2014 (10) TMI 749 - HC - Income Tax

Deemed dividend u/s 2(22)(e) Amount advances to shareholders - Whether lending of the amount to the shareholder is in the ordinary course of its business and that the activity of lending of money constitutes substantial part of the business of the company are based on material on record or not Held that - The assessee-company owed certain sum during the assessment year and it had a sum of ₹ 1,12,24,745 to the credit of the subsidiary company which is much in excess of the amount of ₹ 27,59,932/- sought to be brought to tax under deemed dividend - the subsidiary company was advancing money to the assessee company for the purpose of purchase of raw material and to make payments to M/s. Hindalco Limited to meet their business/trading liabilities - the Tribunal rightly recorded that there is no element of deemed dividend and the amount of undistributed dividend of the subsidiary company cannot be said to be deemed dividend of the assessee company - there was a running account between the parties and interest was charged - Apart from that, a sum of ₹ 1,12,24,745/- was standing to the credit of the subsidiary company thus, there was no reason to interfere in the order of the Tribunal Decided against revenue.

Summary

Issues:
1. Whether the amount advanced to the shareholder can be considered as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961?
2. Whether lending of the amount to the shareholder constitutes a substantial part of the business of the company?

Analysis:

Issue 1: The appeal concerns the classification of an amount advanced to a shareholder as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Tribunal found mutual transactions between the parties in the normal course of business, with the subsidiary company having lending money as one of its business objectives. The Tribunal set aside the assessing officer's order based on these findings. The department argued that there was only one transaction in the year and lending money was not the subsidiary company's business. However, the Tribunal's decision was supported by the Supreme Court judgment in M. Janardhan Rao v. Joint Commissioner of Income Tax 273 ITR 50. The Tribunal's analysis of the statutory provisions and company documents favored the assessee's position, leading to the deletion of the addition as deemed dividend.

Issue 2: The second issue revolves around whether lending the amount to the shareholder constitutes a substantial part of the company's business. The Tribunal's findings indicated a significant credit balance owed by the assessee company to the subsidiary company, which exceeded the amount sought to be taxed as deemed dividend. The Tribunal observed that the subsidiary company advanced money for business purposes like purchasing raw materials and meeting trading liabilities. In contrast to the Walchand case, where isolated transactions were involved, the present case showed a running account with interest charged and a substantial credit balance. The Court upheld the Tribunal's decision, stating that there was no reason to interfere and ruled in favor of the assessee, dismissing the appeal with no costs.

In conclusion, the judgment delves into the intricacies of the Income Tax Act, analyzing the nature of transactions between companies and shareholders to determine the applicability of deemed dividend provisions. The Court's detailed examination of the facts and legal precedents led to a decision favoring the assessee, highlighting the importance of business practices and statutory compliance in tax assessments.