2016 (3) TMI 649 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - Held that - We find from the record that assessee derives salary income from M/s. Gad Fashions (India) Pvt. Ltd. and remuneration interest income from M/s. Gad Fashions (India) Pvt. Ltd. and M/s. R. Fashions. The transaction is not in the nature of loan or advance but it is only a reimbursement of amount paid by the assessee to M/s. Manpasnd Textile Processors (P) Ltd. on behalf of M/s. Gad Fashions (India) (P) Ltd. It is further observed that the amount of ₹ 20.00 lacs so received by the assessee from M/s. Gad Fashions India Pvt. Ltd. was with reference to the advance given by the assessee to M/s. Manpasad Textile Processors (P) Ltd. considering the business interest. It is further observed that the transaction between assessee and M/s. Gad Fashions India Pvt. Ltd. is a mutual, open, current and running account which is not a loan or advance as envisaged u/s 2(22)(e). In view of the above facts and circumstances of the, case the orders of the lower authorities are reversed and Ground No. 1 of the assessee is allowed. We find from the record that when transaction between M/s. GAD Fashions India Pvt. Ltd. and M/s. Ecotune India Ltd. is not in the nature of loan or advance as envisaged u/s 2(22)(e) of the Act then it does not arise to make any further addition in the hands of the assessee. - Decided in favour of assessee

Issues Involved:
1. Treatment of Rs. 20,00,000 received from M/s. GAD Fashions (India) Pvt. Ltd. as deemed dividend under Section 2(22)(e).
2. Addition of Rs. 4,42,800 by treating the amount given by M/s. Ecotunes India (P) Ltd. to M/s. GAD Fashions (India) Pvt. Ltd. as deemed dividend under Section 2(22)(e).

Detailed Analysis:

Issue 1: Treatment of Rs. 20,00,000 as Deemed Dividend under Section 2(22)(e)

The Assessing Officer (AO) observed that the assessee derived income from salary from M/s. GAD Fashions (India) Pvt. Ltd. and M/s. R Fashions, holding 26.13% shares in M/s. Ecotunes India Pvt. Ltd. and 22.14% shares in M/s. GAD Fashions (India) Pvt. Ltd. for the assessment year 2008-09. The AO noted that an advance of Rs. 20,00,000 was made to the assessee by M/s. GAD Fashions (India) Pvt. Ltd., and since the assessee had more than 10% shareholding, the transaction was covered under the definition of deemed dividend as per Section 2(22)(e) of the I.T. Act, 1961. The AO treated the amount as deemed dividend and made an addition of Rs. 20,00,000 to the assessee's income.

The assessee contended that the amount was not a loan or advance but a reimbursement for advances made to M/s. Manpasand Textiles Processors Pvt. Ltd. on behalf of M/s. GAD Fashions (India) Pvt. Ltd. The CIT(A) confirmed the AO's addition, stating that the payment was covered under Section 2(22)(e) as the assessee was a substantial shareholder and the transaction did not have sufficient business justification.

Upon appeal, it was found that the transaction was not a loan or advance but a reimbursement for business-related payments. The Tribunal observed that the amount was paid by the assessee to M/s. Manpasand Textiles Processors Pvt. Ltd. considering the business interest of M/s. GAD Fashions (India) Pvt. Ltd. The Tribunal concluded that the transaction was a mutual, open, current, and running account, not a loan or advance as envisaged under Section 2(22)(e). Therefore, the addition of Rs. 20,00,000 as deemed dividend was deleted.

Issue 2: Addition of Rs. 4,42,800 as Deemed Dividend under Section 2(22)(e)

The AO observed that M/s. Ecotunes India Pvt. Ltd. advanced Rs. 20,00,000 to M/s. GAD Fashions (India) Pvt. Ltd., and since the assessee had substantial shareholding in both companies, the transaction was treated as deemed dividend. The AO distributed the deemed dividend amount of Rs. 20,00,000 equally among the three directors, resulting in an addition of Rs. 6,66,666 to the assessee's income.

The CIT(A) partly allowed the assessee's appeal, confirming the addition of Rs. 4,42,800 (22.14% of Rs. 20,00,000) based on the assessee's shareholding in M/s. GAD Fashions (India) Pvt. Ltd. The CIT(A) relied on the decision of the Hon'ble Rajasthan High Court in the case of CIT vs. Hotel Hill Top, which held that deemed dividend should be taxed in the hands of the shareholders proportionate to their shareholding.

The assessee argued that the transaction between M/s. Ecotunes India Pvt. Ltd. and M/s. GAD Fashions (India) Pvt. Ltd. was a mutual, open, current, and running account, not a loan or advance. The Tribunal found that the transaction was not in the nature of a loan or advance as envisaged under Section 2(22)(e) and did not warrant any addition in the hands of the assessee. Consequently, the addition of Rs. 4,42,800 was deleted.

Conclusion:

The Tribunal allowed the appeals of both assessees, deleting the additions made under Section 2(22)(e) for both the Rs. 20,00,000 received from M/s. GAD Fashions (India) Pvt. Ltd. and the Rs. 4,42,800 treated as deemed dividend from M/s. Ecotunes India Pvt. Ltd. The Tribunal concluded that the transactions were not loans or advances but business-related transactions, and thus, Section 2(22)(e) was not applicable.

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