2018 (4) TMI 507 - AT - Income Tax

Deemed dividend u/s 2(22(e) - receipt of advances by the shareholders from the company - maintaining the current account with DVPL - Held that - The purpose of Section 2(22)(e) of the Act is to tax the benefit extended by private limited company to its shareholders holding shares not less than 10% as beneficial owner of shares (not being shares entitled to a fixed rate of dividend income). There is no dispute with regard to shareholding of the assessee. Now coming to the amount of advance taken by assessee, we note that assessee has not only taken loan / advance from DVPL, but also it has sometime given advance to DVPL. Thus, there was change in the balance shown by assessee. Thus, it cannot be termed as advance taken by assessee as it was fluctuating during the year There remains no doubt that the transactions between assessee and DVPL is representing current account transactions. Therefore, the provision of Section 2(22)(e) of the Act cannot be attracted to such transactions. Keeping all, we deem it fit and proper to uphold the grievance of the assessee and quash the impugned revision order as devoid of jurisdiction. - Decided in favour of assessee.

Summary

Issues:
1. Jurisdiction of Principal CIT under section 263 of the Income Tax Act.
2. Application of Section 2(22)(e) of the Act regarding deemed dividend.
3. Interpretation of transactions between the assessee and DVPL as current account or loan.

Issue 1: Jurisdiction of Principal CIT under section 263 of the Income Tax Act:
The appeal disputed the order of the Principal Commissioner of Income Tax-2 passed under section 263 of the Income Tax Act, setting aside the assessment order for assessment year 2011-12. The appellant argued that the Principal CIT erred in assuming jurisdiction to impose his views on the Assessing Officer (AO) and that the assessment order was neither erroneous nor prejudicial to the interest of revenue. The appellant contended that the direction for a fresh assessment was arbitrary and unlawful, against the provisions of the Act. The Tribunal considered the grounds of appeal and found the substantial issue to be whether the order of the AO was erroneous and prejudicial to the interest of revenue as held by the Principal CIT.

Issue 2: Application of Section 2(22)(e) of the Act regarding deemed dividend:
The Principal CIT observed that the assessee received a loan from a company in which it held shares, attracting provisions of deemed dividend under Section 2(22)(e) of the Act. The AO had not considered this during assessment, leading to the Principal CIT issuing a notice under section 263. The assessee argued that the transaction was a current account and not a loan, thus not falling under the purview of deemed dividend. The Tribunal analyzed the ledger of transactions between the assessee and the company, noting fluctuations in balances and distinguishing between loans/advances and inter-corporate deposits. Citing relevant case law, the Tribunal held that the transactions represented current account dealings, not deemed dividends, and upheld the grievance of the assessee.

Issue 3: Interpretation of transactions between the assessee and DVPL as current account or loan:
The Tribunal examined the ledger entries showing transactions between the assessee and the company, highlighting the nature of the balances and payments made. The assessee argued that the amounts represented current account transactions, while the Revenue relied on the order of the Principal CIT. Relying on legal precedents, including a decision by the jurisdictional High Court, the Tribunal concluded that the transactions were not deemed dividends under Section 2(22)(e) of the Act but were current account dealings. Consequently, the Tribunal allowed the appeal, quashing the revision order as lacking jurisdiction and granting relief to the assessee.

In conclusion, the Tribunal's detailed analysis addressed the jurisdiction of the Principal CIT under section 263, the application of Section 2(22)(e) regarding deemed dividends, and the interpretation of transactions as current account dealings. The Tribunal's decision favored the assessee, emphasizing the distinction between loans/advances and current accounts, ultimately providing relief by allowing the appeal and quashing the revision order.