2017 (5) TMI 247 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - The company had advanced money to clear the loan outstanding in the name of the assessee, so as to pledge the properties for loans availed - Held that - Considering the facts and circumstances of this case and also respectfully following the decision in the case of Pradeep Kumar Malhotra Vs. CIT (2011 (8) TMI 16 - CALCUTTA HIGH COURT) we are of the view that any loan or advance received from the company for the mutual benefit of the company as well as the assessee to get business advantage are not falls within the definition of deemed dividend as defined u/s 2(22)(e) of the Act. Therefore, we are of the view that the advance received by the assessee from the company is not a gratuitous payment which attracts deeming provision of section 2(22)(e) of the Act. Hence, we delete additions made by the A.O. towards deemed dividend u/s 2(22)(e) of the Act. In so far as appeal filed by the revenue is concerned, since we hold that the advance received by the assessee from his company are not coming within the meaning of deemed dividend as defined u/s 2(22)(e) of the Act. the findings given by the CIT(A) on the alternative plea of the assessee that for the purpose of computation of deemed dividend, the accumulated profit of the company up to the date of advancement of each loan has to be considered, but not current year profit becomes academic in nature. Therefore, the ground raised by the revenue in its appeal is dismissed as infructuous.

Issues Involved:
1. Application of Section 2(22)(e) of the Income Tax Act regarding deemed dividend.
2. Determination of whether advances received by the assessee from the company were gratuitous payments.
3. Consideration of accumulated profits for the purpose of deemed dividend calculation.

Issue-wise Detailed Analysis:

1. Application of Section 2(22)(e) of the Income Tax Act regarding deemed dividend:
The primary issue revolves around whether the advances received by the assessee from M/s. Alfa Electronics Services Pvt. Ltd. should be considered as deemed dividend under Section 2(22)(e) of the Income Tax Act. The Assessing Officer (A.O.) observed that the assessee, being a substantial shareholder and director of the company, received an advance of ?88,57,000/- from the company, which had accumulated profits of ?51,14,597/-. The A.O. concluded that the amount received was in the nature of loans and advances, thereby attracting the provisions of deemed dividend under Section 2(22)(e) of the Act, resulting in an addition of ?51,44,597/- to the assessee's income.

2. Determination of whether advances received by the assessee from the company were gratuitous payments:
The assessee argued that the advances were not gratuitous payments but were made to clear existing loans on properties mortgaged for obtaining an overdraft facility from Axis Bank, which was beneficial for the company. The assessee provided evidence that the company availed overdraft loans using the properties as collateral. The CIT(A) rejected the assessee's claim, stating that there was no contemporaneous documentation or board minutes to support the claim that the advances were for business purposes. The CIT(A) concluded that the advances were not for the benefit of the company's business and upheld the A.O.'s decision.

However, the ITAT found merit in the assessee's argument. It was noted that the assessee had provided his properties as collateral for the company's overdraft facility, and the advances were used to clear existing loans on these properties. The ITAT referred to the decision of the Hon'ble Kolkata High Court in the case of Pradeep Kumar Malhotra Vs. CIT (2011) 338 ITR 588, which held that advances given in return for an advantage conferred upon the company by the shareholder are not deemed dividends. The ITAT concluded that the advances were not gratuitous payments but were made for mutual benefit, thus not falling within the definition of deemed dividend under Section 2(22)(e).

3. Consideration of accumulated profits for the purpose of deemed dividend calculation:
The CIT(A) directed the A.O. to recompute the deemed dividend by considering the accumulated profits up to the date of each loan advance, excluding the current year's profits. The revenue contested this, arguing that accumulated profits should include current year's profits. The ITAT, however, found this issue academic since it held that the advances were not deemed dividends. Therefore, the ITAT dismissed the revenue's appeal on this ground as infructuous.

Conclusion:
The ITAT allowed the assessee's appeal, holding that the advances received from the company were not gratuitous payments and thus did not attract the provisions of deemed dividend under Section 2(22)(e) of the Income Tax Act. Consequently, the additions made by the A.O. were deleted. The revenue's appeal was dismissed as infructuous, given the primary finding that the advances were not deemed dividends.

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