2015 (11) TMI 1282 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - CIT(A) deleted the addition - whether the payment made by the company to the assessee falls under the category of loans and advances - whether the entire amount of payment of ₹ 38,60,000/- given by the company to the assessee or the peak amount appearing in Sandeep Sabharwal advance Account ?- Held that - The assessee is also one of the Director who has received loan out of ₹ 35,13,939/-. Further ,clause 3(a) of the annexure referred to in paragraph 3 of the audit report filed by the auditor Deepak K. Kejrewal & Co., which is placed at page no. 12 of the paper book, it is one again mentioned that the company has granted interest free loan aggregating to ₹ 35,13,939.26 to two Directors covered in registrar maintaining u/s 301 of the Companies Act, 1956. We find that in Audited Statement of the company for the financial year 2005-06, there is no mention of any security deposit in respect of the property, given by the company to the assessee, who is director and covered by the persons in respect of whom entries are to be made in register maintained u/s 301 of the Companies Act. We also don t agree with assessee that ₹ 2,27,997 was advance against salary because firstly, there was no such advance given by the company , which can be confirmed from the fact that no such advance was mentioned in Annual statement of the company, secondly, the amount was derived merely after subtraction of ₹ 20,40,000/- claimed by the assessee as security deposit and credit balance of ₹ 4,52,003 out of ₹ 27,18,692 claimed as peak of Sandeep sabharwal Advance Account . Further, even if amount was advance against salary , transaction between an employee and company cannot acquire character of business transaction. Thus we are of the opinion that the payments advanced appearing in the Sandeep sabharwal Advance Account by the company to the assessee are purely in nature of loans or advances to the assessee and same are held to be in the nature of deemed dividend under section 2(22) of the Act. The provisions of section are very much clear in this respect and according to which , any loan and advance subject to fulfillment of conditions laid down in section, shall be treated as deemed dividend. So, once an amount is held as deemed dividend, then incremental loan amount thereafter, will only be added to the deemed dividend. Accordingly , we hold that the peak amount in the Advance Account during the year should be treated as deemed dividend, subject to availability of the accumulated profit as on the date of peak loan or advances to the assessee. Thus we direct the learned Assessing Officer to examine the peak advance amount stated by the assessee and availability of accumulated profit as on the date of peak advance and compute the deemed dividend accordingly - Decided in favour of assessee for statistical purpose.

Summary

Issues Involved:
1. Deletion of the addition of Rs. 38,60,000/- made as deemed dividend under section 2(22)(e) of the Income-tax Act.
2. Verification of the classification of Rs. 20,40,000/- as security towards rent.
3. Verification of the classification of Rs. 2,27,997/- as advance against salary.
4. Determination of whether the entire amount or the peak amount in the 'Sandeep Sabharwal Advance Account' should be treated as deemed dividend.

Detailed Analysis:

Issue 1: Deletion of the addition of Rs. 38,60,000/- as deemed dividend under section 2(22)(e)
The Revenue's appeal contested the deletion of Rs. 38,60,000/- added as deemed dividend under section 2(22)(e) by the Assessing Officer (AO). The AO observed that the assessee, a director with more than 10% shareholding in M/s Overseas Connextion Ltd., received loans/advances of Rs. 38,60,000/- from the company. The AO held these payments as deemed dividends, satisfying the conditions under section 2(22)(e). The learned Commissioner of Income-tax (Appeals) [CIT(A)] deleted this addition, accepting the assessee's explanation that part of the amount was a security deposit and part was an advance against salary. The Tribunal found that the payments were loans/advances and directed the AO to compute the deemed dividend based on the peak amount in the 'Sandeep Sabharwal Advance Account'.

Issue 2: Verification of Rs. 20,40,000/- as security towards rent
The assessee claimed Rs. 20,40,000/- was received as a security deposit for a property leased to the company. The AO did not accept this explanation, noting no mention of such a deposit in the company's balance sheet and the improbability of receiving security deposits in installments. The CIT(A) accepted the assessee's claim, but the Tribunal found that the explanation seemed to be an afterthought, especially since the security deposit was not mentioned in the original lease agreement and was not reflected in the company's financial statements. The Tribunal concluded that these payments were not security deposits but loans/advances.

Issue 3: Verification of Rs. 2,27,997/- as advance against salary
The assessee contended that Rs. 2,27,997/- was an advance against salary. The AO rejected this, noting the absence of such an advance in the company's annual statements and the lack of tax deduction at source. The Tribunal agreed with the AO, finding the claim unsupported by evidence and the amount derived merely by subtracting the claimed security deposit and other credits from the peak amount. The Tribunal held that even if it were an advance against salary, it would not qualify as a business transaction.

Issue 4: Determination of the amount to be treated as deemed dividend
The Tribunal examined whether the entire amount of Rs. 38,60,000/- or the peak amount in the 'Sandeep Sabharwal Advance Account' should be treated as deemed dividend. It held that only the peak amount should be considered, subject to the availability of accumulated profits at the time of the peak advance. The Tribunal directed the AO to verify the peak amount and accumulated profits and compute the deemed dividend accordingly.

Conclusion:
The Tribunal concluded that the payments in the 'Sandeep Sabharwal Advance Account' were loans/advances and directed the AO to compute the deemed dividend based on the peak amount, subject to accumulated profits. The appeal of the Revenue was allowed for statistical purposes, and the CIT(A)'s order was modified accordingly.