2023 (3) TMI 1102 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - assessee is a common shareholder having share in nature at 12.3% in one company and 50% in other - contention of the assessee that the transfer of fund was from and to the sister concerns on need basis for a few days and therefore, receipt and payment of the amount is only for short while depending upon the exigency of the business. HELD THAT - The transaction interest between the sister concerns and the assessee cannot partake of the nature of either deposit or loan though interest might have been paid on the same. It only represents giving funds from one concern to another depending upon the exigencies of the business. The decision of Ankitech 2011 (5) TMI 325 - DELHI HIGH COURT relied upon by the Revenue that the assessee entered into normal business transaction as a part of day to day business activity and is a loan / dividend income. The same will not be applicable in present assessee s case. Therefore, the addition made by the AO and the confirmation made by the CIT(A) u/s 2(22)(e) cannot be termed as deemed dividend income and hence is deleted. Appeal of the assessee is allowed.

Summary

Issues involved:
The appeal challenges the order confirming deemed dividend addition under Section 2(22)(e) of the Income Tax Act, 1961 in the hands of the shareholder. The main issues raised are the correctness and legality of the addition, the amount of the addition, and the applicability of the law to the case.

Deemed Dividend Addition:
The Assessing Officer observed that a loan of Rs. 16,00,000/- was given by M/s. Monachem Additives Pvt. Ltd. to M/s. Addpol Chemspecialities Pvt. Ltd., where the appellant held a shareholding. Consequently, the provisions of Section 2(22)(e) of the Act were deemed applicable, leading to the addition of Rs. 16,00,000/- as deemed dividend income in the hands of the appellant.

Appellate Proceedings:
The appellant, being dissatisfied with the assessment order, appealed before the CIT(A), who partially allowed the appeal.

Arguments Presented:
The appellant, a Director in both companies involved, explained that the fund transfers between sister concerns were on a need basis for a short duration and not as fixed deposits or loans. Various legal precedents were cited to support the contention that the transactions were part of normal business activities and not deemed dividends.

Decision and Rationale:
After considering the arguments, the Tribunal held that the fund transfers were for business exigencies and did not qualify as deemed dividend income under Section 2(22)(e). The addition made by the Assessing Officer and confirmed by the CIT(A) was deemed incorrect, leading to the deletion of the addition. The appeal was allowed in favor of the assessee.

Conclusion:
The Tribunal's decision on the deemed dividend addition was in favor of the appellant, emphasizing the business nature of the transactions and rejecting the application of Section 2(22)(e) to the case. The appeal was allowed, and the addition was deleted.