2019 (9) TMI 971 - AT - Income Tax

Deemed dividend addition u/s (2)(22)(e) - subsequent repayment (of loan/advance) relevant, i.e., in determining if the amount received from the payer-company is to be, or is not to be, considered as dividend u/s. 2(22)(e)? - length of the period over which the credit obtains, being at 45 days (i.e., from 15.10.2013 to 29.11.2013) in the instant case - HELD THAT - The exclusion of a business advance, referred to earlier, i.e., even as the provision speaks of any payment by way of a loan or advance, covering therefore advances of all types, is only on the premise that the said word, read conjunctively with the word loan , applying the principle of ejusdem generis, should only include payments in the nature of loans, excluding business transactions, which have, as a matter of course, if not necessarily, to be settled by remitting funds; the provision in no manner seeking to impinge on genuine business transactions. Finally, it is stated that the entries in the books of account are not determinative. The same seeks to perhaps meet the reflection of the outstanding sum (as at the year-end) as a loan or advance in the balance-sheet of the lender or the borrower company. It is nobody's case that the provision stands invoked on account of such reflection, which has not been shown to be incorrect, so that there is no factual basis to the argument. The provision would in fact apply even if the shareholder does not, as is usually the case for an individual shareholder, maintain books of account, and which is so in the present case only because of it being a corporate entity. On the contrary, it is the assessee who draws on the accounts, stating it to be a running account and, further, a low retention period, and on that basis plead that the provision shall not apply. The provision is applicable qua any payment and, therefore, would (or would not) apply with reference to each specific sum. It is immaterial whether such payment/s is recorded in the books of account or not, and the only thing relevant is if it is in the nature of a loan/s or advance/s. The assessee s argument, which is even otherwise not backed by any material and only in the nature of a bald statement, is therefore without merit. Chargeability of the dividend under section 2(22)(e) as income from other sources u/s. 56 - HELD THAT - Only the dividend declared, distributed or paid by a company, on which tax u/s. 115-O has been suffered, that falls u/s. 10(34), and would therefore not stand to be assessed u/s. 2(24)(ii) r/w s. 56 of the Act. The said dividend would only be that envisaged u/s. 2(22)(a), i.e., as declared observing the required procedure in its respect under the Companies Act, 1956 (or, as the case may be, Companies Act, 2013), to all the shareholders, i.e., in proportion to their shareholding. This would certainly not cover dividend which gets included within its definition under the Act in view of the extended meaning of the term dividend by virtue of a legal fiction. The dividend deemed as such u/s. 2(22)(e) would, therefore, stand to be assessed and, accordingly, has been rightly brought to tax, u/s. 56 Being not a regular dividend, declared and paid by company, the same does not fall to be covered u/s. 10(34) and, thus, is not excepted u/s. 56. The same has, accordingly, been rightly brought to tax u/s. 2(24)(ii) r/w ss. 2(22)(e) and 56 of the Act by the Revenue, whose action is upheld. The assessee, in this view of the matter, fails. We decide accordingly.

Summary

Issues Involved:
1. Whether the amount received by the assessee from GAPL qualifies as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.
2. Whether the subsequent repayment of the loan or advance affects its classification as deemed dividend.
3. Whether the transactions between the assessee and GAPL constitute a mutual, open, and current account, thereby excluding them from the purview of section 2(22)(e).
4. Whether the deemed dividend should be assessed under the head "Income from other sources" under section 56 of the Act.

Detailed Analysis:

1. Deemed Dividend under Section 2(22)(e):
The primary issue is whether the amount received by the assessee from GAPL qualifies as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961. The assessee, holding 34.40% voting power in GAPL, received unsecured loans from GAPL, which was not a company in which the public is substantially interested. The total accumulated profit of GAPL up to 06/11/2013 was ?117.17 lacs. The Tribunal concluded that the loan or advance received by the assessee from GAPL falls within the ambit of section 2(22)(e) as deemed dividend, as the conditions specified in the provision were satisfied.

2. Subsequent Repayment of Loan or Advance:
The Tribunal addressed whether the subsequent repayment of the loan or advance affects its classification as deemed dividend. It was held that the repayment of the loan or advance is inconsequential for the purpose of applying the fiction of section 2(22)(e). The statutory fiction created by section 2(22)(e) comes into operation at the time of the payment by way of advance or loan, provided the other conditions are satisfied. This position was supported by the Supreme Court's decision in Tarulata Shyam v. CIT, which clarified that the subsequent repayment does not alter the fact that the amount received is deemed as dividend.

3. Mutual, Open, and Current Account:
The assessee contended that the transactions with GAPL were in the nature of a mutual, open, and current account and should not be regarded as loans or advances for the purpose of section 2(22)(e). However, the Tribunal found that the transactions were purely financial in nature, involving the receipt and payment of money, and thus constituted loans or advances. The charge of interest on these transactions further confirmed their nature as loans. The Tribunal referred to judicial precedents, including the decision in P.K. Badiani v. CIT, which held that the nature of each payment must be considered individually to determine whether it constitutes a loan.

4. Assessment under Section 56:
The Tribunal examined whether the deemed dividend should be assessed under the head "Income from other sources" under section 56 of the Act. Section 56(2)(i) specifies that dividends are chargeable to tax under the head "Income from other sources." The Tribunal noted that only dividends referred to in section 115-O, which have suffered dividend distribution tax, are excluded from the total income under section 10(34). Since the deemed dividend under section 2(22)(e) does not fall under section 115-O, it is assessable under section 56. The Tribunal upheld the Revenue's action of taxing the deemed dividend as "Income from other sources."

Conclusion:
The Tribunal dismissed the assessee's appeal, affirming that the amount received from GAPL qualifies as deemed dividend under section 2(22)(e), the subsequent repayment does not affect its classification, the transactions were not mutual, open, and current accounts, and the deemed dividend is assessable under section 56. The Tribunal's decision was based on the clear language of the statute and binding judicial precedents, including decisions by the Supreme Court.