2016 (12) TMI 1289 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - Held that - The provisions of Section 2(22)(e) impose a deeming fiction and the conditions imposed therein call for strict and concurrent satisfaction being (i) payment by closely held company, (ii) of the nature of an advance or loan, (iii) to a share holder or beneficial owners of shares, (iv) with more than 10% voting power, (v) for his individual benefit. In the present case, the credit arises by virtue of a contractual obligation and a business transaction and has been settled the very next year. There is no individual benefit derived by the Assessee. Moreover, the credit does not satisfy the definition of advance or loan . The fiction thus fails on several counts. In the present case, there are no withdrawals and as the findings of fact by the lower authorities reveal, the frequency of advances by the Assessee to the company was more than in the reverse. The Calcutta High Court, in the case of M.D.Jindal 1986 (4) TMI 17 - CALCUTTA High Court , dealt with a transaction that was found to be colourable. The concurrent finding of fact in that case was to the effect that the transaction was a device designed to circumvent the provisions of Section 2(22)(e) of the Act. The veil was thus lifted and the true facts brought to light. In the present case, there is no such allegation and on the contrary, the concurrent finding is to the effect that no benefit has accrued to the assessee, the credit is the result of a business transaction and is neither in the nature of a loan or a deposit. The decisions relied upon by the revenue do not advance its case, being distinguishable on facts. - Decided in favour of the Assessee

Summary

Issues:
Assessment under scrutiny for deemed dividend under Section 2(22)(e) of the Income Tax Act for a business transaction involving two companies.

Analysis:
1. The Assessee, engaged in Real Estate Development, sub-contracted a construction contract to another entity, resulting in a financial credit. The Assessing Authority invoked Section 2(22)(e) of the Income Tax Act, treating the credit as deemed dividend due to shareholding relationship and accumulated profits.

2. The Assessee objected, citing a business transaction exemption under Section 2(22)(e), supported by the Calcutta High Court judgment in M.D.Jindal vs. Commissioner of Income Tax. The exclusion clause (ii) was invoked for companies engaged in money lending.

3. The Commissioner of Income Tax (Appeals) allowed the Assessee's appeal, finding that the credit was a result of a business transaction, not a loan, and no individual benefit was derived. The Tribunal upheld these findings, dismissing the Revenue's appeal.

4. The Tribunal addressed three Substantial Questions of Law, focusing on the contractual nature of the credit, legislative intent interpretation, and transaction history between the companies.

5. The High Court analyzed Section 2(22)(e) conditions, emphasizing the deeming fiction's strict satisfaction requirements. The credit, arising from a contractual obligation and settled promptly, did not confer individual benefit and did not meet the advance or loan definition.

6. The Court differentiated the present case from precedents like Miss P.Sarada vs. CIT and M.D.Jindal vs. CIT, where withdrawals from accumulated profits were deemed dividends. In this case, no withdrawals occurred, and the credit resulted from a legitimate business transaction.

7. The Court rejected the Revenue's reliance on previous judgments, highlighting the absence of benefit to the Assessee, the absence of a loan or deposit nature in the credit, and the lack of circumvention allegations.

8. Despite various case laws cited by the Assessee's counsel, the Court concluded that Section 2(22)(e) did not apply in this case, ruling in favor of the Assessee and rejecting the Department's appeal.