2014 (5) TMI 625 - HC - Income Tax

Deemed dividend u/s 2(22)(e) of the Act - Money advances to the company Interest earned Held that - CIT(A) and the Tribunal had concurrently recorded that the assessee had running account with the company M/s Dada Motors Pvt. Limited and had been advancing money to it - the provisions of Section 2(22)(e) of the Act were not attracted as this provision was inserted to stop the misuse by the assessee by taking the funds out of the company by way of loan advances instead of dividends and thereby avoid tax - the assessee had in fact advanced money to the Company and there was credit for only 55 days for which provisions of Section 2(22) (e) of the Act could not be invoked - The findings were not shown to be erroneous or perverse in any manner thus, no substantial question of law arises for consideration Decided against Revenue. Disallowance u/s 36(1)(iii) of the Act - Initial purpose of advancing amount could not be established Held that - The CIT(A) as well as the Tribunal was of the view that there was no justification for making an addition u/s 36(1)(iii) of the Act - The assessee had not charged any interest on the amount advanced to M/s Nalanda Spinners as the amount advanced to Nalanda Spinners was not returned for which a civil suit was filed and with the assistance of influential people, the same was recovered - for the assessment years 2006-07 and 2007-08, similar additions had been deleted which has attained finality Decided against Revenue.

Summary

Issues:
1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961.
2. Determination of whether transactions of advancing money and earning interest amount to business transactions.
3. Disallowance under Section 36(1)(iii) based on commercial expediency.

Analysis:

Issue 1 - Section 2(22)(e) Interpretation:
The appeal involved a dispute regarding the applicability of Section 2(22)(e) of the Income Tax Act, 1961. The revenue challenged the Tribunal's decision, arguing that the provision should have been applied in the case. However, both the CIT(A) and the Tribunal held that the provision was not attracted as the assessee had a running account with the company and had been advancing money for business purposes. They emphasized that the provision aims to prevent misuse of funds by shareholders, which was not the case here. The Tribunal affirmed the CIT(A)'s findings, concluding that the provision did not apply in this scenario.

Issue 2 - Business Transactions involving Advancing Money:
The dispute also revolved around whether the transactions of advancing money and earning interest constituted business transactions. The revenue contended that there was no commercial expediency in the transactions, justifying the disallowance of interest under Section 36(1)(iii) of the Act. However, both the CIT(A) and the Tribunal disagreed, noting that the assessee had not charged any interest on the advanced amount as it was eventually recovered through legal means. They found no grounds for disallowance under the said section, emphasizing the lack of justification for charging interest and the absence of commercial expediency in the case.

Issue 3 - Disallowance under Section 36(1)(iii) based on Commercial Expediency:
The final issue pertained to the disallowance under Section 36(1)(iii) of the Act based on commercial expediency. The CIT(A) and the Tribunal concurred that the disallowance was not warranted as the assessee had not levied interest on the amount advanced to the company, which was eventually recovered through legal proceedings. They highlighted that similar additions for previous assessment years had been deleted, indicating a consistent approach. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal and emphasizing the lack of grounds for the addition under the said section.

In conclusion, the High Court dismissed the appeal, finding no substantial question of law based on the concurrent and reasoned findings of the CIT(A) and the Tribunal. The judgment clarified the interpretation of Section 2(22)(e), the nature of business transactions involving advancing money, and the criteria for disallowance under Section 36(1)(iii) based on commercial expediency.