2013 (5) TMI 581 - AT - Income Tax

Deemed dividend - Addition made on account of section 2(22)(e) - Held that - In this case the assessee is a Director of M/s Nevco Engineers Pvt. Ltd. holding 99% share of the total paid up capital. Assessee has made investment to the tune of Rs. 12,00,000/- in Reliance Equity Fund on behalf of Nevco Engineers Pvt. Ltd. The proposal for the assessee to make investment on behalf of Nevco Engineers Pvt. Ltd. was duly approved by the Board of Directors of the said company. The reasons for the Company not being able to make the investment in its name was that at that point of time, the Company did not meet the requirement of Know Your Customer (KYC) Scheme (for Money Laundering measures) and also did not have a PAN card which were mandatory for the purpose of applying of units of mutual funds. AO reasoning for not accepting these submissions on the ground that Company could have waited to complete the formalities before the making the investment is not sustainable as it was on account of commercial expediency as to avail the business opportunity, the Company invested in the Reliance Equity Funds through the assessee. The amount investment was duly reflected in the books of accounts of the Company as an investment. Assessee did not derive any benefit for the said investment in his personal name. It has further been submitted that the said investment was redeemed on 10.12.2010 at a profit of Rs. 1,35,838.21. On 10.12.2010 on the same date there was a transfer of redemption money of Rs. 13,35,838.21 from the assessee s bank account to the Company s bank account. Thus, it was for proper and cogent reasons due to which the investment was made in the name of assessee on behalf of the Company. The assessee did not derive any benefit out of the same. The profit derived on the investment was immediately transferred to the assessee company on redemption. Against revenue.

Summary

Issues:
Interpretation of section 2(22)(e) of the Income Tax Act - Deletion of addition made by Assessing Officer - Investment made in mutual funds on behalf of a company by a director - Compliance with formalities for investment - Beneficial owner of investments - Application of deeming provisions - Appeal by Revenue against order of Ld. Commissioner of Income Tax (Appeals).

Analysis:

The case involved an appeal by the Revenue against the order of the Ld. Commissioner of Income Tax (Appeals) pertaining to the assessment year 2008-09. The primary issue revolved around the interpretation of section 2(22)(e) of the Income Tax Act and the deletion of an addition made by the Assessing Officer regarding investments made in mutual funds on behalf of a company by one of its directors.

The Assessing Officer had added a certain amount to the income of the assessee under the deeming provisions of section 2(22)(e) of the Income Tax Act. This addition was based on the premise that the company had forwarded funds to the director for investment in mutual funds, which the Assessing Officer considered as falling under the purview of deemed dividends.

The assessee contended that the investments were made on behalf of the company due to the company's inability to fulfill certain formalities at the time of investment. The Ld. Commissioner of Income Tax (Appeals) agreed with the assessee's arguments and deleted the addition, emphasizing that the investments were made for the business purposes of the company and not for personal benefit.

Upon further appeal by the Revenue, the Appellate Tribunal upheld the order of the Ld. Commissioner of Income Tax (Appeals). The Tribunal noted that the investments were duly approved by the company's Board of Directors and were reflected in the company's books as an investment. The Tribunal found that the investments were made in the director's name for commercial expediency, with the profits immediately transferred back to the company upon redemption.

Ultimately, the Tribunal dismissed the Revenue's appeal, concluding that there was no infirmity in the order of the Ld. Commissioner of Income Tax (Appeals) regarding the deletion of the addition under section 2(22)(e) of the Income Tax Act.

In summary, the case centered on the application of deeming provisions under section 2(22)(e) of the Income Tax Act to investments made by a director on behalf of a company in mutual funds. The judgments emphasized the business purpose of the investments, compliance with formalities, and the absence of personal benefit to the director, leading to the deletion of the addition by the Ld. Commissioner of Income Tax (Appeals) and subsequent affirmation by the Appellate Tribunal.