2017 (11) TMI 322 - AT - Income Tax

Additions for deemed dividend u/s 2(22)(e) - Held that - In Circular No.19/2017 paragraph 3 the CBDT has also held that trade advances which are in the nature of commercial transactions would not fall within the ambit of the word advance in Section 2(22)(e) of the Act. The addition u/s 2(22)(e) is made in the case of an assessee who is an individual. Admittedly no advance or borrowed money is received by the assessee from the concerns in which the assessee is a shareholder. There is a transaction of advancing of money by M/s Superior Films (P) Ltd. to the group concerns in the normal course of business. In view of the above as well as CBDT s Circular No.19/2017 Section 2(22)(e) is not applicable in the facts of the case under appeal before us. - Decided in favour of assessee.

Summary

Issues:
Challenge of disallowance under Section 2(22)(e) of the Income-tax Act, 1961 for assessment years 2011-12 & 2012-13.

Detailed Analysis:
1. The assessee challenged disallowance under Section 2(22)(e) of the Income-tax Act, 1961 for the assessment years 2011-12 & 2012-13. The disallowance amounts were ?2,84,87,233/- and ?6,37,55,557/- respectively. The assessee, a major shareholder in various companies, highlighted business transactions between group companies where no money was paid to the assessee, leading to deemed dividend additions by the Assessing Officer.

2. The assessee argued that the transactions were business-related as interest income was charged by one company and offered for taxation, emphasizing the regularity and market-based nature of the transactions. The Revenue accepted these as normal business dealings in other years. The assessee cited a Calcutta High Court decision and CBDT Circular No.19/2017 supporting the contention that Section 2(22)(e) did not apply to normal business transactions.

3. The Department, however, contended that Section 2(22)(e) applied due to the substantial interest of the assessee in both lending and borrowing companies. The CIT(A) upheld the addition as deemed dividend, emphasizing the substantial interest of the assessee in the transactions. The Tribunal analyzed interest income details received by the lending company over the years and transactions between the lending company and group concerns.

4. The Tribunal noted consistent interest income received by the lending company from group concerns and others, establishing a regular course of advancing money for interest earnings. Relying on the Calcutta High Court decision and CBDT Circular, the Tribunal concluded that the advances were part of normal business operations, not deemed dividends under Section 2(22)(e). As the assessee, an individual, did not receive any advance or borrowed money, the Tribunal deleted the additions under Section 2(22)(e) for the years under appeal.

5. The Tribunal's decision aligned with the Calcutta High Court ruling and CBDT Circular, emphasizing that the transactions were commercial in nature and not covered under Section 2(22)(e). Consequently, the Tribunal allowed the appeals of the assessee, overturning the additions made under Section 2(22)(e) for the assessment years in question.