2023 (2) TMI 271 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - advance amount given to the Directors - whether business advances made by the Company cannot be held to be deemed dividend? - HELD THAT - A portion of the agreement between M/s. DTDC and its Directors has been acted upon and an area of 963 sq. ft. in the ground floor has been sold in favour of M/s. DTDC. It is the specific contention of the assessee before this Court that the remaining amount out of Rs.39.60 Lakhs has also been beneficial to the Company because, the first floor and upper floors have been leased out on subsidized rental value. The impugned order by the ITAT has emanated out of the Assessment order dated 28.03.2003. In the said Assessment order, the sum of Rs.6.60 Lakhs has been treated as dividend paid to the share holder/Director. In our considered view, the AO CIT(A), as also the ITAT have missed a relevant point that the ground floor of the premises has been purchased by M/s. DTDC. If the consideration amount towards the ground floor is considered, the entire sum of Rs.6.60 Lakhs cannot be treated as dividend. Therefore, the matter requires reconsideration in the hands of ITAT which is the last fact finding authority. We also notice that ITAT has not recorded any reasons on this aspect. Appellant submitted that any finding recorded by this Court with regard to the construction value of Rs.8.87 Lakhs may influence the ITAT. We clarify that having noticed the sale of ground floor, in our view, at least the consideration amount of Rs.8.87 Lakhs ought to have been considered as a part of advance sale consideration. Therefore, the entire matter requires re-consideration. We make it clear and direct that the ITAT shall pass fresh orders wholly uninfluenced by any observations made by this Court. The matter is remitted to the ITAT to re-examine the matter and pass fresh orders in accordance with law.

Summary

Issues:
1. Whether the Appellate Tribunal was justified in dismissing the appeals without considering all grounds and documents for business advances?
2. Whether the order holding deemed dividend based on accumulated profits is arbitrary and unreasonable?

Analysis:

Issue 1:
The case involved an appeal challenging the Income Tax Appellate Tribunal's order regarding the treatment of business advances made by a company to its directors. The assessee, a director with the company, received an advance for the purchase of property for the company's benefit. The dispute arose when the Assessing Officer treated the advance as deemed dividend under Section 2(22)(e) of the Income Tax Act. The ITAT initially set aside the order but later dismissed the appeal. The appellant argued that the advance was used for construction and lease purposes beneficial to the company, hence not deemed dividend. The court found that the entire advance amount could not be considered as dividend, as a portion was for the purchase of property. The ITAT was directed to reconsider the matter without influence from the court's observations.

Issue 2:
The second issue revolved around the justification of deeming the advance as dividend solely based on accumulated profits. The appellant contended that the advance was utilized for construction and lease purposes, not for personal use, thus not meeting the criteria for deemed dividend. The court emphasized that the consideration amount for the property purchase should be factored in, and the entire matter required re-evaluation by the ITAT. The court clarified that the ITAT should make fresh, unbiased decisions without being swayed by the court's observations, ultimately setting aside the ITAT's order and remitting the case for reconsideration.

In conclusion, the High Court allowed the appeal, set aside the ITAT's order, and remitted the case for fresh consideration, emphasizing the importance of factoring in the property purchase consideration and directing the ITAT to make decisions independently.