2019 (1) TMI 406 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - amount received by the assessee from his father - family settlement - Assessing Officer came to the view that the agreement is artificially created for the purpose of withdrawing money by the assessee from the accumulated profits of MEL. - Held that - Sri K.P. Poddar, namely, the father of the assessee, who is aged 80 years, had given the money received in a commercial transaction to his son. Therefore, transfer of money from father to son is nothing unusual. Moreover, the Assessing Officer has not examined Sri K.P. Poddar. He accepted the transaction of refundable non-interest bearing security deposit for mines as a commercial transaction. Therefore, we of the view that appreciation of the material on record by the Tribunal is just and appropriate. Even otherwise, we are also of the view that the issue involved revolves around appreciation of facts. We do not find that the order of the Tribunal suffers from any infirmity. There is no ground for any interference. Consequently, we hold that a sum of ₹ 17.50 crores received from MEL by Sri K.P. Poddar and transferred to the assessee, who was the shareholder, cannot be treated as dividend income of the assessee under Section 2(22)(e) of the Act. - Decided in favour of the assessee

Summary

Issues involved:
Interpretation of Section 2(22)(e) of the Income Tax Act regarding a payment made to a shareholder, validity of an agreement between a company and a shareholder, determination of dividend income for tax purposes.

Analysis:
1. The assessee, a Managing Director of a company, declared income for the Assessment Year 2005-06. A search under Section 132 of the Income Tax Act revealed incriminating documents related to payments made to the assessee and his father. The Assessing Officer treated the payment as a dividend under Section 2(22)(e) of the Act, alleging tax evasion. The Commissioner of Income Tax (Appeals) confirmed the order, but the Tribunal later allowed the appeal, finding the provision inapplicable to the case. The Tribunal directed the Assessing Officer to delete the addition of the payment to the father.

2. The main question considered was whether the sum received by the father from the company and transferred to the assessee constitutes dividend income under Section 2(22)(e) of the Act. The Revenue contended that the agreement was a tax evasion tactic, but the respondent argued that the payment was for legitimate business purposes. The Tribunal found in favor of the assessee, emphasizing the genuineness of the agreement and the commercial nature of the transaction between the father and son.

3. The High Court analyzed the facts and the agreement between the company and the father, concluding that the transfer of funds from the company to the father and then to the assessee did not qualify as dividend income. The Court noted the commercial nature of the transaction, the business expansion purpose, and the absence of tax evasion motives. The Tribunal's decision was upheld, and the substantial question of law was answered in favor of the assessee, leading to the dismissal of the Revenue's appeal.

In conclusion, the judgment clarified the application of Section 2(22)(e) of the Income Tax Act to a payment made by a company to a shareholder through an agreement, emphasizing the commercial nature of the transaction and the absence of tax evasion motives. The Tribunal's decision in favor of the assessee was upheld by the High Court, leading to the dismissal of the Revenue's appeal.