2016 (9) TMI 12 - AT - Income Tax

Deemed dividend as per section 2(22)(e) - Held that - It is clear that as on the date of loan advanced to the assessee by the M/s. Chaitanya Packagings (P) Ltd. it has to be seen whether there is accumulated profit in the hands of the creditor company or not. In the present case as on 1.4.2007, M/s. Chaitayna Packings Pvt. Ltd. is having accumulated profit of ₹ 48,03,137/-. Not only that, the creditor company in its ledger folio account it is clearly mentioned that the assessee as the proprietor of M/s. Tulasi Digital Studio borrowed money as an advance from M/s. Chaitanya Packagings (P) Ltd. during the financial year 2007-08. It is also further found that from the loan account of the assessee company, there is an outstanding credit balance of ₹ 11,87,483.98 ps. as on 31.3.2008. From the above facts, it is very clear that when the assessee borrowed the money from the M/s. Chaitanya Packagings (P) Ltd. the creditor company i.e. M/s. Chaitanya Packagings (P) Ltd. is having an amount of ₹ 48,03,137/- and out of which loan advanced to the assessee of ₹ 25,24,796/-. It is clearly a deemed dividend in the light of section 2(22)(e) of the Act. So far as various case laws relied by the Ld. Counsel for the assessee is concerned, we have gone through each and every case and we find that the facts involved in those case laws are entirely different from the case in hand. In view of the above, we find no infirmity in the order passed by the Ld. CIT(A) and also no interference is called for.

Summary

Issues:
1. Whether the provisions of section 2(22)(e) of the Income Tax Act are applicable to the loan received by the assessee from a closely held company.
2. Whether the loan received by the assessee should be treated as deemed dividend in the hands of the assessee.

Analysis:

Issue 1: Applicability of Section 2(22)(e) of the Act
The case involved the assessee, engaged in running a digital studio and manufacturing files, who received a loan from M/s. Chaitanya Packagings (P) Ltd., a creditor company where the assessee held 13% shares. The Assessing Officer (A.O.) observed that the loan received fell under the provisions of section 2(22)(e) of the Act, considering the shareholding pattern and the nature of the transaction. The CIT(A) upheld this view, emphasizing that the loan was not a business transaction but a deemed dividend. The Tribunal also agreed with this interpretation, noting the accumulated profits of the creditor company and the shareholding percentage of the assessee, concluding that the provisions of section 2(22)(e) were applicable.

Issue 2: Treatment of Loan as Deemed Dividend
The assessee argued that the loan received was a business advance and not subject to section 2(22)(e) of the Act. Additionally, the assessee claimed that the loan was secured by providing a property as collateral, suggesting that the provisions did not apply. However, the Tribunal rejected these arguments, stating that the assessee failed to provide sufficient evidence to support the business advance claim or the security provided. The Tribunal also dismissed the alternative ground raised by the assessee regarding the accumulated profits, emphasizing that the loan amount received was less than the accumulated profits of the creditor company, thus constituting a deemed dividend. The Tribunal reviewed the case laws cited by the assessee but found them inapplicable to the current case, ultimately upholding the decision of the lower authorities to treat the loan as deemed dividend.

In conclusion, the Tribunal dismissed the appeal filed by the assessee, affirming the treatment of the loan as deemed dividend under section 2(22)(e) of the Income Tax Act for the assessment year 2008-09.