid paying dividends.
- The Tribunal concluded that there was no intention to give the money as a loan or advance since the funds returned to M/s. Swati Energy and Projects P. Ltd. on the same day.
- The Tribunal also referred to the case of CIT v. Raj Kumar, which states that trade advances in the nature of money transacted to give effect to commercial transactions do not fall within the ambit of section 2(22)(e).

- Conclusion:
- The Tribunal held that the transaction was not a loan or advance and thus did not attract section 2(22)(e). The addition of Rs. 1,40,00,000 as deemed dividend was deleted.

3. Violation of Principles of Natural Justice:
The assessee did not press this issue. Consequently, the ground was dismissed as "not pressed."

4. Levy of Interest under Sections 234B and 234C:
The assessee did not press this issue. Consequently, the ground was dismissed as "not pressed."

Separate Judgments:
- I.T.A. No. 2483/Mum./2011 (Mr. Pravin Bhimshi Chhada):
- The appeal was allowed in part, with the addition of Rs. 1,40,00,000 as deemed dividend under section 2(22)(e) being deleted.

- I.T.A. No. 6319/Mum./2009 (M/s. Sujyoti Enterprises):
- The appeal was dismissed as the issue was considered academic in light of the findings in I.T.A. No. 2483/Mum./2011.

Summary:
The Tribunal concluded that the transaction involving Rs. 1,40,00,000 was not a loan or advance but a circuitous transaction with no net outflow of funds from M/s. Swati Energy and Projects P. Ltd. on the same day. Consequently, the addition of Rs. 1,40,00,000 as deemed dividend under section 2(22)(e) was deleted. Other issues raised by the assessee were dismissed as "not pressed." The appeal in I.T.A. No. 2483/Mum./2011 was allowed in part, while the appeal in I.T.A. No. 6319/Mum./2009 was dismissed.