2016 (8) TMI 651 - AT - Income Tax

Deemed dividend u/s.2(22)(e) - assessee was having major shareholding - nature of loan received from the company - inter-se transactions between the companies - Held that - In this case the facts reveal beyond doubt that the transactions in question were out of business requirements between the said three companies which were having running accounts with each other. The assessee has not received any direct or indirect individual benefit out of these transactions. The Hon ble Supreme Court in the case of S.A.Builders Vs. CIT 2006 (12) TMI 82 - SUPREME COURT held that it is not necessary that loan amount should be exclusively used in the business of the assessee. However, requirement is that it should be used for the purpose of business expediency. Though, the above observations have been made by the Hon ble Supreme Court in the context of Section 37 of the Act, yet, the proposition as to when the amount was advanced or paid in the case was out of any commercial expediency or in the course of business and were not gratuitous payments for the benefit of the shareholders, then, applying the same analogy, such payments made through inter-corporate transactions between the parties cannot be treated deemed dividend at the hands of the assessee-shareholder. The coordinate Visakhapatnam Bench in the case of M. Amareswara Rao Vs. DCIT 2016 (2) TMI 379 - ITAT VISAKHAPATNAM has observed that a careful study of the provisions of Section 2(22)(e) make it clear that the Legislature wanted to bring to tax the amount paid by closely held companies to their principle shareholders to avoid dividend distribution tax and that the provisions of section 2(22)(e) of the Act must be made applicable, wherein the dividend is paid in the guise of loan or advance to avoid tax. But to apply the provisions of Section 2(22)(e) of the Act, an honest attempt is to be made to understand, whether the impugned amount is a loan or advance within the meaning of said section. Thus payments made through inter-se transactions between the companies cannot be termed as any gratuitous payment to the assessee shareholder and, thus, the provisions of Section 2(22)(e) are not applicable in this case. - Decided in favour of assessee

Issues Involved:
1. Addition of income as deemed dividend under Section 2(22)(e) of the Income Tax Act.
2. Nature and purpose of inter-corporate transactions.
3. Applicability of Section 2(22)(e) to inter-corporate deposits and loans.
4. Commercial expediency and business requirements in inter-corporate transactions.
5. Interpretation of the term "dividend" under the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition of Income as Deemed Dividend under Section 2(22)(e):
The primary issue was whether the loans advanced by M/s. Anachem Instruments India P.Ltd. and M/s. Advance Scientific Equipment P.Ltd. to M/s. Star Earth Minerals P.Ltd., where the assessee had substantial shareholding, should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act. The AO added ?66,00,000 to the assessee's income as deemed dividend, which was upheld by the CIT(A). The assessee contested this addition, arguing that the transactions were inter-corporate deposits for business purposes and not gratuitous loans.

2. Nature and Purpose of Inter-Corporate Transactions:
The assessee argued that the transactions between the companies were regular business transactions and not gratuitous. The companies had running accounts with each other, and the transactions were made for business considerations, with interest being charged at market rates. The assessee further explained that these inter-corporate deposits were made for business purposes, such as providing scientific and technical services, installation, and maintenance of instruments.

3. Applicability of Section 2(22)(e) to Inter-Corporate Deposits and Loans:
The Tribunal examined the definition of "dividend" under Section 2(22)(e) and its legislative intent. The provision aims to tax accumulated profits distributed as loans or advances to shareholders to avoid dividend distribution tax. However, the Tribunal noted that gratuitous loans or advances given by a company to its shareholders would fall within this provision, but not those given in the course of business or for business expediency. The Tribunal concluded that the transactions in question were business-related and not gratuitous, hence not falling under the purview of Section 2(22)(e).

4. Commercial Expediency and Business Requirements in Inter-Corporate Transactions:
The Tribunal emphasized the importance of commercial expediency and business requirements in determining the nature of the transactions. It referred to the Supreme Court's decision in "S.A. Builders Vs. CIT," which held that loans advanced for commercial expediency are allowable business expenditures. Applying this principle, the Tribunal found that the inter-corporate deposits were made for business purposes and were not gratuitous payments for the benefit of the shareholders.

5. Interpretation of the Term "Dividend" under the Income Tax Act:
The Tribunal compared the definition of "dividend" under the old Indian Income Tax Act, 1922, and the current Income Tax Act, 1961. It noted that the purpose of the provision was to tax accumulated profits distributed as loans to avoid dividend distribution tax. However, it clarified that the term "dividend" should not include loans or advances given for business considerations. The Tribunal relied on various judicial precedents, including the Supreme Court and High Court decisions, to interpret the term "dividend" in the context of Section 2(22)(e).

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the transactions between the companies were business-related and not gratuitous. Therefore, the provisions of Section 2(22)(e) were not applicable, and the additions made by the lower authorities were deleted. The Tribunal emphasized that the purpose of Section 2(22)(e) is to tax accumulated profits distributed as loans to avoid dividend distribution tax, but not to cover business-related transactions made for commercial expediency.

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