2018 (2) TMI 1532 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - assessee claimed the amount received as guarantee fee for advance received from Ginza - Held that - All indications were that the assessee was sanguine and assured about the nature of the amount given by Ginza, i.e. that it could use it for its own purposes as it did by advancing substantial amounts at commercial rates of interest which could not be conceivably attributable to short term deposits and also for the purpose of yielding income, i.e. by investing with the object of trading in shares. In these circumstances, both the lower authorities, in the opinion of the Court overlooked that the real intent of Ginza in advancing the sums it did to the assessee was to share its profit by way of deemed dividend. The sum of ₹ 6.16 crores clearly fell within the description of deemed dividend under Section 2(22)(e) of the Act like in the case of Sunil Chopra (2011 (5) TMI 218 - DELHI HIGH COURT). For these reasons, the first question is answered in favour of revenue and against the assessee Disallowance of commission - CIT (A) and the ITAT deleted the disallowance holding that the original transaction of advance was genuine and a trading one and furthermore that the commission was paid through payment channels in terms of the tripartite agreements - Held that - AO s findings are based upon facts. A significant detail that seems to have escaped the notice of lower appellate authorities, i.e. that after obtaining substantial sums, the assessee even made over a substantial part of it ₹ 6.14 crores to Adani to whom it paid ₹ 43.5 lakhs as commission for the standing guarantor. The latter payment in the light of the transactions previously discussed strain ones credibility and does not accord with prudent commercial practice. For these reasons the Court is of the opinion that the findings of the lower authorities are based upon a mis-appreciation of circumstances and are, therefore, unreasonable, and are premised on an erroneous appreciation of the facts and the law. The disallowance of ₹ 43.5 lakhs was just and warranted. - Decided against assessee.

Summary

Issues Involved:
1. Whether the advance of ?6.16 crores made by M/s Ginza Industries Ltd. to the assessee can be taxed as deemed dividend without finding that lending money was a substantial part of the business of Ginza.
2. Whether the disallowance of ?43.50 lakhs paid by the assessee to M/s Adani Associates towards guarantee commission fee was wrongly made by the Assessing Officer.

Issue-wise Detailed Analysis:

Issue 1: Deemed Dividend under Section 2(22)(e)
The Revenue challenged the ITAT’s decision that the sum of ?6.16 crores received by the assessee from M/s Ginza Industries Ltd. (Ginza) could not be taxed as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The assessee argued that the amount was an advance for procuring import licenses, and not a loan or dividend. The Assessing Officer (AO) noted that the assessee held 17,67,642 shares of Ginza and questioned the purpose of the advance, suspecting it was for the benefit of the assessee rather than a genuine business transaction.

A survey under Section 133A was conducted at Ginza's premises, revealing that the advance was not used for purchasing licenses but rather for investments and loans, undermining the claim of a business transaction. The AO concluded that the advance was a deemed dividend, as it was not in the ordinary course of business.

The CIT(A) and ITAT disagreed, holding that the advance was for a legitimate business purpose, despite no licenses being procured. They emphasized the tripartite agreement and the lack of common directors between the companies involved. The ITAT further noted that Ginza intended to trade in import licenses and had shown the advance in its public issue documentation.

However, the High Court found that the lower authorities overlooked significant facts, such as the lack of actual import licenses procured and the long-term investments made by the assessee with the advance. The Court concluded that the real intent of Ginza was to share its profit by way of deemed dividend, and the sum of ?6.16 crores fell within the description of deemed dividend under Section 2(22)(e).

Issue 2: Disallowance of ?43.50 Lakhs Guarantee Commission Fee
The second issue concerned the disallowance of ?43.50 lakhs paid by the assessee to M/s Adani Associates as a guarantee commission fee. The AO rejected the payment as a business expense, considering it a cover-up to avoid the provisions of Section 2(22)(e). The CIT(A) and ITAT found the payment genuine, based on the tripartite agreement and the lack of common interests between the parties involved.

The High Court, however, noted that the commission payment was premised on the genuineness of the underlying transaction, which was found to be a deemed dividend. The Court held that the findings of the lower authorities were based on a misappreciation of circumstances and were unreasonable. Therefore, the disallowance of ?43.50 lakhs was justified.

Conclusion:
The High Court allowed the appeal, answering both questions in favor of the Revenue. The sum of ?6.16 crores was deemed a dividend under Section 2(22)(e), and the disallowance of ?43.50 lakhs as guarantee commission fee was upheld.