2014 (10) TMI 41 - HC - Income Tax

Deemed dividend u/s 2(22)(e) Security deposits received from sister concern - colourable device adopted to avoid the incidence of tax or not - The Tribunal rightly held that the amount given by the sister concern to the assessee was not a loan or an advance, but was a security deposit - the amount given by the sister concern to the assessee was given in the course of business and was not given to a shareholder and, the provision of Section 2(22)(e) was not applicable - it has the effect of bringing to tax as dividend where any payment of any sum is made by way of advance or loan to a shareholder in which a shareholder holds a substantial interest or any payment is made on behalf of a shareholder or any payment is made for the individual benefit of a shareholder - the assessee firm was having a business dealing with its sister concern, which was apparent from the books of account of the assessee, which showed various job works being carried out by the sister concern. The borrowing is primarily for the benefit of the borrower although the person, who lends the money, may also stand to gain by earning interest on the amount lent - Another distinction is the obligation to return the money so received - In the case of a deposit, the deposit becomes payable when a demand is made and, in the case of the loan , the obligation to repay the amount arises immediately on receipt of the loan - the deposit made by the sister concern was a business transaction arising in the normal course of business between the two concerns thus, the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Interpretation of Section 2(22)(e) of the Income Tax Act regarding deemed dividend.
2. Determination of whether a security deposit received by a firm from its sister concern constitutes a loan or an advance.

Issue 1: Interpretation of Section 2(22)(e) of the Income Tax Act regarding deemed dividend:
The case involved an appeal by the Department against the Tribunal's order for the Assessment Year 2006-07. The dispute arose from a security deposit of Rs. 80 lacs received by the assessee from its sister concern. The assessing officer treated this amount as a deemed dividend under Section 2(22)(e) of the Act. However, the Tribunal found that the transaction was a security deposit and not a loan or an advance. The Tribunal's decision was based on the fact that the amount was given in the course of business and not to a shareholder, thus the provision of Section 2(22)(e) did not apply. The Tribunal's conclusion was supported by evidence of commercial transactions between the parties and the purpose of the deposit.

Issue 2: Determination of whether a security deposit received by a firm from its sister concern constitutes a loan or an advance:
The key question was whether the Rs. 80 lacs received by the assessee was a deemed dividend under Section 2(22)(e) of the Act. The provision defines "dividend" to include any payment by a company as an advance or loan to a shareholder or a concern in which the shareholder has a substantial interest. The Tribunal's analysis focused on whether the transaction constituted a loan or an advance. It was found that the deposit was part of a business dealing between the two concerns, with the sister concern providing the deposit for business expediency. The Tribunal concluded that the amount was a security deposit, not a loan or an advance, based on the purpose and nature of the transaction. The Tribunal's decision was upheld, emphasizing the distinction between a loan and a deposit, with the latter being for the benefit of the depositor and arising in the normal course of business.

In summary, the High Court dismissed the Department's appeal, affirming the Tribunal's decision that the Rs. 80 lacs received by the assessee was a security deposit and not a deemed dividend under Section 2(22)(e) of the Income Tax Act. The Court found no manifest error of law in the Tribunal's decision, emphasizing the factual basis and evidence supporting the characterization of the transaction as a business-related security deposit.