2011 (9) TMI 363 - HC - Income Tax

Deemed Dividend - Trading transaction - Treatment of unsecured loan given to shareholder of company (holding 50% of shares) as deemed Dividend - Held that - the amount was not in the nature of advance or loan and in fact there was a business transaction between the assessee and company and the amount reflected running business relationship and there was a running account maintained by the assessee showing those transactions as in the books of accounts though the amount was shown as unsecured loan . - It is trite law that mere nomenclature of entry in the books of accounts is not determinative of the true nature of transaction. See Commissioner of Income Tax Vs. India Discount Co. Ltd. (1969 -TMI - 5158 - SUPREME Court) - the payment made were the result of trading transaction between the parties and the amount was not given by way of loan or advance. - Decided against the revenue.

Summary

Issues:
Assessment of deemed dividend under Section 2(22)(e) of the Act based on unsecured loan from a company in which the assessee is a shareholder.

Analysis:
1. The assessee, engaged in trading, was found to have received an unsecured loan from a company in which they held 50% shares, triggering the application of Section 2(22)(e) of the Act by the Assessing Officer.

2. The assessee contended that the amount was not a loan but part of regular business transactions with the company, supported by a running account. However, the Assessing Officer disregarded this explanation due to the entry as "unsecured loan" in the books.

3. The CIT (A) accepted the assessee's explanation, noting the business nature of transactions between the parties, and deleted the addition. The ITAT upheld this decision, emphasizing that the amount was not a loan but a result of business dealings, as evidenced by the maintained current account.

4. The judgment referenced CIT Vs. Raj Kumar, highlighting that payments resulting from business transactions, even to substantial shareholders, do not qualify as loans under Section 2(22)(e). The purpose of the provision is to tax accumulated profits distributed as loans by closely held companies to prevent tax avoidance.

5. The court applied the rule of noscitur a sociis to interpret "advance" in conjunction with "loan" under Section 2(22)(e), emphasizing the obligation of repayment for an advance to be considered a loan. The judgment clarified that trade advances for commercial transactions fall outside the provision's scope.

6. The appellant argued based on the entry in the books as "unsecured loan," but the court reiterated that the true nature of a transaction is not solely determined by its book entry, citing relevant precedents.

7. Relying on the evidence and current account details, the court found that the payments were part of trading transactions, not loans or advances, leading to the dismissal of the appeal.

8. Ultimately, the court concluded that no legal question arose in the appeal, which was consequently dismissed.