2004 (10) TMI 274 - AT - Income Tax

Applicability of Section 2(22)(e) - Interest-free loan account advanced to its directors/shareholder -Determination of the appropriate assessee for the addition - HELD THAT - We find that the amount given to the director/shareholder towards the imprest amount in real sense was in fact not an amount given to the director towards the imprest but was a short-term loan because admittedly it is evident from the accounts that from 5th June 1997 to 3rd Feb. 1998 there were huge deposits in the imprest account of the shareholder/director and there were no withdrawals indicating the utilisation of those funds during the year and so this imprest account was a sham creation by the assessee though in fact this amount advanced by the assessee-company to its director/shareholder was a short-term loan. We carne to the conclusion that the creation of imprest account with the director/shareholder by the assessee was a loan transaction by giving short-term interest-free loan to its director/shareholder to evade the payment of the tax on accumulated profits. We have come to the conclusion that the AO has rightly held that the impugned amount deposited in the imprest account of the director/shareholder Shri Satish Behal by the assessee-company amounted to the grant of loan or advance by the company to its shareholder and treated the same as dividend as per s. 2(22)(e) of the Act. Accordingly the order of the CIT(A) is set aside and the finding of the AO is upheld. It is clear that as per the provisions of s. 2(22)(e) the impugned amount is only liable to tax as deemed dividend in the hands of the director/shareholder Shri Satish Behal of the assessee-company and not in the hands of the assessee-company. Since the second point is decided in favour of the assessee and against the Revenue so on that basis the impugned addition made in the hands of the assessee is liable to be deleted. Thus the order of the CIT(A) in this regard is upheld and the ground of appeal taken by the Revenue is allowed in part. In the result the appeal of the Revenue is partly allowed.

Summary

Issues Involved:
1. Applicability of Section 2(22)(e) of the IT Act, 1961.
2. Determination of the appropriate assessee for the addition.

Summary:

Issue 1: Applicability of Section 2(22)(e) of the IT Act, 1961

The Revenue appealed against the CIT(A)'s order deleting the addition of Rs. 6,29,922 made by the AO on account of an interest-free loan paid to a director, deemed as dividend u/s 2(22)(e) of the IT Act, 1961. The AO observed that the assessee-company maintained an imprest account with the director, which was not utilized during the year, and concluded that the amount advanced was in the nature of a short-term interest-free loan, falling within the ambit of dividend u/s 2(22)(e). The CIT(A) directed the deletion of the addition, stating that the cash kept as imprest with the director was a common practice and not a loan or advance to a shareholder.

The Tribunal examined whether the interest-free loan advanced to the director fell under s. 2(22)(e). It was noted that the assessee-company was one in which the public was not substantially interested, and the director held a substantial interest in the company. The Tribunal concluded that the amount given to the director was, in fact, a short-term loan rather than an imprest amount, as there were no withdrawals indicating utilization of funds during the year. The Tribunal held that the AO rightly treated the amount as a loan or advance, thus falling under the definition of dividend u/s 2(22)(e).

Issue 2: Determination of the Appropriate Assessee for the Addition

The Tribunal considered whether the addition should be made in the hands of the director or the assessee-company. It was concluded that the impugned amount is liable to tax as deemed dividend in the hands of the director/shareholder and not in the hands of the assessee-company. Consequently, the addition made in the hands of the assessee-company was deleted.

Conclusion:

The Tribunal upheld the AO's finding that the amount advanced to the director was a loan or advance and thus deemed dividend u/s 2(22)(e). However, it was determined that the addition should be made in the hands of the director, not the assessee-company. The appeal of the Revenue was partly allowed.