2014 (4) TMI 964 - AT - Income Tax

Deemed dividend u/s 2(22)(e) of the Act Withdrawal of amount - Held that - The assessee has contributed substantial funds towards Share Application account - the assessee is having a running account with the company, wherein the transactions relating to remuneration, rent, salaries etc. are accounted for - the amount refunded to the assessee during June, 2008 and in subsequent months was debited by the company and the same has converted the credit balance into debit balance on certain dates - the assessee has also prepared combined ledger account combining both his Running account and the balance available in the Share Application account - the assessee s account was always having credit balances, the assessee has not withdrawn any money over and above the money already contributed by him there was merit in the contentions of the assessee that the Running account was wrongly debited with the amounts refunded, instead of debiting the same to the Share Application Account thus, the assessee should not be penalized for the mistake committed by the company in not accounting the transactions properly - the factual position also shows that there was no intention to avoid payment of taxes by distributing money in the form of loan or dividend instead of distributing the same as dividend. Relying upon M.D. Jindal Vs. CIT 1986 (4) TMI 17 - CALCUTTA High Court - the company only possesses the funds belonging to the assessee, if both the Running account and Share application money contributed by the assessee is taken together - the amounts debited to the Running account of the assessee cannot be considered as deemed dividend in terms of the provisions of sec. 2(22)(e) of the Act - they represents money refunded out of the contribution made by the assessee towards Share Application account thus, the order of the CIT(A) set aside Decided in favour of Assessee.

Summary

Issues:
Assessment of deemed dividend under section 2(22)(e) of the Income Tax Act based on withdrawals made by the assessee from a company where he is a director and holds voting rights.

Analysis:
The appeal before the Appellate Tribunal ITAT Hyderabad was against the order confirming the assessment of deemed dividend made under section 2(22)(e) of the Income Tax Act for the assessment year 2009-10. The assessing officer observed that the assessee, a director in a company, had withdrawn funds from the company, leading to the conclusion that the withdrawals constituted income under the Act. The assessee contended that the withdrawals were related to share application money and not deemed dividend. The company's accounting error in debiting the withdrawals to the running account instead of the share application account was highlighted. The Tribunal noted that the refunds made to the assessee were part of the share application money transactions and not standalone withdrawals, as evidenced by the account balances. The Tribunal agreed with the assessee's argument that the company's accounting mistake should not penalize the assessee and that there was no intent to avoid tax liability. Citing relevant case law, the Tribunal held that the withdrawals should not be treated as deemed dividend under section 2(22)(e) of the Act. The order of the Ld CIT(A) was set aside, directing the assessing officer to delete the assessment under section 2(22)(e) of the Act.

The Tribunal considered the nature of the transactions involving the share application money contributed by the assessee and the company's accounting treatment of refunds. The Tribunal emphasized that the withdrawals were not independent of the share application money transactions and should not be treated as deemed dividend. The Tribunal also discussed the applicability of notifications by the Ministry of Corporate Affairs, emphasizing that the Companies Act provisions may not solely determine the tax implications under the Income Tax Act. The Tribunal relied on precedents and legal principles to support the assessee's position that the withdrawals were not in the nature of deemed dividend as per section 2(22)(e) of the Act. The Tribunal's decision was based on the factual analysis of the transactions and the intent behind the company's accounting entries, ensuring that the tax liability was correctly determined without penalizing the assessee for the company's errors.