2016 (10) TMI 1331 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - amount received by the shareholder should be in the nature of loan or advance - HELD THAT - There is running account of the company in the books of the assessee. There is regular receipt and payment of money between the assessee and the company. For more than half of the year, the debit balance of the company in the books of the assessee was more than ₹ 2 crores. Up to 16th December, 2005, the debit balance of the company was more than a Crore and up to 10th January, 2006, in the running account, there was debit balance of the company. It is only at the end of January or in the beginning of February the credit balance of the company occurred and the highest credit balance remained ₹ 28,46,927/- for a period of 17 days. As against this credit balance for a period of 17 days, we find that the debit balance of the company in the accounts of the assessee remained in Crores for months together. In the above circumstances, after considering the entirety of facts and the submission of both the sides, we agree with the assessee that there was a running account of the assessee with OCG and for most of the period, there was huge debit balance of the company and it is only for few days there was a meager credit balance of the company. In our opinion, such meager balance of the company for a few days in a running account wherein there was huge debit balance of the company for months together cannot be said to be loan and advance so as to attract provisions of Section 2(22)(e) of the Act. In view of the above, we hold that on the facts of this case, Section 2(22)(e) was wrongly applied - Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Addition of ?28,46,927/- as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Addition of ?28,46,927/- as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.

The assessee filed an appeal against the order of the CIT(A)-XXIII, New Delhi, which added ?28,46,927/- as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961. The primary contention of the assessee was that he maintained a running account with Orient Carpet Gallery Pvt. Ltd. (OCG), where he was a shareholder. At the beginning of the year, the assessee had a credit balance of ?3,28,78,073/- in the company, indicating that the company owed him money. Throughout most of the year, the assessee was to receive money from the company. However, on receiving two cheques of ?5 lakhs and ?25 lakhs on 01.02.2006 and 11.02.2006 respectively, the balance temporarily shifted, showing a credit balance of ?28,46,927/- for the company with the assessee for a brief period of sixteen days. The assessee argued that this temporary credit balance should not be considered as a loan or advance, which could be treated as deemed dividend under Section 2(22)(e).

The Departmental Representative (DR) contended that each transaction should be considered in isolation for the purposes of Section 2(22)(e). The DR highlighted that the credit balance of ?28,46,927/- was indeed a loan or advance, fulfilling the conditions for deemed dividend under Section 2(22)(e), and thus, the addition was rightly made by the Assessing Officer and sustained by the CIT(A).

Upon examining the account details, the Tribunal observed that there was a consistent running account between the assessee and OCG, with regular receipts and payments. For most of the year, there was a substantial debit balance, indicating that the company owed money to the assessee. The credit balance of ?28,46,927/- occurred only for a short span of 17 days, whereas the debit balance remained in crores for several months. The Tribunal concluded that such a temporary and meager credit balance in a running account, where there was a substantial debit balance for most of the year, could not be considered as a loan or advance to attract the provisions of Section 2(22)(e).

In light of these observations, the Tribunal held that the application of Section 2(22)(e) was incorrect in this case and deleted the addition of ?28,46,927/- made by the Assessing Officer. Consequently, the appeal of the assessee was allowed.

Conclusion:
The Tribunal ruled in favor of the assessee, deleting the addition of ?28,46,927/- as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961, and allowed the appeal. The decision was pronounced in the open Court on 28.10.2016.