2013 (7) TMI 117 - HC - Income Tax

Deemed dividends u/s 2(22)(e) - accumulated profit - loan or business transaction - Held that - appellant had sold goods and had established that the amounts involved business transactions. Such amounts, therefore, cannot be categorized as loan as envisaged under section 2(22)(3) of the Act. Section 2(22)(e) of the Act, as is well known, treats certain loan or advance made by the company to a person who is the beneficial owner of the shares holding not less than ten per cent of the voting power under certain circumstances to be the deemed dividend. In the present case, when the authorities found that the amount in question cannot be categorized as loan or advance, question of application of section 2(22)(e) would not arise - Decided in favour of assessee. Tribunal in the impugned judgment has made a reference to a decision of the Ahmedabad Bench in the case of Sai Jyoti & Printing Ltd 2012 (8) TMI 36 - ITAT, AHMEDABAD . The Tribunal has also reproduced a portion of that judgment. We are of the opinion that the said decision has no bearing in the present appeal. This order, therefore, would have no effect on the Revenues appeal against such order, which we are informed has been admitted

Summary

Issues:
1. Whether the amount received from certain entities is taxable as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961?

Analysis:
For the assessment year 2006-07, the Assessing Officer taxed a sum of Rs.35.50 lacs as deemed dividend under section 2(22)(e) of the Act. The Assessing Officer considered the amounts received from related entities as deemed dividend. The assessee argued that the amounts were not in the nature of loan or advance but were production advances. The CIT(Appeals) noted that separate accounts were maintained for financial and business transactions. The CIT(Appeals) allowed the appeal, stating that the amounts were received for selling goods and were business transactions, not loans. The Tribunal upheld this decision, emphasizing that the amounts were part of business transactions and not loans as per section 2(22)(e) of the Act.

The Tribunal found that the appellant had established that the amounts received were part of business transactions and not loans as per section 2(22)(e) of the Act. The Tribunal noted that the appellant had sold goods to the related entities and maintained separate accounts for financial and business transactions. The Tribunal concluded that the amounts in question could not be categorized as loans, and therefore, section 2(22)(e) did not apply. The Tribunal dismissed the Revenue's appeal, affirming the decision of the CIT(Appeals).

The High Court, after reviewing the Tribunal's decision, found no error in the judgment. The Court reiterated that the amounts received were part of business transactions and not loans as defined under section 2(22)(e) of the Act. The Court clarified the application of section 2(22)(e) and emphasized that since the amounts were not loans, the provision did not apply. The Court also clarified that a reference made to a previous decision had no relevance to the current case. Consequently, the High Court dismissed the Tax Appeal, upholding the Tribunal's decision.

In conclusion, the High Court affirmed the Tribunal's decision that the amounts received from related entities were not taxable as deemed dividend under section 2(22)(e) of the Income Tax Act, as they were part of business transactions and not loans. The Court clarified the legal interpretation of section 2(22)(e) and dismissed the Revenue's appeal.