2022 (8) TMI 1276 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - assessee is a major share holder in loan granting company - HELD THAT - We are of the view that an advance against agreement to sale of the property is trade advance which is in the nature of commercial transaction. Trade or commerce connotes the idea of buying and selling and there are judicial precedents which hold that even a single transaction may constitute business/trade. It is not in dispute that the company M/s. AMP gave the advance to the assessee towards sale of property under Agreement to Sale and the said amount was received as part payment by the buyer M/s. AMP to the seller of the property, namely the assessee as per the obligation in the Agreement to Sale which is clearly borne out from the recitals in the MOU. The Hon ble Delhi High Court has hold in CIT vs. Raj Kumar 2009 (5) TMI 17 - DELHI HIGH COURT that trade advances cannot be treated as deemed dividend. In such a fact scenario as set out above, we are of the view that even though the assessee is substantial shareholder in the company M/s. AMP which had made the impugned advance to the assessee, it is not a fit case to invoke the provisions of section 2(22)(e) of the Act. The words loans or advances occurring in the provision can be applied to loans or advances simplicitor and not to those transactions carried out in the course of trade/business. By giving advance, if the business purpose of the company is served, such advance cannot be brought within the provision of deemed dividend under section 2(22)(e) of the Act. Trade advance given as a consideration for purchase of a capital asset (i.e. property) as in the case before us which indirectly would benefit the company giving advance, such advance would not fall within the ambit of provisions of section 2(22)(e) of the Act. CBDT circular No. 19/2017 dated 12.06.2017 squarely applies to the case of the assessee. We do not find any substance in the appeal of the Revenue and uphold the order of the Ld. CIT(A). - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of additions made under section 2(22)(e) of the Income Tax Act.
2. Nature of the transaction between the assessee and M/s AMP Motors Pvt. Ltd.
3. Applicability of deemed dividend provisions.

Issue-Wise Detailed Analysis:

1. Deletion of Additions Made Under Section 2(22)(e):
The Revenue contended that the CIT(A) erred in deleting the additions made under section 2(22)(e) of the Income Tax Act, 1961, amounting to Rs. 1.5 crore. The AO argued that the assessee, a major shareholder in M/s AMP Motors Pvt. Ltd., received a loan of Rs. 1.5 crore, which should be treated as deemed dividend under section 2(22)(e). The AO held that the transaction was an attempt to divert the profits of the company in the guise of providing loans/advances to the assessee.

2. Nature of the Transaction:
The assessee submitted that the amount of Rs. 1.5 crore was an advance towards the sale of property under a Memorandum of Understanding (MOU) dated 05.10.2014. The assessee provided evidence, including the ledger account and the MOU, indicating that the transaction was for the purchase of property and not a loan or advance. The CIT(A) accepted the assessee's contention, noting that the amount was returned within the same financial year, resulting in a credit balance.

3. Applicability of Deemed Dividend Provisions:
The CIT(A) and the Tribunal examined whether the transaction could be considered a deemed dividend under section 2(22)(e). The Tribunal noted that the MOU specified the payment terms for the property sale, and the transaction was duly recorded in the company's ledger. It was held that the advance was a trade advance for a commercial transaction, not a loan or advance simpliciter. The Tribunal referenced the CBDT Circular No. 19/2017 and judicial precedents, including CIT vs. Raj Kumar (2009) 318 ITR 462 (Del), which state that trade advances cannot be treated as deemed dividends.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the transaction was a commercial trade advance and not a deemed dividend under section 2(22)(e). The appeal by the Revenue was dismissed, affirming that the provisions of section 2(22)(e) were not applicable in this case. The Tribunal emphasized that advances made for business purposes, such as the purchase of property, do not fall within the ambit of deemed dividend provisions. The order was pronounced on 29th August 2022.