2000 (11) TMI 291 - AT - Income Tax

Summary

Issues Involved:
1. Whether the receipt of Rs. 26,00,000 as share application money from M/s. Hoovar Services Pvt. Ltd. (HSPL) should be treated as deemed dividend u/s 2(22)(e) of the Income-tax Act, 1961.
2. Whether the amount received as share application money can be considered as a loan or advance.
3. Whether the advances to the extent of accumulated profits could be treated as loans within the meaning of section 2(22)(e) of the Act.

Summary:

Issue 1: Treatment of Rs. 26,00,000 as Deemed Dividend u/s 2(22)(e)
The assessee-company received Rs. 26,00,000 from HSPL as share application money. The Assessing Officer treated this amount as a loan and considered it as deemed dividend u/s 2(22)(e) of the Income-tax Act, 1961. The Commissioner of Income-tax (Appeals) confirmed this view. However, the Tribunal found that the amount was received as share application money and was reflected as such in the balance sheet. The shares were allotted subsequently, and the amount was adjusted. The Tribunal held that the amount could not be construed as a loan or advance and thus fell beyond the purview of section 2(22)(e).

Issue 2: Nature of Share Application Money
The Tribunal examined whether the share application money could be considered a loan or advance. It was argued that the amount paid was not in the nature of a loan or deposit and was not repayable after a notice or period. The Tribunal noted that the balance sheet was prepared in accordance with the Companies Act, 1956, and was audited by a Chartered Accountant. There was no indication that the amount was anything other than share application money. The Tribunal concluded that the share application money does not fall in the category of loan or deposit and hence cannot be treated as deemed dividend.

Issue 3: Advances to the Extent of Accumulated Profits
Alternatively, it was argued that only advances to the extent of accumulated profits could be treated as loans within the meaning of section 2(22)(e). The accumulated profits amounted to Rs. 4,65,168. The Tribunal held that since the main issue was decided in favor of the assessee, this ground became infructuous.

Conclusion:
The Tribunal directed the Assessing Officer to delete the addition of Rs. 26,00,000, concluding that the receipt was in the nature of share application money and could not be construed as a loan or advance. The appeal of the assessee was allowed.