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2017 (9) TMI 1459 - AT - Income TaxDeemed dividend addition u/s. 2(22)(e) - current adjustment accommodation and movement of funds - DR contended before us that this issue be restored to the file of the Assessing Officer as the assessee as raised this contention for the first time before this Tribunal - Held that - We noted that the assessee has raised this contention even before the Assessing Officer, which is clear from para 4.3.3 of the assessment order. The Assessing Officer has observed the plea of the assessee that the accounts between these companies should be treated as current account and the transactions are temporary in nature cannot be accepted. On this basis, we reject the plea of the learned DR. No contrary decision was brought to our knowledge. Respectfully, following the decision of Hon ble Gujarat High Court in the case of Schutz Dishman Bio-tech P Ltd (2016 (1) TMI 84 - GUJARAT HIGH COURT), we hold that the sum of ₹ 48,50,000/- cannot be treated as deemed dividend u/s. 2(22)(e) of the Act. Coming to the sum of ₹ 36,60,000/-, which was paid by Flamingo Additives & Colourants Pvt. Ltd to Genesis Nutech Pvt. Ltd. The assessee is having 48% share holding in Flamingo Additives & Colourants Pvt. Ltd and 25% share holding in Gnesis Nutech Pvt. Ltd. From the copy of the account, we do agree with the learned AR that there are debit and credit transactions between both the companies. The companies has given and received funds as and when required to and from its associate concern. The account here also appeared to be in the nature of current adjustment accommodation account where there is movement of funds in both ways on need basis. These transactions, as has been held by us in the preceding paragraphs, following the decision of the Hon ble Gujarat High Court in the case of Schutz Dishman Bio-tech P Ltd (supra), we hold that the sum of can also not be regarded as deemed dividend u/s. 2(22)(e) of the Act. We hold accordingly, and, therefore delete the addition of ₹ 38,60,000/-. Now coming to the sum of ₹ 1,09,785/- paid by Flamingo Additives and Colourants Pvt. Ltd. to Flamingo Polycolours Pvt. Ltd, we, restrict the source to the sum of ₹ 89,774/- and ₹ 1,250/-. We noted from the copy of the account of the submissions made by the assessee the fact that these amounts were received by customers of Flamingo Polycolours Pvt. Ltd viz Shree Mother Plast in favour of Flamingo Additives and Colourants Pvt. Ltd. Since the cheque has been drawn in the name of Flamingo Additives and Colourants Pvt., therefore a cheque was issued in favour of Flamingo Polycolours Pvt. Ltd. This amount in our view cannot be regarded as loan and advances within the ambit of section 2(22)(e). We, accordingly, delete the addition in respect of ₹ 89,774/- and ₹ 1,250/-. Thus, in fact, the whole addition of ₹ 1,09,785/- stands deleted. Coming to the sum of ₹ 3000/-, which was the amount paid by Flamingo Polycolours Pvt. Ltd to M/s. Genesis Nutech Pvt. Ltd. In this regard we have gone though the copy of account available lat page 1 of the paperbook. From the account, it is apparent that as on 01.04.2009, there was a opening balance of ₹ 3,000/- against which on 10.09.2009 a cheque bearing no.180322 was paid to S.P. Enterprise. Since the cheque has to be paid by Flamingo Polycolours Pvt. Ltd but wrongly paid out of Genesis Nutech Pvt. Ltd., later on Flamingo Polycolours Pvt. Ltd repaid to Genesis Nutech Pvt. Ltd. Thus, this payment is nothing but repayment of the dues by Flamingo Polycolours Pvt. Ltd. to Genesis Nutech Pvt. Ltd. Thus this payment cannot be regarded as loans and advances as per section 2(22)(e) of the I.T.Act. We, therefore delete the addition of ₹ 3,000/-. Appeal of the assessee is allowed.
Issues Involved:
1. Whether the amounts advanced by Flamingo Additives & Colourants Pvt. Ltd. to Flamingo Polycolours Pvt. Ltd. and Genesis Nutech Pvt. Ltd. are to be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act. 2. Whether the amounts paid by Flamingo Additives & Colourants Pvt. Ltd. to Flamingo Polycolours Pvt. Ltd. against the credit balance and by Flamingo Polycolours Pvt. Ltd. to Genesis Nutech Pvt. Ltd. in trading transactions fall under the purview of deemed dividend. 3. Whether the amounts should be restricted to the extent of accumulated profits if treated as deemed dividend. Detailed Analysis: 1. Advances as Deemed Dividend: The Assessing Officer (AO) noted that Flamingo Additives & Colourants Pvt. Ltd. had advanced ?48,50,000 to Flamingo Polycolours Pvt. Ltd. and ?38,60,000 to Genesis Nutech Pvt. Ltd. The AO treated these amounts as deemed dividends under Section 2(22)(e) of the Income Tax Act, as the assessee held substantial interest in these companies. The assessee contended that these were current account transactions and relied on various judicial precedents, but the AO rejected this plea, stating that any loan or deposit given by a company to a shareholder or a concern in which the shareholder has a substantial interest is deemed to be a dividend from the accumulated profits of the company. 2. Amounts Paid Against Credit Balance and Trading Transactions: The AO also included ?1,09,785 paid by Flamingo Additives & Colourants Pvt. Ltd. to Flamingo Polycolours Pvt. Ltd. against the credit balance and ?3,000 paid by Flamingo Polycolours Pvt. Ltd. to Genesis Nutech Pvt. Ltd. in trading transactions as deemed dividends. The CIT(A) confirmed the AO's order but allowed relief of ?18,761 to the assessee. 3. Restriction to Accumulated Profits: The assessee argued that if the amounts are treated as deemed dividends, they should be restricted to the extent of accumulated profits amounting to ?78,50,414. However, the primary contention was that these amounts were not loans or advances but current account transactions. Tribunal's Findings: 1. Advances as Deemed Dividend: The Tribunal examined the provisions of Section 2(22)(e) and noted that it creates a legal fiction to treat certain payments as dividends. The section applies to payments made by a company to a shareholder who holds not less than 10% of the voting power or to a concern in which the shareholder has a substantial interest. The Tribunal referred to various judicial precedents, including the Special Bench decision in ACIT vs. Bhaumik Colour P. Ltd., which held that deemed dividend can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person. 2. Amounts Paid Against Credit Balance and Trading Transactions: The Tribunal considered the nature of transactions and concluded that the amounts paid by Flamingo Additives & Colourants Pvt. Ltd. to Flamingo Polycolours Pvt. Ltd. and Genesis Nutech Pvt. Ltd. were part of current account transactions and not loans or advances. The Tribunal relied on the Gujarat High Court decision in CIT vs. Schutz Dishman Bio-tech Pvt. Ltd., which held that current accommodation entries cannot be regarded as loans or advances. 3. Restriction to Accumulated Profits: Since the Tribunal held that the amounts were not loans or advances, the question of restricting them to accumulated profits did not arise. Conclusion: The Tribunal allowed the appeal of the assessee, holding that the amounts advanced were part of current account transactions and not loans or advances within the meaning of Section 2(22)(e). Consequently, the additions made by the AO were deleted, and the alternative ground regarding restriction to accumulated profits was rendered moot. The Tribunal's order was pronounced on 11th September 2017.
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