2006 (4) TMI 190 - AT - Income Tax

Interpretation Of Statute - Deemed dividend u/s 2(22)(e) - advanced money from sister-concern - HELD THAT - Sub-cl. (e) of s. 2(22) shows that for the purpose of the Act any payment made by a company of any sum of money by way of advance or loan to its shareholder is deemed to be a dividend since the Act has not provided for any other definition of the word dividend except the words enumerated in s. 2(22) it should be construed that this definition would be applicable to all provisions which contains the term dividend in the Act. Distribution can be physical or constructive. The expression accumulated profits occurring in sub-cl. (e) of s. 2(6A) of 1922 Act corresponding to s. 2(22)(e) of 1961 Act was or for the manner in any other clause means profit in the commercial sense and not assessable or taxable profits liable to tax as income under the Act. Sec. 2(22)(e) creates a fiction bringing in amounts paid otherwise than as dividend into the net of dividend. Sec. 2(22)(e) must therefore be given a strict interpretation. The learned CIT(A) concluded that the AO stretched the definition of s. 2(22)(e) to include even legitimate transactions carried out in the ordinary course of business where the intention is neither to give a loan or advance or to confer some individual benefit on the shareholders. The important words in the section are loan or advance and for the individual benefit of such shareholders. The loan is something different from debt. For a loan there must be a lender borrower as well as a contract/agreement between the parties for the return of the loan amount. Every sale of goods on credit does not amount to a transaction of loan. One important point pertinent to mention here is that the learned AO has never doubted the sequence of market service exhibition at Taj Palace and execution of orders in pursuance of the advance. We agree with the conclusion of the learned CIT(A) that it would have been a different story if M/s Ariel Exports (P) Ltd. would have made the payment by way of loan or advance to the partners of the assessee not for the purpose of business but for their individual benefit. No specific defect has been pointed out in the conclusion of the learned CIT(A). The same is upheld. In the result the appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition on account of deemed dividend under Section 2(22)(e) of the IT Act, 1961.
2. Whether the amount advanced by M/s Ariel Exports (P) Ltd. to the assessee-firm constitutes deemed dividend.

Detailed Analysis:

1. Deletion of addition on account of deemed dividend under Section 2(22)(e) of the IT Act, 1961:

The Revenue challenged the order of the CIT(A) dated 9th July 2004, which deleted the addition of Rs. 17,09,299 made by the AO on account of deemed dividend under Section 2(22)(e) of the IT Act, 1961. The AO had added Rs. 17,09,299 to the income of the assessee, considering it as deemed dividend from M/s Ariel Exports (P) Ltd. The CIT(A) deleted this addition, leading to the Revenue's appeal.

2. Whether the amount advanced by M/s Ariel Exports (P) Ltd. to the assessee-firm constitutes deemed dividend:

The assessee showed an income of Rs. 9,99,126 in its return filed on 24th Oct. 2001, declaring a deduction of Rs. 82,300 under Section 80HHC. M/s Ariel Exports (P) Ltd. advanced money to the assessee, resulting in a credit balance in the account of M/s Ariel Exports (P) Ltd. in the books of the assessee-firm for a substantial period. The AO considered the amount of Rs. 19,48,000 advanced by M/s Ariel Exports (P) Ltd. as for the benefit of the assessee-firm, where two partners held more than 10% holdings in the said company. Consequently, the AO issued a show-cause notice to the assessee on 20th Jan. 2004, questioning why the payment of Rs. 17,09,299 should not be considered for addition under Section 2(22)(e) of the Act.

During the hearing, the Revenue argued that M/s Ariel Exports (P) Ltd. is a sister-concern of the assessee and that the dividend includes "any payment by a company, not being a company in which the public are substantially interested or any sum made after 31st of May, 1997 by way of advance or loan to a shareholder being a person who is the beneficial owner of shares." The Revenue supported the AO's order, emphasizing the conditions laid down under Section 2(22)(e) of the Act.

On the other hand, the assessee's counsel argued that no discrepancy was found in the books of account of the assessee and that sales of the assessee-firm were duly accepted. The counsel contended that the advances were made for legitimate business transactions, including marketing and exhibition expenses, and not for the individual benefit of the shareholders. The counsel supported the CIT(A)'s order.

The Tribunal analyzed Section 2(22)(e) of the Act, which defines deemed dividend and concluded that the amount advanced by M/s Ariel Exports (P) Ltd. was not for the individual benefit of the shareholders but for business purposes. The Tribunal noted that the exhibition was held, and the advances were used for business activities such as marketing new products and appointing dealers. The Tribunal also considered various judicial pronouncements, including the Hon'ble Bombay High Court's decision in Sadhna Textile Mills (P) Ltd. vs. CIT and the Hon'ble Delhi High Court's decision in R. Dalmia vs. CIT, which supported the assessee's case.

The Tribunal upheld the CIT(A)'s conclusion that the AO stretched the definition of Section 2(22)(e) to include legitimate business transactions and that the amount in question was given for business expediencies, not as a loan or advance for individual benefit. The Tribunal found no specific defect in the CIT(A)'s conclusion and dismissed the Revenue's appeal.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that deleted the addition of Rs. 17,09,299 on account of deemed dividend under Section 2(22)(e) of the IT Act, 1961. The Tribunal concluded that the advances made by M/s Ariel Exports (P) Ltd. to the assessee-firm were for legitimate business purposes and not for the individual benefit of the shareholders.