2021 (7) TMI 146 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - AO concluded that the assessee by adopting the colourable device has received a sum from Aartee Roadways private Ltd which is nothing but the deemed dividend - HELD THAT - It is the settled position of law that the trading advance, received by the assessee from a company in which he holds the substantial interest, does not constitute the loans and advances as provided under section 2(22)(e) of the Act for holding such loans and advances as deemed dividend. The Hon ble Delhi High Court in the case of CIT v. Raj Kumar 2009 (5) TMI 17 - DELHI HIGH COURT held that the word 'advance', which appears in company of word 'loan' in section 2(22)(e), can only mean such advance which carries with it an obligation of repayment and that trade advance, which is in nature of money transacted to give effect to a commercial transaction, cannot be treated as 'deemed dividend' falling within ambit of provisions of section 2(22)(e). Once it has been established that the amount received by the assessee represents the trading receipt i.e. in the course of the business, the usage of the same whether for commercial or personal purposes cannot change the character such receipt. As such the trading receipt is available at the disposal of the assessee and the revenue cannot direct to him for the usage of such trading receipts in a particular manner. In the given case, the assessee was to supply 150 refrigerated truck bodies and against such supply the assessee inter-alia received a sum which was directly disbursed by the bank on behalf of M/s Aartee Roadways private Ltd. There may be several reasons for transferring the sum to the personal saving account of the assessee such as the fund was not immediately required for use in the business or there was sufficient capital of the assessee in his business which has been withdrawn or for any other reason. But such withdrawal cannot be a basis to draw an inference that such trading receipts represents the loans and advances in the nature of deemed dividend as provided under section 2(22)(e) - There was no colourable device adopted by the assessee in the given facts and circumstances as alleged by the AO by holding that the transfer of a sum represents the deemed dividend in the hands of the assessee. Hence we do not find any infirmity in the order of the learned CIT (A). Thus the ground of appeal of the Revenue is hereby dismissed.

Summary

Issues Involved:
1. Whether the sum of ?5.25 crores received by the assessee from M/s Aartee Roadways Pvt. Ltd. constitutes a loan or advance under section 2(22)(e) of the Income Tax Act, 1961.
2. Whether the amount of ?5.25 crores transferred to the personal savings account of the assessee can be treated as deemed dividend.
3. Whether the learned CIT (A) erred in deleting the addition made by the AO for an amount of ?5.25 crores on account of deemed dividend.
4. Whether the learned CIT (A) correctly interpreted and applied judicial precedents and legal provisions relevant to the case.

Detailed Analysis:

1. Nature of the Sum of ?5.25 Crores:
The primary issue revolves around whether the sum of ?5.25 crores received by the assessee from M/s Aartee Roadways Pvt. Ltd. can be classified as a loan or advance under section 2(22)(e) of the Income Tax Act, 1961. The assessee argued that the amount was received as part of a business transaction for building refrigerated truck bodies, thus constituting a trade advance rather than a loan or advance. The CIT (A) upheld this view, noting that the sum was advanced for a commercial transaction and did not carry an obligation of repayment, distinguishing it from a loan or advance.

2. Transfer to Personal Savings Account:
The Revenue contended that the transfer of ?5.25 crores to the assessee's personal savings account indicated personal use, suggesting it should be treated as deemed dividend. However, the CIT (A) found that the withdrawal of the sum by the assessee was merely an appropriation of money received by his proprietary concern and did not alter the nature of the initial trade advance. The CIT (A) emphasized that the usage of the trading receipt, whether for personal or commercial purposes, does not change its character as a trade advance.

3. Deletion of Addition by CIT (A):
The CIT (A) deleted the addition made by the AO, holding that the sum advanced was a trade advance and not a loan or advance under section 2(22)(e). The CIT (A) referred to judicial precedents, including decisions from the Delhi High Court and Karnataka High Court, which supported the view that trade advances for commercial transactions do not fall within the ambit of deemed dividends under section 2(22)(e).

4. Interpretation and Application of Judicial Precedents:
The CIT (A) relied on several judicial decisions to support the conclusion that trade advances do not constitute deemed dividends. These included:
- CIT vs Raj Kumar [2009] 181 Taxman 155 (Delhi): Held that trade advances for commercial transactions are not deemed dividends.
- CIT vs Creative Dyeing & Printing (P.) Ltd. [2009] (Delhi): Clarified that business transactions do not fall within section 2(22)(e).
- Bagmane Constructions (P.) Ltd. vs CIT [2015] 57 taxmann.com 120 (Karnataka): Held that trade advances for commercial purposes do not fall within section 2(22)(e).
- CIT vs Amrik Singh [2015] 56 taxmann.com 460 (Punjab & Haryana): Held that advances for job work under an agreement do not constitute deemed dividends.

The CIT (A) concluded that the sum of ?5.25 crores was a trade advance for the fabrication of refrigerated truck bodies, a regular business transaction, and not a loan or advance. The CIT (A) also noted that the AO failed to provide evidence that the transaction was a cover for a surreptitious payment.

Conclusion:
The Tribunal upheld the CIT (A)'s decision, dismissing the Revenue's appeal. It agreed that the sum of ?5.25 crores was a trade advance and not a deemed dividend under section 2(22)(e). The Tribunal emphasized that the usage of the trading receipt, whether for personal or business purposes, does not alter its nature as a trade advance. The appeal of the Revenue was dismissed, and the order of the CIT (A) was sustained.