2015 (4) TMI 372 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Advance against sales - whether the advance payments are purely an advance/loan made to the assessee, attracting the provisions of section 2(22)(e) of the Act? - Held that - The debit balance in the account of the assessee has not been treated as deemed dividend under Section 2(22)(e) which also impliedly proves that in the preceding year, the Revenue accepted the transactions to be in the nature of trading transactions and has not charged the debit balance as deemed dividend under Section 2(22)(e). In view of the above factual position and relying upon the decisions of Hon'ble Delhi High Court in the case of Ambassador Travels (P.) Ltd. (2008 (4) TMI 428 - DELHI HIGH COURT), Raj Kumar (2009 (5) TMI 17 - DELHI HIGH COURT) and Creative Dyeing and Printing (P.) Ltd. (2009 (9) TMI 43 - DELHI HIGH COURT), answer question No. l in favour of the assessee and hold that the payments received by the assessee from AIL are receipt against sales made during the course of commercial transactions and therefore, provision of Section 2(22)(e) is not applicable. - Decided in favour of assessee. Allotment of shares - whether benefit accrued to the assessee on allotment of shares attracts provisions of section 2(22)(e) - Held that - When in the books of account the assessee has also credited the AIL and debited to the investment account for the allotment of the shares, it cannot be claimed by the assessee at the stage of the ITAT for the first time that the shares were allotted unilaterally by AIL. The assessee is a substantial shareholder in AIL and it is improbable to believe that the company would allot the shares to the assessee without her knowledge. Moreover, the assessee has not objected to the allotment of shares by the company, on the other hand, made the payment in the month of December. The learned counsel for the assessee has not given any evidence to support his contention that the shares were allotted by the company to the assessee unilaterally without her knowledge and the reply furnished before the Assessing Officer was factually incorrect. In view of the above question No.2 is answered in favour of the Revenue and hold that the addition of ₹ 10 lakhs was correctly made under Section 2(22)(e) in respect of debit entry for allotment of shares. - Decided against assessee.

Issues Involved:
1. Whether the payments received by the assessee from M/s Amit Poly Yarn Ltd. (now known as M/s Amitech Ind. Ltd.) are receipts as advances against sales made during commercial transactions, thereby not attracting the provisions of Section 2(22)(e) of the Income-tax Act, 1961, or are they purely advances/loans attracting the provisions of Section 2(22)(e)?
2. Whether the issue of allotment of shares for Rs. 10 lakhs should be restored to the Assessing Officer to investigate whether the allotment was a unilateral act of the company or done at the instance of the assessee to determine the applicability of Section 2(22)(e) of the Act.

Detailed Analysis:

Issue 1: Payments Received by the Assessee

The primary contention was whether the payments received by the assessee from M/s Amitech Industries Limited (AIL) were advances against sales made during commercial transactions or loans/advances attracting Section 2(22)(e) of the Income-tax Act, 1961.

- Assessee's Argument: The payments were received during the regular course of business for the sale of yarn. The assessee engaged in similar transactions in preceding and subsequent years, and these were not treated as deemed dividends under Section 2(22)(e). The transactions were part of the normal business operations and not loans or advances.
- Revenue's Argument: The assessee held more than 30% shares in AIL, which had sufficient accumulated profits. The payments were made against an existing debit balance, thus fulfilling the conditions for Section 2(22)(e) applicability.

Judgment:
The Third Member agreed with the assessee, holding that the payments were received during the course of trading transactions and not as loans or advances. The business transactions involved regular trading of yarn, with payments and receipts almost equal to the value of yarn supplied. The transactions were part of a running trading account and not in the nature of loans or advances. Hence, Section 2(22)(e) was not applicable.

Issue 2: Allotment of Shares

The dispute was whether the allotment of shares worth Rs. 10 lakhs was a unilateral act by AIL or done at the instance of the assessee, impacting the applicability of Section 2(22)(e).

- Assessee's Argument: The shares were allotted unilaterally by AIL without the assessee's application, and the assessee paid for the shares only after becoming aware of the allotment.
- Revenue's Argument: The assessee had applied for the shares, and the allotment was not unilateral. The payment was made subsequently as a repayment of the obligation, thus attracting Section 2(22)(e).

Judgment:
The Third Member found that the assessee had indeed applied for the shares, as evidenced by the written submission to the Assessing Officer. The allotment was not unilateral, and the subsequent payment was towards the share application money. The addition of Rs. 10 lakhs was correctly made under Section 2(22)(e), as the shares were allotted based on the assessee's application.

Conclusion:
- The payments of Rs. 64,43,019/- received by the assessee from AIL were not treated as deemed dividends under Section 2(22)(e) as they were part of commercial transactions.
- The addition of Rs. 10 lakhs for the allotment of shares was upheld, confirming the applicability of Section 2(22)(e) for this transaction.

Final Order:
The appeal of the assessee was partly allowed, modifying the order of the CIT(A) accordingly. The payments received were not deemed dividends, but the addition for the share allotment was sustained.

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