2019 (7) TMI 1365 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - proof of record that the assessee is a substantial shareholder in both the companies lender and receiver - advance given under agreement to finance a milk related product project pursuant to appointment of sole selling agent of milk business for seven years - project was not kicked of and advance was refunded - HELD THAT - Position of Revenue cannot be accepted as section 2(22)(e) itself provides by way of an exception under clause (2) of the exceptions that any advance or loan made to a shareholder or to the said concern by a company in the ordinary course of its business where lending is substantial part of business of the company cannot be treated as deemed dividend. Similarly the CBDT Circular referred supra has also stated that trade advances which are in the nature commercial transactions would not fall within the ambit section 2(22)(e). Therefore, we find that the agreement entered into between the two companies which is placed on record by virtue of which the funds have been lend is clearly a relevant piece of document which needs to be examined. Given that the said agreement has not been taken into consideration by the lower authorities, we are setting aside the matter to the file of the AO to examine the same afresh. In view of the same, various contentions raised by the Ld. AR are left open and the assessee is free to raise the same before the AO. In the result, the ground is allowed for statistical purposes.

Issues Involved:
1. Whether the addition of ?2,62,75,000/- and ?2,98,00,000/- as deemed dividend under section 2(22)(e) of the Income Tax Act for the Assessment Years 2014-15 and 2015-16, respectively, was justified.
2. Whether the transactions in question were purely business transactions and thus not subject to deemed dividend provisions.
3. Whether the principles of natural justice were observed in the assessment process.

Detailed Analysis:

Issue 1: Addition as Deemed Dividend under Section 2(22)(e)
The core issue revolves around the addition of ?2,62,75,000/- for AY 2014-15 and ?2,98,00,000/- for AY 2015-16 as deemed dividend under section 2(22)(e) of the Income Tax Act. The Assessing Officer (AO) concluded that the assessee, holding substantial shareholding in both M/s Bhagwati Lacto Vegetarian Exports Pvt. Ltd. and M/s Hazoor Sahib Milk Processing Pvt. Ltd., received an interest-free loan, which was classified as deemed dividend. The AO's decision was based on the fact that the loan was given without any business purpose, and the accumulated profits of M/s Bhagwati Lacto Vegetarian Exports Pvt. Ltd. exceeded the loan amount.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the clear provisions of section 2(22)(e) were applicable since the assessee was a substantial shareholder in both companies. The CIT(A) dismissed the argument that no benefit accrued to the assessee, emphasizing that the statutory provisions were clear.

Issue 2: Nature of Transactions
The assessee argued that the transactions were purely business-oriented, aimed at diversifying and expanding the business of M/s Bhagwati Lacto Vegetarian Exports Pvt. Ltd. The funds were advanced under an agreement where M/s Bhagwati Lacto Vegetarian Exports Pvt. Ltd. was appointed as the sole selling agent for milk products manufactured by M/s Hazoor Sahib Milk Processing Pvt. Ltd. The assessee emphasized that the transaction was in line with the company's business objectives and that the entire amount was eventually returned due to disputes among directors.

The assessee referenced CBDT Circular Instruction No. 19/2017, which clarifies that trade advances in the nature of commercial transactions do not fall within the ambit of deemed dividend under section 2(22)(e). The assessee also cited judicial precedents supporting the view that business transactions should not be classified as deemed dividends.

Issue 3: Observance of Natural Justice
The assessee contended that the AO did not consider the submissions and evidence provided, thereby violating the principles of natural justice. The lower authorities did not adequately examine the agreement between the two companies, which was crucial to understanding the nature of the transactions.

Tribunal's Decision:
The Tribunal acknowledged that the assessee held substantial shareholding in both companies and that the conditions for section 2(22)(e) were satisfied. However, it emphasized the need to examine the nature of the transactions thoroughly. The Tribunal noted that the agreement between the companies, which indicated a business purpose, was not considered by the lower authorities.

The Tribunal decided to set aside the matter to the AO for a fresh examination, particularly focusing on the agreement and the nature of the transactions. The Tribunal directed the AO to consider whether the transactions were indeed in the ordinary course of business and thus exempt from deemed dividend provisions under section 2(22)(e).

Conclusion:
The appeals for both Assessment Years 2014-15 and 2015-16 were allowed for statistical purposes, with the matter remanded to the AO for a detailed examination of the business agreement and the nature of the transactions. The Tribunal left open various contentions raised by the assessee for consideration during the reassessment.

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