2020 (6) TMI 612 - AT - Income Tax

Deemed dividend under section 2(22)(e) - assessee company has received loans and advances from M/s Exotica Housing and Infra Projects Pvt. Ltd., which was squared off during the year - money in question was advanced by subsidiary company to the assessee company in the ordinary course of business and as per Memorandum and Articles of Association money lending is one of the main objectives of the subsidiary company - HELD THAT - The ledger account of the subsidiary company in assessment year under appeal also clearly reveals that it is the assessee company who have given the amount mostly to the subsidiary company which have been returned to the subsidiary company by the assessee company. Therefore, on such facts when the Revenue did not dispute the transactions in the current account between the assessee company and the subsidiary company in earlier as well as in subsequent year and the assessee company on most of the occasions have made payment to the subsidiary company, which have been returned by assessee company for business purposes, there was no reason to apply provisions of Section 2(22)(e). It is clear from the Orders of the authorities below that assessee has been taken the plea consistently that provisions of Section 2(22)(e) of the I.T. Act, 1961, would not apply in the case of the assessee company because assessee company is maintaining the running transactions with its subsidiary company which are clear from PB-5 to 12 which are ledger account of this year as well as earlier year and subsequent year and the same are in the nature of mutual and current account. Therefore, deeming provisions of Section 2(22)(e) of the I.T. Act, 1961, would not apply. - Decided in favour of assessee.

Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961 on deemed dividend.
2. Nature of transactions between the assessee company and its subsidiary company.
3. Interpretation of current account transactions in the context of deemed dividend.
4. Consistency in applying tax provisions across different assessment years.

Issue-wise Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961 on deemed dividend:
The primary issue in this appeal was the addition of ?2,88,92,817/- as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (A.O.) observed that the assessee company received loans and advances amounting to ?23,70,33,000/- from its subsidiary, M/s Exotica Housing and Infra Projects Pvt. Ltd., which was squared off during the year. The A.O. considered this amount as deemed dividend because the assessee held 98% shares in the subsidiary. The assessee contended that the transactions were current account transactions and not loans or advances, thus outside the purview of Section 2(22)(e). The A.O. rejected this argument, stating that the advances were not made in the ordinary course of business and added the impugned amount as deemed dividend.

2. Nature of transactions between the assessee company and its subsidiary company:
The assessee argued that the transactions with its subsidiary were in the nature of current account transactions, which are momentary and subject to frequent changes. The assessee provided a statement of current account to support this claim and argued that such transactions are excluded from the definition of dividend under Clause (ii) of Section 2(22)(e) of the Act, which states that advances or loans made by a company in the ordinary course of its business, where money lending is a substantial part of the business, are not deemed dividends. The assessee also highlighted that money lending was one of the main objectives of the subsidiary company as per its Memorandum and Articles of Association.

3. Interpretation of current account transactions in the context of deemed dividend:
The Tribunal examined the nature of the transactions and found that they were indeed current account transactions, characterized by frequent debits and credits. The Tribunal referred to several judicial precedents, including decisions from the Delhi High Court and various ITAT benches, which consistently held that current account transactions for business purposes do not fall within the definition of deemed dividend under Section 2(22)(e). The Tribunal noted that the transactions were temporary financial accommodations for business purposes and not loans or advances as contemplated under the section.

4. Consistency in applying tax provisions across different assessment years:
The Tribunal emphasized the principle of consistency, noting that similar transactions in earlier and subsequent years were not treated as deemed dividends by the Revenue Authorities. The Tribunal referred to the Supreme Court's ruling in Radhasoami Satsang 193 ITR 321 (SC), which mandates consistency in tax treatment across different assessment years unless there is a material change in facts. The Tribunal found that the pattern of transactions in the current year was similar to those in earlier and subsequent years, and thus, the addition under Section 2(22)(e) was not justified.

Conclusion:
The Tribunal concluded that the transactions between the assessee company and its subsidiary were in the nature of current account transactions and not loans or advances. Therefore, the provisions of Section 2(22)(e) of the Income Tax Act, 1961, were not applicable. The addition of ?2,88,92,817/- as deemed dividend was deleted, and the appeal of the assessee was allowed. The judgment underscored the importance of understanding the nature of transactions and maintaining consistency in tax treatment across different assessment years.

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