2016 (5) TMI 1513 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - HELD THAT It is important that unless advances it is not gratuitous to its shareholder but it is to protect the business interest of the company, it falls out of the purview of taxation u/s 2(22) (e) of the act. It is not a current account but advances in the nature of loan which assessee enjoys, simply on account to being a share holder exceeding specific percentage, then only, the provisions the section 2(2)(e) of the act comes into play. The above view further gets support from the decision of CIT Vs. Creative Dying and Printing Pvt. Ltd 2009 (9) TMI 43 - DELHI HIGH COURT . No other contrary decisions were brought to our notice by the ld DR. In view of the above finding we reverse the finding of the ld CIT(A) in confirming the addition as deemed dividend u/s 2(22)(e) We also clarify that in the present appeal the accumulated profit are to the tune of only ₹ 1123551/- and the total alleged advances given to the appellant is ₹ 2377000/- and ₹ 15,00,0008/- are on account of security deposit and therefore ₹ 877000/- are the entries of mutual current account transactions, which are also not deemed dividend in view of above judicial precedents and hence, total addition confirmed of ₹ 11,23,551/- by the ld CIT(A) is deleted - Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Treatment of ?15,00,000/- received as a security deposit.
2. Adjustments in accumulated profits for the purposes of section 2(22)(e) of the Income Tax Act.

Detailed Analysis:

Issue 1: Treatment of ?15,00,000/- received as a security deposit

The assessee argued that ?15,00,000/- received from Ocean King Shipping Services Pvt. Ltd. was a security deposit against the property let out to the company. The Assessing Officer (AO) and CIT(A) rejected this claim, treating the entire amount of ?23,77,000/- received from the company as deemed dividend under section 2(22)(e) of the Income Tax Act. The assessee contended that the security deposit was a legitimate business transaction as per a board resolution dated 1st August 2008, and that both the assessee and the company are separate legal entities. The Tribunal found that the security deposit was indeed a common practice when the rent is on the lower side to compensate the landlord, and the terms of the rent agreement could not be disregarded. The Tribunal further noted that the assessee maintained a current account with the company, with funds moving on a needs basis, which does not fall under the purview of deemed dividend as per section 2(22)(e).

Issue 2: Adjustments in accumulated profits for the purposes of section 2(22)(e) of the Income Tax Act

The assessee sought two adjustments to the accumulated profits of the company:
a) Reduction of ?2,15,683/- on account of accrual to deferred tax assets, credited to the Profit & Loss Account of the Company, being a notional profit.
b) Reduction of ?3,20,517/- being prepaid expenses, not debited to the profit and loss account of the company.

The Tribunal examined the nature of transactions between the assessee and the company, noting that there were multiple entries in the ledger, indicating a mutual current account rather than a loan account. Citing precedents from the Hon’ble Gujarat High Court and the Kolkata Bench of ITAT, the Tribunal concluded that mutual current accounts with reciprocal demands do not attract the provisions of section 2(22)(e). The Tribunal emphasized that section 2(22)(e) targets gratuitous loans or advances to shareholders, not transactions that benefit both the company and the shareholder in a commercial context.

Conclusion:

The Tribunal reversed the CIT(A)'s finding, deleting the addition of ?11,23,551/- as deemed dividend under section 2(22)(e). It clarified that ?15,00,000/- was a security deposit, and ?8,77,000/- were mutual current account transactions, neither of which are deemed dividends. The appeal of the assessee was allowed.