2015 (3) TMI 767 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - CIT (A) held that SISICOL had advanced sums to a concern (the firm) in which the assessee had a substantial interest. and taking note that Section 2(22)(e) as applicable after its amendment w.e.f. from 31-05-1987, for AY year 1988-89, included concerns in which shareholder is a member or partner, the CIT (A) upheld the addition made - Held that - Granted, the assessee is a shareholder of SISICOL; he is also a partner of the firm. However, neither did SISICOL give him the money nor did it advance the amount to the firm. The firm has an independent existence and it had over ₹ 60 crores in its account. That a significant part of it, i.e., 44% or over ₹ 26 crores was payable to SISICOL could not have blinded the revenue to the fact that the other amount was available and given as a loan to the assessee. In these circumstances at least, it could not have been said that the loan to the assessee and the loan (in the form of credits in favour of SISICOL) were really one transaction. It is also a matter of record that the firm had over 290 branches or units and collection by it exceeded- on an average ₹ 10 crores per month. Therefore, it could not be legitimately held that amount retained by the firm was for the assessee s benefit. The amount of ₹ 1,84,19,305 was not deemed dividend in the hands of the assessee under the provisions of Section 2 (22) (e) of the Income Tax Act, 1961 - Decided in favour of assessee. Revenue s application for rectification of the majority opinion, in view of the third member not noticing or wrongly appreciating important features has been challenged - Held that - The impugned order does not suffer from any infirmity calling for interference. As to whether there was a mistake apparent from the face of the record, in the context of this case, the ITAT felt that the revenue could not establish its case, since the basic contention about applicability of Section 2 (22) (e) was not accepted. - Decided against revenue.

Issues Involved:
1. Whether the amount of Rs. 1,84,19,305 was deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
2. The applicability of Section 2(22)(e) to the facts of the case.
3. The interpretation of "loan" and "advance" under Section 2(22)(e).
4. The concept of deemed dividend and its implications.
5. The role of accumulated profits in determining deemed dividend.
6. The concept of lifting the corporate veil to determine the true nature of transactions.
7. The relevance of the judicial and accountant members' differing views.
8. The correctness of the ITAT's majority opinion.
9. The validity of the revenue's application for rectification of the majority opinion.

Detailed Analysis:

1. Whether the amount of Rs. 1,84,19,305 was deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961:
The primary issue was whether the amount advanced to the assessee by the firm, which had collected funds on behalf of SISICOL, could be considered a deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) initially held that the amount was a loan from SISICOL to the assessee through the firm, acting as a conduit to bypass the application of Section 2(22)(e). This amount was treated as "deemed dividend" and added to the assessee's income.

2. The applicability of Section 2(22)(e) to the facts of the case:
The CIT (A) upheld the AO's decision, noting that the sums were advanced to a concern (the firm) in which the assessee had a substantial interest. However, the ITAT had differing views. The Judicial Member held that Section 2(22)(e) was inapplicable, while the Administrative Member held the contrary. The third member, concurring with the Judicial Member, concluded that the amount was not a deemed dividend.

3. The interpretation of "loan" and "advance" under Section 2(22)(e):
The Judicial Member distinguished between a trade debt and a loan or advance. It was held that the amounts collected by the firm on behalf of SISICOL were trade debts and not loans or advances. The dictionary meaning and the prerequisites for a loan were considered, emphasizing that not all debts are loans. The Judicial Member also noted that the firm's retention of funds was in the ordinary course of business and not for the benefit of the assessee.

4. The concept of deemed dividend and its implications:
Section 2(22)(e) deems certain payments by a company to its shareholders or concerns in which shareholders have substantial interest as dividends. The provision aims to prevent the avoidance of tax on accumulated profits by advancing loans to shareholders. The revenue argued that the firm acted as a conduit to funnel SISICOL's funds to the assessee, thereby invoking the deemed dividend provision.

5. The role of accumulated profits in determining deemed dividend:
The Accountant Member highlighted that SISICOL had accumulated profits and that the firm's loan to the assessee had its roots in the credit balance of SISICOL. However, the Judicial Member and the third member found no direct nexus between the firm's loan to the assessee and SISICOL's accumulated profits. The firm had sufficient funds from other sources, and the loan to the assessee was not part of the credit balances of SISICOL.

6. The concept of lifting the corporate veil to determine the true nature of transactions:
The revenue argued for lifting the corporate veil to reveal the true nature of the transactions, suggesting that the firm was a facade to avoid tax. However, the Judicial Member and the third member found no evidence to support this claim. The firm's retention of funds was in the ordinary course of business, and there was no material to prove that SISICOL's funds were used to advance the loan to the assessee.

7. The relevance of the judicial and accountant members' differing views:
The Judicial Member and the Accountant Member had divergent views on the applicability of Section 2(22)(e). The Judicial Member focused on the factual circumstances and the absence of a direct nexus between the firm's loan and SISICOL's funds. The Accountant Member emphasized the control the assessee had over SISICOL and the firm, suggesting that the transactions were not at arm's length. The third member's concurrence with the Judicial Member led to the majority opinion favoring the assessee.

8. The correctness of the ITAT's majority opinion:
The High Court upheld the ITAT's majority opinion, agreeing that the transactions did not fall under the purview of Section 2(22)(e). The court emphasized the need for the revenue to establish a direct link between the firm's loan to the assessee and SISICOL's accumulated profits. The court found no material evidence to support the revenue's claim that the firm was a conduit for SISICOL's funds.

9. The validity of the revenue's application for rectification of the majority opinion:
The revenue's application for rectification of the majority opinion was dismissed. The ITAT found no mistake apparent from the record and held that the revenue's contentions were without substance. The third member's findings were based on the evidence on record, and there was no basis for further inquiries or investigations.

Conclusion:
The High Court dismissed the revenue's appeal and upheld the ITAT's majority opinion, concluding that the amount advanced to the assessee by the firm was not a deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The court emphasized the need for concrete evidence to establish the nexus between the firm's loan and SISICOL's accumulated profits and found no material to support the revenue's claims.

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