2019 (3) TMI 1243 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - business exigency - Norman business transactions or otherwise - assessee firm is holding more than 20% share in the lender company through two of its partners - case selected for scrutiny and notice u/s 143(2) and 142(1) - HELD THAT - In this case, CIT(A) has recorded categorical finding that the transactions between the assessee and M/s Arbes Tools Pvt Ltd has arisen out of normal business transactions, for which the assessee has filed comparative purchases for last three years, as per which, the assessee is regularly dealing with the company for purchase of raw materials. Once a particular transaction is not in the nature of loans and advances, then the provisions of section 2(22)(e) could not be applied. Therefore, to that extent, we are in agreement with the findings of Ld.CIT(A). Insofar as the finding of CIT(A) with regard to the beneficial shareholder and registered shareholder and further, only an amount received by a shareholder from a company where he is holding beneficial interest is taxable as deemed dividend, is devoid of merit in view of the decision of Gopal And Sons, HUF vs CIT 2017 (1) TMI 331 - SUPREME COURT wherein held that even if HUF is not a registered shareholder in lending company, advances / loans received by HUF is taxable as deemed dividend u/s 2(22)(e) if karta shareholder has substantial interest in HUF. There is no dispute with regard to this legal proposition rendered by the Hon ble Supreme Court. To that extent, the findings of facts recorded by the CIT(A) are incorrect. Fact remains that the assessee has succeeded in his attempt on the issue of business exigency, where the assessee has filed complete details to prove that the transactions between the assessee and the lending company is arising out of normal commercial transactions for purchase of goods. Therefore, we are of the considered view that the AO was erred in treating loans received from lending company as deemed dividend u/s 2(22)(e) - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made under Section 2(22)(e) of the Income Tax Act, 1961.
2. Applicability of deemed dividend provisions to the partnership firm.
3. Nature of transactions between the assessee and the lending company.
4. Consideration of judicial precedents and legal principles.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made Under Section 2(22)(e) of the Income Tax Act, 1961:
The revenue contested the CIT(A)'s decision to delete an addition of ?97,79,278 made under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) had classified a loan received by the assessee from M/s Arbes Tools Pvt Ltd as deemed dividend under this section. The AO noted that the partners of the assessee firm held more than 50% shares in the lending company, which had sufficient reserves and surplus. The AO argued that the loan should be taxed as deemed dividend. However, the CIT(A) deleted this addition, concluding that the amount advanced for business transactions does not fall within the definition of deemed dividend under Section 2(22)(e).

2. Applicability of Deemed Dividend Provisions to the Partnership Firm:
The CIT(A) held that Section 2(22)(e) applies only when a registered shareholder receives loans from a company where they have a beneficial interest in shareholding. Since the assessee, a partnership firm, is not a shareholder of the lending company, the provisions of Section 2(22)(e) did not apply. The CIT(A) relied on various judicial precedents, including the Bombay High Court's decision in CIT vs. Impact Containers Pvt Ltd, which stated that Section 2(22)(e) cannot be invoked if the assessee is not a shareholder of the lending company.

3. Nature of Transactions Between the Assessee and the Lending Company:
The assessee argued that the amount received from M/s Arbes Tools Pvt Ltd was part of normal business transactions for purchasing materials and could not be considered as loans or advances under Section 2(22)(e). The CIT(A) accepted this argument, noting that the transactions were regular business dealings and not loans or advances. The CIT(A) cited several judicial precedents, including the Supreme Court's decision in CIT vs. NSN Jewellers Pvt Ltd, which held that business transactions are outside the purview of Section 2(22)(e).

4. Consideration of Judicial Precedents and Legal Principles:
The CIT(A) and the ITAT relied on various judicial precedents to support their conclusions. The CIT(A) referred to decisions from the Bombay High Court and the Supreme Court, which clarified that business transactions do not fall under the definition of deemed dividend. The ITAT also considered the Supreme Court's decision in Gopal And Sons, HUF vs. CIT, which held that even if an HUF is not a registered shareholder, loans received by the HUF are taxable as deemed dividend if the karta has substantial interest in the lending company. However, the ITAT concluded that the transactions in question were normal business transactions and not loans or advances, thus upholding the CIT(A)'s decision to delete the addition.

Conclusion:
The ITAT dismissed the revenue's appeal, agreeing with the CIT(A) that the transactions between the assessee and M/s Arbes Tools Pvt Ltd were normal business transactions and not loans or advances. Consequently, the provisions of Section 2(22)(e) did not apply, and the addition made by the AO was rightly deleted by the CIT(A).