2014 (9) TMI 360 - AT - Income Tax

Deemed dividend u/s 2(22)(e) Whether credit balances in the accounts can be construed as advance or loan by these companies - Held that - The law- makers wanted to bring to tax monies paid by closely held companies to their principal shareholders, in the guise of loans and advances to avoid payment of tax relying upon Navneet Lal C. Jhaveri V K.K. Sen 1964 (10) TMI 16 - SUPREME Court - the provisions of section 2(22)(e) of the Act must be made applicable where dividend disguised as loan is paid by a company - it for a fact that only due to business necessity and expediency, the assessee agreed to collect dues from customers of the company - Sec. 2(22)(e) enacted a deeming fiction whereby the scope and ambit of the word dividend has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in S.2(22)(e). The Court should ascertain for what purpose the fiction is created and after ascertaining the purpose, the Court has to assume all facts which are incidental to the giving effect to that fiction - Such a deeming fiction would not be given a wider meaning than what it purports to do - Sec. 2(22)(e) has not been enacted to stifle normal business transaction carried out during the course of business - It not obviously bring within its limited purview collection of debts from customers so to ensure the speedy recovery of trade debts - the amount received by the assessee can neither be treated as loan or advance for the purposes of S. 2(22)(e) - A loan is granted for temporary use of money or temporary accommodation - basic features which characteristics, a loan transaction are conspicuous by their absence - the amount cannot be construed as a loan. The addition which was collected by the assessee on behalf of CCPL in pursuance of resolution passed by the Company and deposited in the assessee s bank account for a short period which is a temporary loan and to the extent of amount remitted to the CCPL, cannot be considered as deemed dividend in the hands of the assessee - only that portion of the amount which was unsettled as on 31-03-2009, i.e., the closing day of the Company s account for F.Y. 2008-09, is to be considered as deemed dividend in the hands of the assessee under section 2(22)(e) of the I.T. Act amount added to the income u/s. 2(22)(e), it was contended by the assessee that there are three accounts in the name of the assessee in the books of CCPL which is a temporary loan and applying the principle, the AO is directed to consider the consolidated Net balance in all the three accounts if the Accounts are in the individual capacity of the assessee, and only that outstanding balance in the books of CCPL if any, should be treated as deemed dividend in the hands of the assessee u/s. 2(22)(e) of the I.T. Act - The Account relating to the firm IRC is to be considered separately if that firm is having substantial interest in CCPL and decide afresh in accordance with law Decided partly in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition of Rs. 32,74,635/- as deemed dividend under section 2(22)(e) of the Income Tax Act.
2. Deletion of addition of Rs. 23,16,678/- as deemed dividend under section 2(22)(e) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 32,74,635/- as Deemed Dividend:

The case revolves around the addition of Rs. 32,74,635/- by the Assessing Officer (AO) as deemed dividend under section 2(22)(e) of the Income Tax Act. The assessee, a shareholder in Ceyannar Chemicals Pvt. Ltd. (CCPL), collected this amount from the company's customers and deposited it in his savings bank account. The AO treated this amount as a temporary loan from CCPL to the assessee.

The CIT(A) observed that the provisions of section 2(22)(e) emphasize the word 'payment,' which implies a direct act of transferring money by the company to the shareholder. In this case, the assessee collected the outstanding debts of the company from various customers and deposited the amounts in his bank account before remitting them to the company. The CIT(A) concluded that these transactions do not fall within the ambit of section 2(22)(e) as there was no direct payment from the company to the shareholder, and the assessee did not derive any individual benefit from the collected amounts.

The Tribunal agreed with the CIT(A) and noted that the law aims to tax monies paid by closely held companies to their principal shareholders disguised as loans and advances. It was found that the assessee collected the dues from customers on behalf of CCPL due to business necessity and expediency. The Tribunal held that the amount received by the assessee could not be considered a loan or advance for the purposes of section 2(22)(e) as it lacked the basic features of a loan transaction. Consequently, the addition of Rs. 32,74,635/- was deleted.

2. Deletion of Addition of Rs. 23,16,678/- as Deemed Dividend:

The AO added Rs. 23,16,678/- to the income of the assessee as deemed dividend under section 2(22)(e). The AO observed that three accounts of the assessee were maintained in the books of CCPL, and upon consolidation, there was a debit balance, which was treated as deemed dividend.

The CIT(A) noted that the AO failed to consider the factual details submitted by the assessee and calculated the net debit balance by merging the three accounts. The assessee argued that the transactions in these accounts included amounts related to the firm India Rubber and Chemicals (IRC), in which he was a partner. The CIT(A) observed that if the account of the firm was also considered, the consolidated account would show a credit balance, and the transactions were of a current and open nature, not partaking the character of a loan or advance.

The Tribunal directed the AO to consider the consolidated net balance in all three accounts in the individual capacity of the assessee. Only the outstanding balance in the books of CCPL, if any, should be treated as deemed dividend under section 2(22)(e). The account relating to the firm IRC should be considered separately if the firm has substantial interest in CCPL.

Conclusion:

The Tribunal concluded that the addition of Rs. 32,74,635/- as deemed dividend was not justified as the amount collected by the assessee on behalf of CCPL did not constitute a loan or advance. Regarding the addition of Rs. 23,16,678/-, the Tribunal directed the AO to reassess the consolidated net balance in the individual accounts of the assessee and consider the account of the firm IRC separately. The appeal of the assessee was partly allowed.