2018 (6) TMI 1235 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - nature of receipt of sum from a company in which assessee is having 25.24% holding - assessee s case that the same formed part of transactions in mutual or current account - assessee claimed that it was not loan or advance - Held that - there is a clear finding of fact by the two statutory appellate fora that the assessee was beneficiary of the sums given by the company at some point of time and the company was beneficiary of the sums given by the assessee at another point of time. This finding given by the two statutory appellate fora distinguishes the present case from the factual basis of the decision in the case of Mukundray K. Shah 2007 (4) TMI 201 - SUPREME COURT . The ratio of that decision thus does not apply in the facts of the case giving rise to this appeal. In this factual and legal perspective, in our opinion payment of the aforesaid sums to the assessee cannot be treated as dividend out of profit. No perversity has been pointed out on behalf of the Revenue so far as such a concurrent finding of fact is concerned by the two statutory appellate fora. We are not inclined to disturb such finding of fact, which the Tribunal has backed with detailed analysis. - Decided in favour of assessee.

Issues Involved:
1. Whether the sum received by the assessee from the company constituted deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
2. Whether the transactions between the assessee and the company were part of a mutual running or current account.
3. Applicability of the Supreme Court's decisions in Commissioner of Income-Tax Vs. Mukundray K. Shah and Miss P. Sarada Vs. Commissioner of Income-Tax.

Detailed Analysis:

Issue 1: Deemed Dividend Under Section 2(22)(e)
The primary issue was whether the sum of ?3,10,83,635/- received by the assessee from Bright Advertising (P.) Ltd., in which she held a 25.24% equity stake, should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The assessing officer added this sum to the assessee's income, treating it as deemed dividend. However, both the C.I.T. (Appeals) and the Tribunal found that the sum did not constitute a loan or advance attracting the deeming provision of Section 2(22)(e). The Tribunal concluded that the transactions were part of a mutual running current account, and thus, the sum could not be treated as deemed dividend.

Issue 2: Mutual Running or Current Account
The assessee contended that the sum received was part of transactions in a mutual running current account. The C.I.T. (Appeals) and the Tribunal accepted this stand, finding that the transactions created mutual obligations and benefits between the assessee and the company. The Tribunal analyzed the ledger of the assessee in the company's books, noting that the account was squared at the end of the year, indicating reciprocal demands and mutual benefits. This mutual nature of the account distinguished the transactions from those that would be considered loans or advances under Section 2(22)(e).

Issue 3: Applicability of Supreme Court Decisions
The Revenue argued that the inflow of funds from the company to the assessee attracted the deeming provision, citing the Supreme Court's decisions in Miss P. Sarada Vs. Commissioner of Income-Tax and Commissioner of Income-Tax Vs. Mukundray K. Shah. In Miss P. Sarada, the Supreme Court held that withdrawals by the assessee from the company constituted loans or advances, attracting the deeming provision. In Mukundray K. Shah, the Supreme Court emphasized that the concept of deemed dividend under Section 2(22)(e) involves determining whether the payment is a loan and whether there were accumulated profits at the time of payment.

The Tribunal distinguished the present case from these Supreme Court decisions, noting that the transactions between the assessee and the company involved mutual benefits and obligations, unlike in Miss P. Sarada and Mukundray K. Shah, where the payments were for the benefit of the assessee without mutual obligations. The Tribunal's finding of mutual transactions was a key factor in concluding that the sum could not be treated as deemed dividend.

Conclusion:
The High Court upheld the decisions of the C.I.T. (Appeals) and the Tribunal, confirming that the sum received by the assessee could not be treated as deemed dividend under Section 2(22)(e). The Court found no perversity in the concurrent findings of fact by the two statutory appellate fora and declined to reappreciate the evidence. The appeal by the Revenue was dismissed, and the question was answered in favor of the assessee, affirming that the transactions were part of a mutual running current account and did not constitute deemed dividend.

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