2008 (4) TMI 428 - HC - Income Tax

Deemed dividend - business transactions - assessee is engaged in the business of a travel agency - assessee was involved in the booking of resorts for the customers of two companies and entered into normal business transactions as a part of its day-to-day business activities - Assessing Officer came to the conclusion that because of the shareholding pattern, financial transactions would fall in the category of deemed dividend defined under section 2(22)(e) - Being a travel agency, it had regular business dealings with the concerns dealing with holiday resorts and the tourism industry. Therefore, since the transactions were normal business transactions, which were carried out during the course of the relevant previous year, they cannot be described as advances or loans, which form a distinct category of financial transactions. Under the circumstances, the Tribunal rightly came to the conclusion that since these transactions did not represent loans or advances, the provisions of section 2(22)(e) of the Act were not at all applicable. Hence not taxable as deemed dividend

Summary

Issues:
Interpretation of section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividend in financial transactions between the assessee and other companies.

Analysis:
The judgment pertains to an appeal by the Revenue against an order of the Income-tax Appellate Tribunal concerning financial transactions between the assessee and two companies during the assessment year 1998-99. The Revenue contended that due to the shareholding pattern, these transactions should be classified as "deemed dividend" under section 2(22)(e) of the Income-tax Act, 1961. The Commissioner of Income-tax (Appeals) upheld this view, leading to the assessee's appeal before the Tribunal.

The Tribunal, upon review, found that the transactions were regular business dealings between the assessee, a travel agency, and the two companies in the tourism industry. It noted that there was no evidence to suggest that the amounts in question were advances or loans. Given the nature of the transactions and the business relationship, the Tribunal concluded that they did not constitute loans or advances falling under the purview of section 2(22)(e) of the Act.

The High Court, in its analysis, concurred with the Tribunal's findings. It emphasized that the assessee's activities were part of its routine business operations, involving bookings for the companies' customers in the tourism sector. The Court agreed that the financial transactions were not akin to loans or advances received by the assessee from the companies. Therefore, the provisions of section 2(22)(e) were deemed inapplicable in this context.

Ultimately, the High Court dismissed the appeal, stating that the Tribunal's decision was legally sound and free from error. It affirmed that the transactions did not meet the criteria for deemed dividend under the Act, and no substantial question of law arose from the case.