2023 (6) TMI 813 - AT - Income Tax

Deemed dividend u/s. 2(22)(e) - nature of receipt - business transactions or loan - assessee company has received amount from another company having common and substantial shareholding - shareholding in excess of 20% in the two companies - HELD THAT - As there have been various transactions of receipt and payment between the assessee and Saga Developers P. Ltd. for the transfer of fund as and when required for the purpose of business, the money that was advanced was in the nature of trade advance. As relying on case of Raj Kumar 2009 (5) TMI 17 - DELHI HIGH COURT we are of the view that the amount received by the assessee cannot be termed as deemed dividend within the meaning of s. 2(22)(e) of the Act and therefore its addition cannot be made. Thus no addition u/s 2(22)(e) of the Act of the Act could be made in the present case. Decided in favour of assessee.

Summary

Issues involved:
The judgment involves the interpretation of Section 2(22)(e) of the Income Tax Act in relation to the treatment of advances received by the assessee from another company, the applicability of deemed dividend provisions, and whether the transactions between the companies fall within the scope of the said provision.

Interpretation of Section 2(22)(e) - Addition of Advances:
The assessee, engaged in real estate development, received advances including Rs.8,65,000 from another company. The Assessing Officer (AO) treated this amount as deemed dividend under Section 2(22)(e) of the Act due to common shareholding between the companies. The assessee contended that the advances were received in the normal course of business for land acquisition and other purposes, and not for shareholder benefit. The AO's decision was upheld by the Commissioner of Income Tax (Appeals) (CIT(A)). The Tribunal, however, noted that the transactions were in the nature of trade advances, not falling under the ambit of Section 2(22)(e). Citing precedents, the Tribunal held that the advances did not qualify as deemed dividend and directed deletion of the addition made by the AO.

Precedents and Legal Interpretation:
The Tribunal referred to legal precedents to support its decision. It cited the H'ble Bombay High Court case of PCIT vs. Dina Shah, emphasizing that common shareholding alone does not trigger Section 2(22)(e). Additionally, it relied on the H'ble Delhi High Court case of CIT vs. Raj Kumar, which outlined the criteria for a payment to be considered as 'dividend' under the provision. The Tribunal concluded that the advances received by the assessee were in the nature of trade advances and did not meet the conditions for deemed dividend, as per the interpretation provided in the legal precedents.

Decision and Outcome:
The Tribunal allowed the appeal of the assessee, partly, by directing the deletion of the addition made by the AO under Section 2(22)(e) of the Act. It noted that similar issues had been resolved in favor of the assessee's group company in an earlier case. Based on the nature of the transactions and the legal interpretation of the provision, the Tribunal concluded that the advances did not constitute deemed dividend. Therefore, the addition made by the AO and upheld by the CIT(A) was deemed unjustified, leading to the partial allowance of the assessee's appeal.