2014 (4) TMI 1290 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - Addition based on peak amount of the debit balance - ITAT deleted the addition that after merging all accounts, the final position is zero in the balance sheet in the name of the assessee in the books of accounts of the company as on 31.03.2008 - HELD THAT - Though the said Company did advance loan to the assessee in different accounts, it is also an established fact that in two separate accounts, the assessee was the creditor of the Company - At the end of the year, this exactly is the amount which is in net the assessee withdrew from the company, may be in different accounts. The peak credit in different accounts never exceeded Rs.13.16 crore. Under the circumstances, the CIT (Appeals) as well as the Tribunal, both took an overall view of the accounts of the assessee and the said Company to hold that section 2(22)(e) of the Act would not apply. As is well known, section 2(22)(e) of the Act pertains to dividend, which would include several payments made by the Company. In particular clause (e) of the said subsection (22) pertains to payment by a company to which a legal friction would arise and such payment shall be deemed to be dividend distributed by such company to the person. It is well known that a legal friction can arise only at the circumstance in which the legislature envisages giving rise to the same. In the present case, when the very fundamental condition of a payment made by the Company is on facts found not established, in our opinion, both the CIT (Appeals) and the Tribunal correctly refused to apply the said section. Decided against revenue.

Summary

Issues Involved:
Application of section 2(22)(e) of the Income Tax Act, 1961 - Treatment of deemed dividend - Interpretation of accounts and transactions between assessee and a company.

Analysis:

Issue 1: Application of Section 2(22)(e) of the Income Tax Act
The appeal raised the question of whether the Income Tax Appellate Tribunal was correct in deleting the addition made on account of deemed dividend under section 2(22)(e) of the Income Tax Act. The Assessing Officer treated a sum as deemed dividend paid to the assessee by a company based on the peak amount of the debit balance. The contention was whether the loans advanced were deemed dividend under section 2(22)(e) of the Act, considering the accounts of the assessee with the company as a whole.

Issue 2: Interpretation of Accounts and Transactions
The CIT (Appeals) accepted the assessee's contentions and deleted the addition, emphasizing that the nature of the deposit should not change based on the account title. The CIT (Appeals) highlighted that the appellant had not violated any provisions of law by transferring the amount between accounts and that maintaining separate accounts was within the appellant's discretion. The Tribunal upheld the CIT (Appeals) decision, stating that all conditions for disallowing deemed dividend were not fulfilled. The Tribunal considered the overall view of the accounts of the assessee and the company, concluding that section 2(22)(e) of the Act did not apply due to the lack of established legal fiction in the payments made by the company.

Conclusion:
The High Court dismissed the Tax Appeal, affirming the decisions of the CIT (Appeals) and the Tribunal. The Court held that the application of section 2(22)(e) of the Act was correctly refused as the fundamental condition of a payment made by the company was not established, leading to the refusal to apply the said section. The Court emphasized that the judgments cited by the Revenue were based on different factual premises and did not alter the opinion of the Court.