2020 (3) TMI 1227 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - assessee has beneficial share holding in 2 companies namely M/s Jasubhai Business Services Pvt Ltd and M/s. ABM Steels Pvt M/s.- as per AO ABM Steels Pvt. Ltd is not a company in which public is substantially interested and assessee is holding beneficial interest and voting right and M/s ABM Steels Pvt. Ltd. is having accumulated reserves - HELD THAT - Any credit or advantage taken by the persons having substantial interest will attract the provision of section 2(22)(e) - Even though, assessee has repaid the deposit within the same year, it does not mean that the loan or benefit is not taken. We can call any name but ultimately assessee has taken a credit/ benefit, the assessee should have known that it is surpassing the deeming provisions particularly when it has holding beneficial interest. It is settled law that deemed dividend provisions get attracted as soon as it takes benefit and it does not matter whether it is repaid within the same year. It is similar to the case of Miss P. Sarda vrs. CIT 1997 (12) TMI 1 - SUPREME COURT the Hon ble Apex court held that even though the loan is repaid at the end of the year, will attract the provision of section 2(22)(e) of the act. Even though assessee claims it as inter corporate deposit, the literal meaning will remain same as the short term loan enjoyed by the assessee, hence in our considered view, the provision of section 2(22)(e) is attracted in the present case. With regard to payment by M/s ABM Steels Pvt. Ltd. on behalf of the assessee for the purchase of machinery, it is brought on record that M/s ABM Steels Pvt. Ltd. has purchased the similar machinery from the assessee in the subsequent assessment year and it is a back to back purchase of machinery. Therefore, in our considered view, it is a business transaction and we are inclined to agree with the findings of Ld. CIT(A). With regard to issue of debentures, since assessee has issued redeemable debentures and M/s Jasubhai Business Services Pvt. Ltd has subscribed for the debentures and during this year, they have also exercised the options and assessee has redeemed the debentures and current outstanding amount is of ₹ 2,02,25,000/.This transaction involving issue of securities, even though it is a private placement but it cannot be considered as a loan transaction. The provisions of section 2(22)(e) of the Act are not attracted, it attracts only when loan and advances taken in place of direct issue of dividends. In order to avoid dividend tax, some of the assessee are resorting to taking loan instead of dividend being issued to the respective shareholders. The securities are a separate scripts and having stand alone capital liability, which cannot be equated with loan, which is current liability. Therefore, we are in agreement with the findings of led CIT(A). Accordingly, grounds raised by revenue are dismissed.

Summary

Issues:
- Interpretation of section 2(22)(e) of the Income Tax Act
- Treatment of inter corporate deposits and loans
- Classification of debentures as securities or loans

Analysis:

1. Interpretation of section 2(22)(e) of the Income Tax Act:
The case involved an appeal by the revenue and cross-objection by the assessee against the order of the Ld. CIT(A) for the Assessment Year 2013-14. The main issue was the application of section 2(22)(e) of the Act, which deals with the taxation of deemed dividends. The AO had invoked this provision based on the substantial interest of the assessee in certain companies and transactions involving loans and advances.

2. Treatment of inter corporate deposits and loans:
The AO observed that the assessee had taken a loan from one company and received funds from another, both transactions falling under the purview of section 2(22)(e). The assessee argued that the inter corporate deposit was repaid within the same year and the funds received were for the issue of debentures, not loans. However, the AO equated the securities with loans and made additions based on this interpretation.

3. Classification of debentures as securities or loans:
The case also revolved around the classification of debentures issued by the assessee as securities or loans. The assessee contended that the debentures were issued as part of a scheme and were redeemed during the year, making them securities and not subject to section 2(22)(e). The tribunal agreed with this interpretation, stating that the debentures did not fall under the definition of loans and advances as per the Act.

In conclusion, the tribunal partly allowed the revenue's appeal and dismissed the cross-objection by the assessee. The judgment emphasized the importance of analyzing each transaction separately to determine its nature under the relevant provisions of the Income Tax Act. The decision provided clarity on the application of section 2(22)(e) in cases involving inter corporate transactions and the issuance of debentures.