2014 (9) TMI 1197 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - as per assessee advance was taken for the purpose of purchase of land in Himachal Pradesh and because of the restriction, land could not be purchased and, therefore, amount was returned, therefore, the transaction was of the business nature and the same cannot be treated as deemed dividend - HELD THAT - There is no evidence to show that company where the assessee was director wanted to set up a resort in the State of Himachal Pradesh. Even if such company wanted to set up a resort, the company itself could have invested the money directly in its own name and that would have been permissible in the State of Himachal Pradesh because land can be purchased in the State of Himachal Pradesh for business purposes. This company is mainly earning income from dividend and interest on fixed deposits. In 2009, this company has received some interest also. The schedule of assets at page 16 clearly shows that most of the investments have been clearly made in the mutual funds. Even if it is assumed that company is mainly engaged in the business of lending money then it cannot be said that the said company has lent money to the assessee in the ordinary course of business because for that to happen the said company would have definitely charged the interest. The making of advances in the ordinary course of business of lending itself connotes charging of interest on such lending and admittedly the assessee had received the advance without any interest. Thirdly, this is only an after thought because original explanation before the lower authority and even before us was that money was taken for the purpose of purchase of land in Himachal Pradesh and it was never claimed that money was lent to the assessee in the ordinary course of business of lending, therefore, we find no force in these submissions. In view of this, we find nothing wrong with the order of CIT(A) and we confirm the same. Resultantly, the appeal of the assessee is dismissed.

Summary

Issues:
Appeal against CIT(A) orders dated 06/08/2013 concerning deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.

Detailed Analysis:
1. Issue 1 - Deemed Dividend under Section 2(22)(e):
- The assessee, holding 49.95% share in a company, received payments totaling Rs. 12,27,115. The Assessing Officer treated this as deemed dividend under section 2(22)(e) due to accumulated profits of the lending company.
- The CIT(A) upheld the addition as deemed dividend, rejecting the contention that the advance was for land purchase and not taxable under section 2(22)(e).
- The appellant argued that the advance was for business purposes, citing the company's money lending activities. However, the CIT(A) found this argument factually incorrect.
- The Tribunal confirmed the CIT(A)'s decision, emphasizing that the advance did not meet the exceptions under section 2(22)(e) and that the lending company's main income was from dividends and fixed deposit interest.

2. Issue 2 - Application of Section 2(22)(e) Exceptions:
- The appellant contended that the advance should not be treated as deemed dividend due to exceptions under section 2(22)(e). However, the Tribunal found no evidence supporting this claim.
- The Tribunal distinguished a previous case involving land sale advance, emphasizing the lack of an agreement or proof of land ownership in the present case.
- The Tribunal also noted that the lending company's income primarily comprised dividends and fixed deposit interest, not lending, and the advance was interest-free, indicating it was not part of the company's ordinary lending business.

Conclusion:
The Tribunal dismissed both appeals, upholding the CIT(A)'s decision to treat the advance as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961. The appellant's arguments regarding business nature and exceptions under the section were found to be unsubstantiated, leading to the confirmation of the CIT(A)'s order.