2012 (8) TMI 708 - AT - Income Tax

Applicability of TDS provisions in respect of the advances held as deemed dividends by the AO u/s 2(22)(e) advance provided to sister concern in which share-holders of the assessee are having substantial interest of more than 20% by way of shares legality and validity of the proceedings u/s 201(1) and 201(1A) after lapse of a period of four years Held that - As far as trade advances are concerned, there is no question of applicability of the provisions of S.194, and consequently, applicability of provisions of S.201(1) and S.201(1)(1A) does not arises. As for the other advances as well, it is held that it is only where the payee in relation to the payments in question is a share-holder, such payments may attract the provisions of S.2(22)(e), and consequently liability to TDS u/s 194. Therefore, Section 194 does not require TDS when payment is made to a non-shareholder. See ANZ Reality Pvt. Ltd. V/s. ITO(2008 (10) TMI 268 - ITAT JAIPUR-B) Decided in favor of assessee. For the purpose of applicability of TDS provisions, six years is held to be a reasonable period. See Mahindra and Mahindra Limited V/s. DCIT (2009 (4) TMI 207 - ITAT BOMBAY-H) Decided in favor of Revenue

Issues Involved:
1. Legality and validity of proceedings under S.201(1) and 201(1A) after four years.
2. Applicability of TDS provisions to deemed dividend under S.2(22)(e).
3. Classification and treatment of advances as trade advances or deemed dividends.
4. Liability for deducting tax at source under S.194.
5. Determination of assessee as an assessee in default under S.201(1) and S.201(1A).

Detailed Analysis:

1. Legality and Validity of Proceedings under S.201(1) and 201(1A) after Four Years:
The assessee argued that the proceedings initiated by the assessing officer under S.201(1) and 201(1A) of the Income-tax Act after a lapse of four years from the end of the relevant financial year are invalid. The Revenue contended that six years is a reasonable period for the applicability of TDS provisions, citing the decision of the Special Bench of the Tribunal in Mahindra and Mahindra Limited V/s. DCIT (30 SOT 374). The Tribunal, following the decision of the Special Bench, held that the proceedings initiated by the assessing officer are not barred by limitation, thus deciding the issue in favor of the Revenue.

2. Applicability of TDS Provisions to Deemed Dividend under S.2(22)(e):
The assessee claimed that the issue is covered in their favor by the decision of the Jaipur Bench of the Tribunal in ANZ Reality Pvt. Ltd. V/s. ITO (120 TTJ 142), which held that payment of advances to non-shareholders does not require TDS under S.194. The Revenue argued that the facts of the cited case are distinguishable. The Tribunal found that as per the decision in ANZ Reality, TDS provisions under S.194 apply only when payment is made to a shareholder. Since the advances in question were not made to shareholders, the Tribunal held that the assessee is entitled to relief regarding deemed dividends, thus allowing the assessee's appeals on this issue.

3. Classification and Treatment of Advances as Trade Advances or Deemed Dividends:
The CIT(A) categorized the advances made by the assessee to OMPL into trade advances and other than trade advances. He directed the assessing officer to exclude the trade advances while calculating the demands under S.201(1) and 201(1A). The Revenue contended that all kinds of advances should be treated as deemed dividends under S.2(22)(e). The Tribunal noted that the CIT(A) did not provide a detailed reasoning for excluding trade advances from TDS provisions. Therefore, the Tribunal set aside the CIT(A)'s order on this issue and remanded it for fresh consideration and a detailed, speaking order.

4. Liability for Deducting Tax at Source under S.194:
The CIT(A) upheld that tax has to be deducted at source under S.194 for the advances paid to OMPL. The assessee argued that the advances do not attract TDS provisions as they were not made to shareholders. The Tribunal, referring to the decision in ANZ Reality, concluded that TDS under S.194 is not applicable to payments made to non-shareholders, thus providing relief to the assessee on this ground.

5. Determination of Assessee as an Assessee in Default under S.201(1) and S.201(1A):
The CIT(A) held the assessee as an assessee in default for not deducting tax at source on the deemed dividends. The Tribunal, however, found that the advances categorized as trade advances do not attract TDS provisions. Consequently, the Tribunal allowed the assessee's appeals, holding that the assessee should not be treated as an assessee in default for the trade advances and non-shareholder payments.

Conclusion:
The appeals of the assessee were allowed, and the appeals of the Revenue were allowed for statistical purposes. The Tribunal remanded the issues related to the classification of advances and applicability of TDS provisions on trade advances and processing charges to the CIT(A) for fresh consideration and a detailed order. The Tribunal's decision emphasized the distinction between shareholder and non-shareholder payments concerning deemed dividends and TDS obligations.

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