2015 (11) TMI 585 - AT - Income Tax

Deemed dividend under section 2(22)(e) - whether payments made by the company to the assessee firm represent trade advance? - CIT(A) deleted the addition - Held that - No infirmity in the order of the Commissioner of Income Tax (Appeals) in holding that transactions between the lender company and assessee firm are in the course of business and the amounts received by the assessee are only trade advances and thus provisions of section 2(22)(e) have no application. Further when the assessee is not a shareholder of the lender firm, provisions of section 2(22)(e) are not applicable in view of the Mumbai Special Bench decision in the case of ACIT Vs. Bhaumik Colour Pvt.Ltd (2008 (11) TMI 273 - ITAT BOMBAY-E ). In the circumstances, we uphold the order of the Commissioner of Income Tax (Appeals) and reject the grounds raised by the Revenue. - Decided in favour of assessee.

Summary

Issues:
- Condonation of delay in filing appeal by Revenue
- Classification of payments made by the company to the assessee firm as trade advance or deemed dividend under section 2(22)(e) of the Act
- Assessment of deemed dividend in the hands of a non-shareholder of the lender company

Analysis:
1. Condonation of Delay: The Revenue's appeal was initially barred by a one-day limitation. However, the Tribunal allowed the appeal after the Revenue provided a reasonable cause for the delay, citing a postal delay in receiving appeal papers. The Tribunal, in the interest of justice, condoned the delay and admitted the appeal.

2. Classification of Payments: The Revenue contended that the payments made by the company to the assessee firm should be considered as deemed dividend under section 2(22)(e) of the Act. The Assessing Officer had added a specific amount as deemed dividend during the assessment. However, the Commissioner of Income Tax (Appeals) concluded that the transactions between the parties were trade transactions for the purchase of cotton yarn in the course of business. The Commissioner further held that the advances received were trade advances and not loans or deposits, hence not falling under the purview of deemed dividend.

3. Assessment in Non-Shareholder's Hands: Another crucial issue was whether deemed dividend could be assessed in the hands of a person who is not a shareholder of the lender company. The Commissioner of Income Tax (Appeals) held that deemed dividend could only be assessed in the hands of a shareholder of the lender company. Citing relevant decisions, including the Mumbai Special Bench decision, the Commissioner concluded that since the assessee firm was not a shareholder in the lending company, the provisions of section 2(22)(e) did not apply.

4. Final Decision: The Tribunal upheld the order of the Commissioner of Income Tax (Appeals), emphasizing that the transactions were trade advances and not deemed dividends. Additionally, since the assessee firm was not a shareholder of the lender company, the provisions of section 2(22)(e) were deemed inapplicable. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the decision of the Commissioner of Income Tax (Appeals).

This detailed analysis highlights the Tribunal's decision on the issues of delay condonation, classification of payments, and the assessment of deemed dividend in the hands of a non-shareholder, providing a comprehensive overview of the legal judgment.