2016 (7) TMI 1591 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - two companies have made payments on various dates to the Directors/Shareholders, who held substantial interest in the mentioned companies - whether debit balances in the accounts can be construed as advance or loan by the companies.? - contention of A.R is that the assessee herein is also given advance to those companies and the companies are also benefitted from the loans given to Directors and these are running accounts between the directors and the companies and the running account - HELD THAT - In view of the binding decision of jurisdictional High Court in the case of SUNIL KAPOOR 2015 (3) TMI 812 - MADRAS HIGH COURT wherein observed that any amount paid to the assessee by the company during the relevant year, loan amount repaid by the assessee in a same year should be deemed to be construed as dividend for all purposes. While computing the deemed dividend one has to be considered the payments made by the assessee to the company. Hence as observed each debit will have to be individually considered because it may or may not be a loan. AO is, therefore, directed to verify the each debit entry on the aforesaid loan and treat only the excess amount of debit in the books of accounts of the company as a deemed dividend u/s.2(22)(e). Only those net amounts which reflected the debit side of the books of accounts of the assessee falling under the definition of the loans and advances, is with regard to these assessee in the relevant assessment years will be entitled to be taken as a deemed dividend. AO has to compute the day to day debit balance of these assessee in the books of accounts and thereafter the AO has to arrive at average yearly balance of the debit in the books of account of each company and compare with it, accumulated profit in respect of each company and lower of these to be considered as deemed dividend in the hands of present assessee. With this observation, we remit the issue to the file of AO for fresh consideration. Whether only peak debit balance of loans of each director in the books of accounts in respect of company to be considered to arrive at deemed dividend in terms of Sec.2(22)(e) ? - This argument of the ld.A.R is devoid of merit. If we accept this contention of the ld.A.R, it leads to absurdity and makes the Sec.2(22)(e) of the Act as redundant. Since provision is applicable for each payment, then there is no question of arriving at deemed dividend in the hands of Director. Hence, we are not in a position to consider these arguments of the ld.A.R that only peak credit to be considered to determine the deemed dividend. Double entry of book keeping, the journal entry is also have the financial implication and it cannot be ignored as argued by the ld.A.R. The journal entries are also to be considered while computing the yearly debit balance in respect of loans and advances.

Summary

Issues Involved:
1. Confirmation of addition made by the AO on account of deemed dividend under section 2(22)(e) of the Income Tax Act.
2. Examination of the nature and character of journal entries passed by the company.
3. Computation of deemed dividend based on accumulated profits.
4. Levy of interest under sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

1. Confirmation of Addition on Account of Deemed Dividend:
The primary issue in the appeals was whether the addition made by the Assessing Officer (AO) on account of deemed dividend under section 2(22)(e) was justified. The Tribunal noted that the AO had invoked section 2(22)(e) based on payments made by M/s. Rattha Overseas Company Pvt. Ltd. and M/s. Roverco Apparel Co. Pvt. Ltd. to their Directors/Shareholders. The Tribunal emphasized that the form of the transaction (i.e., whether through journal entries or direct transfer of funds) was not paramount; rather, the substance of the transaction was crucial. The Tribunal directed the AO to re-examine the nature and character of the journal entries and verify whether any fund/benefit had been transferred directly or indirectly to the assessees.

2. Examination of Journal Entries:
The Tribunal criticized the AO and the Commissioner of Income-tax (Appeals) for not thoroughly examining the context and purpose of the journal entries. It was highlighted that the AO must scrutinize each journal entry to determine if it constituted a transfer of funds or benefits to the assessees. The Tribunal remitted the issue back to the AO for a detailed examination of the journal entries and to arrive at a lawful conclusion.

3. Computation of Deemed Dividend:
The Tribunal underscored that the computation of deemed dividend should be based on the company's accumulated profits on the date of payment. The AO was directed to ascertain the exact amount withdrawn by the assessee and compare it with the accumulated profits of the company on the date of payment. The Tribunal referred to several judicial precedents, including the Supreme Court judgment in the case of Miss P. Sarada v. CIT, to emphasize that repayment of loans should not augment the accumulated profits. The AO was instructed to compute the deemed dividend on a day-to-day basis after setting off the loans given by the Director to the company.

4. Levy of Interest under Sections 234B and 234C:
The Tribunal held that the levy of interest under sections 234B and 234C was mandatory and consequential. The AO was directed to compute the interest accordingly.

Conclusion:
The Tribunal set aside the orders of the Commissioner of Income-tax (Appeals) and the AO for the assessment years 2005-06, 2006-07, and 2007-08, remitting the matter back to the AO for fresh examination. The AO was instructed to provide ample opportunities to the assessees to present their cases. The Tribunal also rejected the argument that only the peak debit balance should be considered for determining the deemed dividend, emphasizing that each payment should be examined individually. The appeals were partly allowed, and the AO was directed to re-compute the deemed dividend and interest as per the Tribunal's directions.