2014 (11) TMI 1241 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - HELD THAT - As decided in the case of Pradip Kumar Malhotra 2011 (8) TMI 16 - CALCUTTA HIGH COURT wherein under similar circumstances, it was held that advances given for business purposes of the assessee cannot be treated as deemed dividend u/s 2(22)(e). As decided in SMT. G. SREEVIDYA, 2012 (8) TMI 484 - ITAT, CHENNAI in order to attract the provisions of section 2(22)(e), the important consideration is that there should be loan/advance by a company to its shareholder. Every amount paid must make the company a creditor of the shareholder of that amount - every payment by a company to its shareholders may not be loan/advance. In the present case, the amount was withdrawn by the assessee from the company only to meet her short term cash requirements. By virtue of offering personal guarantee and collateral security for the benefit of the company, the liquidity position of the assessee had gone down. In the strict sense if it is to be construed the amount forwarded by the company to the assessee was not in the shape of advances or loans. The arrangement between the assessee and the company was merely for the sake of convenience arising out of business expediency. In the facts and circumstances of the case, it is not appropriate to hold that the amount withdrawn by the assessee partakes the character of deemed dividend under the provisions of section 2(22)(e) - Decided against revenue.

Summary

Issues:
- Appeal against deletion of addition made under section 2(22)(e) of the Income-tax Act, 1961.
- Interpretation of whether advances and housing loan received by the assessee from the company constitute deemed dividend.

Analysis:
1. The appeal was filed by the Revenue against the CIT(A)'s order deleting the addition made under section 2(22)(e) of the Income-tax Act, 1961. The Revenue contended that the assessee, a Managing Director of a company, had received a housing loan and advances from the company, which should be treated as deemed dividend. The AO held these amounts as deemed dividend and brought them to tax.

2. The CIT(A) deleted the addition after considering the explanation provided by the assessee. The assessee clarified that the housing loan and advances were for business purposes, not for personal benefit, and were based on collateral security and personal guarantee provided by the assessee for the company's credit facilities. The CIT(A) referred to precedents like the Calcutta High Court judgment in Pradip Kumar Malhotra vs. CIT and the ITAT Chennai Bench decision in Asst.CIT vs. G.Sreevidya to support the conclusion that such transactions for business purposes do not constitute deemed dividend.

3. The Tribunal found that the facts of the present case were similar to the cases cited, where advances were given for business expediency and not as gratuitous payments to shareholders. Therefore, the Tribunal upheld the CIT(A)'s decision to delete the addition under section 2(22)(e) of the Act. The Tribunal dismissed the Revenue's appeal, concluding that the order was consistent with established precedents.

4. The Tribunal's decision was pronounced on 21st November 2014, with Smt. P. Madhavi Devi and Shri Abraham P George as the Judicial and Accountant Members, respectively. The appeal was presented by Dr. K. Shankar Prasad for the Appellant and Shri H. Shambu Sharma for the Respondent. The Tribunal's analysis emphasized the distinction between deemed dividends and transactions conducted for legitimate business purposes, aligning with the principles established in relevant legal precedents.