2018 (3) TMI 524 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - Held that - In this case, the assessee has taken a loan from the company for construction of house. The assessee had mortgaged his properties for availing credit limits by the company and dried up his resources for getting financial assistance from the banks. Therefore, he had no option except to take the loan from the assessee company or to get released the properties mortgaged to the Bank. Since the properties cannot be released unless the credit limits are completely repaid, he has taken the advance from assessee company for construction of his house and the entire amount of advance was repaid along with interest as evidenced from the order of the Ld. CIT(A). This Tribunal in the case of DCIT Central Circle-1 Visakhapatnam Vs. Sri Hariprasad Bhararia 2016 (11) TMI 1296 - ITAT VISAKHAPATNAM held that the transaction between the assessee and the company are not within the meaning of loans and advances as defined u/s 2(22)(e) of the Act and accordingly, deleted the addition made towards deemed dividend under the provisions of section 2(22)(e) of the Act. We hold that the transaction is not deemed dividend within the meaning of section 2(22)(e) of the Act and accordingly, delete the addition made by the A.O. - Decided in favour of assessee

Summary

Issues Involved:
1. Deemed dividend assessed under section 2(22)(e) of the Income Tax Act, 1961.
2. Loan transaction characterization and its implications for tax purposes.

Issue-Wise Detailed Analysis:

1. Deemed Dividend Assessed Under Section 2(22)(e) of the Income Tax Act, 1961:
The primary issue in the appeal was whether the loan of ?45,16,977/- taken by the assessee from M/s. Yarlagadda Exports Pvt. Ltd., where the assessee is a director and holds more than 10% shareholding, should be treated as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (A.O.) treated the entire loan amount as deemed dividend, citing the assessee's substantial interest in the lending company and the existence of substantial profits in the company.

The CIT(A) analyzed the transaction thoroughly, including the borrowings and repayments with interest, and relied on the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Creative Dyeing and Printing Private Limited. The CIT(A) concluded that the loan was not a gratuitous payment but was advanced for business expediency. The CIT(A) noted that the company benefited from the credit limits sanctioned due to the personal guarantee and mortgaged properties provided by the assessee. Hence, the transaction did not fall within the purview of deemed dividend under section 2(22)(e).

2. Loan Transaction Characterization and Its Implications for Tax Purposes:
The revenue argued that since the assessee met both conditions of having more than 10% shareholding and the lending company having sufficient reserves, the loan should be taxed as deemed dividend under section 2(22)(e). The revenue contended that the A.O. correctly invoked the provision and brought the loan amount to tax.

Conversely, the assessee argued that the loan was taken due to financial constraints caused by mortgaging personal assets for the company's benefit. The loan was used for constructing a house, and the entire amount, including interest, was repaid. The assessee emphasized that the transaction was a pure loan and should not be treated as deemed dividend.

The Tribunal, after hearing both parties and reviewing the materials on record, noted that the assessee had mortgaged his properties to avail credit limits for the company, which dried up his resources for personal borrowings. The Tribunal found that the loan was taken out of necessity and was repaid with interest. Referring to a similar case (DCIT Central Circle-1 Visakhapatnam Vs. Sri Hariprasad Bhararia), the Tribunal held that such transactions do not fall within the meaning of loans and advances as defined under section 2(22)(e).

The Tribunal upheld the CIT(A)'s order, concluding that the loan transaction was not deemed dividend under section 2(22)(e) and dismissed the revenue's appeal. Consequently, the cross objection filed by the assessee became infructuous and was also dismissed.

Conclusion:
The Tribunal affirmed that the loan taken by the assessee from the company was not a deemed dividend under section 2(22)(e), as it was advanced for business expediency and repaid with interest. The appeal by the revenue was dismissed, and the cross objection by the assessee was rendered infructuous.