2023 (3) TMI 91 - AT - Income Tax

Deemed dividend u/s.2(22)(e) - payments made by M/s.IEIL is nothing but loans advances taken by shareholders having more than specified percentage of share capital, which attracts provisions of Sec.2(22)(e) - as submitted whatever amount paid by M/s.IEIL, has been subsequently re-paid by the assessee through his mother Smt.V.Padma account on very same day or within a short period i.e. less than one month without there being any outstanding balance in the name of the assessee in the books of M/s.IEIL - HELD THAT - It is very clear that company has paid to M/s.Chaitanya Builders on behalf of the assessee for purchase of property as a stop gap arrangement and the same has been subsequently re-paid by the assessee and his mother out of their source of income. The amount paid by M/s.IEIL to M/s.Chaitanya Builders on behalf of the assessee, cannot be considered as loan or advance which can be treated as deemed dividend u/s.2(22)(e) because, at no point of time, there is no outstanding loan or advance in the name of the assessee in the books of accounts of M/s.IEIL. At best transactions between the assessee and M/s.IEIL can be treated as a running current account between the shareholder and company, but said transaction cannot be considered as loan or advance within the meaning of provisions of Sec.2(22)(e) of the Act. In this case, facts are entirely different, because, at no point of time, M/s.IEIL has given any loan or advance to the assessee either by way of cash payment or through account transfer - the company has given some payments to the third party on behalf of the assessee, but said payments have been subsequently re-paid by the assessee or his family members either on the same day or within a short period i.e. less than one month without there being any outstanding balance in the books of accounts of the company. Therefore, transactions between the assessee and company cannot be treated as loan or advance within the meaning of provisions of Sec.2(22)(e) - AO as well as the Ld.CIT(A) are completely erred in invoking provisions of Sec.2(22)(e) of the Act, and making additions u/s.2(22)(e) of the Act. Hence, we direct the AO to delete the additions made towards deemed dividend u/s.2(22)(e) of the Act, in the hands of the assessee. Appeal filed by the assessee is allowed.

Summary

Issues Involved:

1. Application of Section 2(22)(e) of the Income Tax Act.
2. Source of investment for property purchase.
3. Repayment of funds advanced by the company.
4. Role of the company as a facilitator or lender.
5. Applicability of CBDT Circular No. 19/2017.

Issue-wise Detailed Analysis:

1. Application of Section 2(22)(e) of the Income Tax Act:

The core issue revolves around the applicability of Section 2(22)(e) of the Income Tax Act, which deals with deemed dividends. The Assessing Officer (AO) observed that the assessee, holding 29.17% shares in M/s. Integrated Enterprise India Ltd. (IEIL), received funds from IEIL for purchasing a property. The AO concluded that these funds should be treated as deemed dividends under Section 2(22)(e), even though the funds were repaid shortly thereafter. The AO relied on precedents, including the Supreme Court's decision in P. Sarada (229 ITR 444), which held that repayment does not alter the fact of receipt of deemed dividends.

2. Source of Investment for Property Purchase:

The assessee, along with his mother, purchased a property for Rs. 7,19,44,048/-. The AO questioned the source of the investment, noting that the assessee's mother paid Rs. 2.75 crores from the sale of shares, while IEIL paid Rs. 3,10,22,424/- directly to the builder. The AO rejected the assessee's explanation that the funds from IEIL were repaid promptly, treating the transaction as a loan or advance.

3. Repayment of Funds Advanced by the Company:

The assessee argued that the funds advanced by IEIL were repaid by his mother and other family members from their bank accounts within a short period, often on the same day or within a month. The Tribunal found that these repayments were made without leaving any outstanding balance in the company's books, indicating that the transactions were not loans or advances but rather temporary arrangements.

4. Role of the Company as a Facilitator or Lender:

The assessee contended that IEIL acted merely as a facilitator to ensure timely payment to the builder. However, the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] dismissed this argument, citing a lack of evidence to support the claim that IEIL was an escrow agent. The Tribunal, however, accepted that the company's role was limited to facilitating the transaction, given the prompt repayment by the assessee's family members.

5. Applicability of CBDT Circular No. 19/2017:

The assessee also argued that the transaction should be considered a trade advance, which would not fall under Section 2(22)(e) as per CBDT Circular No. 19/2017. The CIT(A) dismissed this argument, stating that the assessee failed to prove the transaction met the criteria for a trade advance. The Tribunal, however, found that the transactions were more akin to a running current account and not loans or advances, thus not attracting Section 2(22)(e).

Conclusion:

The Tribunal concluded that the funds advanced by IEIL, repaid promptly by the assessee's family members, did not constitute loans or advances under Section 2(22)(e). The Tribunal directed the AO to delete the additions made towards deemed dividends, allowing the assessee's appeal. The order was pronounced on February 22, 2023, in Chennai.