2016 (1) TMI 1242 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Held that - This is not the case where a temporary advance is given to the assessee without a reciprocal business arrangements. It was not a gratuitous act. Providing personal guarantee, by itself is an act which benefitted the company by way of grant of loan and cast a legal obligation on the assessee. Providing assets as collateral security is only an act in furtherance to personal guarantee. Thus agree with the contentions of the assessee and delete the addition in question. - Decided in favour of assessee

Summary

Issues:
Appeal against order of Ld. Commissioner of Income Tax (Appeals) for A.Y. 2007-08 - Addition of deemed dividend u/s 2(22)(e) - Whether temporary advance can be deemed dividend.

Analysis:
The Assessee, holding more than 10% shares of a company, withdrew amounts resulting in a debit balance, treated as deemed dividend u/s 2(22)(e) by the Assessing Officer. Assessee's contention of providing personal guarantees for company's bank guarantee rejected by A.O. and First Appellate Authority. The issue was whether a temporary advance of Rs. 8,84,029 can be deemed dividend u/s 2(22)(e).

The Hon'ble Calcutta High Court held that a loan or advance given in return for an advantage conferred upon the company by the shareholder does not qualify as deemed dividend. Chennai Tribunal also emphasized that not every payment by a company to its shareholders is a loan/advance. It noted that the arrangement between the assessee and the company was for business expediency, not deemed dividend.

The Appellate Tribunal found that providing personal guarantees benefitted the company, and the temporary advance was not gratuitous. The Ld. CIT(A) wrongly interpreted case laws, requiring collateral security for applicability, which was deemed incorrect. The Tribunal concluded that the temporary advance was not without reciprocal business arrangements and benefitted the company, hence deleting the addition as deemed dividend.

In conclusion, the Tribunal allowed the appeal of the Assessee, stating that the temporary advance was not deemed dividend under section 2(22)(e) of the Act. The order was pronounced on 27th January 2016.