2011 (9) TMI 100 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - assessee is the beneficial owner of 30% of share holding in the company M/s Pee Jay Fabrics Pvt.Ltd., which is a company in which public are not substantially interested. - Held that - The plea of the assessee that no direct payment was made by the company to the assessee has no relevance as the case of the assessee falls within the third limb i.e. payment on behalf or for the individual benefit of the shareholder - However, the alternate limb of the argument of the assessee was that the entries were passed in the normal course of carrying on of the business. Tribunal in Lakra Brothers case (2006 -TMI - 61607 - ITAT CHANDIGARH-A ) had laid down the principle that loan is something different from sale and every sale of goods on credit does not mean to be transaction of loan. The payment was made by M/s Pee Jay Fabrics Ltd. as the demand was raised by the consignor M/s Raymonds Ltd. after debiting the account of the said company, though the said transaction related to the assessee. Thereafter, on reconciliation of statement of accounts, the said amount was repaid by the assessee to the said company and the same does not partake the character of loan as contemplated u/s 2(22)(e) of the Act. - Decided in favor of assessee.

Issues Involved:
1. Applicability of provisions of Section 2(22)(e) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Applicability of provisions of Section 2(22)(e) of the Income-tax Act, 1961

Background and Facts:
The appeal concerns the deletion of an addition of Rs. 28,28,016/- made by the Assessing Officer (AO) on account of deemed dividend by invoking Section 2(22)(e) of the Income-tax Act, 1961. During the assessment proceedings, the AO noted a credit balance in the books of the assessee, which was later repaid. The AO observed that the assessee, a substantial shareholder (50%) in M/s. Pee Jay Fabrics Pvt. Ltd., had received payments from the company, which were treated as loans or advances.

AO's Findings:
The AO concluded that M/s. Raymonds Ltd. had received payment from M/s. Pee Jay Fabrics Pvt. Ltd. for purchases made by the assessee, thus invoking Section 2(22)(e) of the Act. As a result, the AO treated the entire amount of Rs. 28,28,016/- as deemed dividend.

CIT(A)'s Decision:
The CIT(A) reversed the AO's decision, noting that the transactions were in the normal course of business and involved no direct payment from M/s. Pee Jay Fabrics Pvt. Ltd. to the assessee. The CIT(A) emphasized that the entries were passed by M/s. Raymonds Ltd. without the appellant's request or instruction, and the accounts were reconciled subsequently.

Revenue's Appeal:
The Revenue argued that the CIT(A)'s order should be set aside, relying on the AO's findings and the decision in Ravindra D. Amin v. CIT [1994] 208 ITR 815. The Revenue contended that the provisions of Section 2(22)(e) were applicable as the payments were made by the company for the individual benefit of the shareholder.

Assessee's Argument:
The assessee maintained that no direct payment was made by the company to the shareholder, and the entries were merely adjustments in the normal course of business. Reliance was placed on the decision in G.R. Govindarajulu Naidu v. CIT [1973] 90 ITR 13 and Dy. CIT v. Lakra Brothers [2007] 106 TTJ 250/162 Taxman 170 (Chd.) (Mag.), which held that such transactions do not constitute loans under Section 2(22)(e).

Tribunal's Analysis:
The Tribunal examined the provisions of Section 2(22)(e), which deems certain payments by a company to its shareholders or related concerns as dividends. The Tribunal noted that the assessee was a beneficial owner of 30% shares in M/s. Pee Jay Fabrics Pvt. Ltd., fulfilling the preliminary conditions of Section 2(22)(e).

However, the Tribunal found that the transactions were part of the normal business operations, with payments made by M/s. Pee Jay Fabrics Pvt. Ltd. to M/s. Raymonds Ltd. being subsequently repaid by the assessee. The Tribunal referred to the Chandigarh Bench's decision in Lakra Brothers, which distinguished between loans and business transactions.

Conclusion:
The Tribunal upheld the CIT(A)'s order, concluding that the transactions did not constitute loans under Section 2(22)(e) as they were made in the normal course of business and were subsequently reconciled. The addition made by the AO was deemed unwarranted, and the Revenue's appeal was dismissed.

Final Judgment:
The appeal of the Revenue was dismissed, affirming the CIT(A)'s decision to delete the addition of Rs. 28,28,016/- made under Section 2(22)(e) of the Income-tax Act, 1961.

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