2018 (5) TMI 1757 - AT - Income Tax

Deemed divided u/s 2(22)(e) - amounts advanced to the assessee by the company - assessee claimed that same were relatable to chits - Held that - it is clear that the assessee has received the bid amount as a customer of the company and not as a Director or the shareholder of the company. The business transaction of the company do not fall within the provisions of deemed dividend u/s 2(22)(e) of the Act. Therefore, the addition of ₹ 2,88,000 is deleted. - Decided in favor of assessee. Deemed dividend - the loan taken was in respect of key man policy taken on the life of the assessee - Held that - Since the nexus between the loan and advance to the assessee is clearly established and there is accumulated profit of the company available to such an extent, the same is taxable as deemed dividend u/s 2(22)(e) of the Act. - Decided against the assessee.

Summary

Issues:
1. Whether the advances made to the assessee by the company constitute deemed dividend under section 2(22)(e) of the IT Act.
2. Whether the loan taken by the company and passed on to the assessee should be considered as deemed dividend under section 2(22)(e) of the IT Act.

Analysis:

Issue 1:
The assessee, a Director of a company, received advances from the company, leading to a dispute on whether they constitute deemed dividend under section 2(22)(e) of the IT Act. The Assessing Officer (AO) treated the advances as deemed dividend due to the assessee's shareholding and the company's accumulated profits. The CIT (A) upheld the AO's decision in part. The assessee argued that the advances were related to chits and a key man policy, not falling under deemed dividend. The tribunal found that the advances related to chits were business transactions, not falling under deemed dividend provisions. Thus, the addition related to chits was deleted.

Issue 2:
Regarding the loan of ?5,29,750 passed on to the assessee, the tribunal found that it was linked to a loan taken by the company from LIC for a Keyman Insurance Policy. As there was a clear nexus between the loan and the advance to the assessee, and the company had accumulated profits, the tribunal partially upheld the addition as deemed dividend under section 2(22)(e) of the IT Act. Consequently, the tribunal partly allowed the assessee's appeal, deleting the addition related to chits but upholding the addition concerning the loan passed on to the assessee.

In conclusion, the tribunal's judgment addressed the issues of advances and loans received by the assessee from the company, determining their classification as deemed dividend under the IT Act based on the specific circumstances and provisions of the law.