2015 (9) TMI 657 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - CIT(A) deleted the addition - Held that - We agree with the findings of the Commissioner of Income-tax (Appeals) that the payments made by the assessee on behalf of the company, for its business purposes and the reimbursement thereof to the assessee by the said company cannot be treated as deemed dividend under section 2(22)(e) of the Act. However, it is seen from the paper book filed by the assessee that some of the payments using his credit card were also towards his personal expenditure. Such payments for personal expenditure, if reimbursed by the company, have to be treated as loans or advances under section 2(22)(e) of the Act. Therefore, we deem it fit and proper to remand the issue to the file of the Assessing Officer only for verification of the personal expenditure reimbursed by the company to the assessee and treat only such expenditure out of the accumulated profits of the assessee as deemed dividend under section 2(22)(e) of the Act. - Decided partly in favour of revenue for statistical purposes.

Summary

Issues:
- Interpretation of section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividend in the hands of the assessee.
- Treatment of advances received from a company by the assessee for business purposes.
- Application of the judgment in the case of Bagmane Constructions Pvt. Ltd. by the Karnataka High Court.

Detailed Analysis:

1. Interpretation of section 2(22)(e):
The appeal before the Appellate Tribunal ITAT Bangalore concerned the deletion of an addition made by the Assessing Officer under section 2(22)(e) of the Income-tax Act, 1961. The issue was whether advances received by the assessee from a company, of which he was a director and shareholder, should be treated as deemed dividend. The Tribunal analyzed the provisions of section 2(22)(e) in light of the facts of the case to determine the applicability of the section.

2. Treatment of advances for business purposes:
The Assessing Officer contended that the advances received by the assessee from the company should be treated as deemed dividend. However, the Commissioner of Income-tax (Appeals) held that the transactions between the assessee and the company were in the nature of a running account for business purposes. The Tribunal noted that the payments made by the assessee were for the business needs of the company, which were later reimbursed to him. This led to the conclusion that such payments did not fall under the purview of section 2(22)(e) as they were not deemed as loans or advances.

3. Application of the Bagmane Constructions Pvt. Ltd. judgment:
The Tribunal referred to the judgment of the Karnataka High Court in the case of Bagmane Constructions Pvt. Ltd. for guidance. The High Court's judgment emphasized that the provisions of section 2(22)(e) would apply only to gratuitous loans or advances given by a company to shareholders. It clarified that if the loan or advance is given as a consideration beneficial to the company, such transactions would not fall under section 2(22)(e). The Tribunal applied this interpretation to the present case and found that the payments made by the assessee were for business purposes and not for personal benefit.

In conclusion, the Tribunal partially allowed the Revenue's appeal for statistical purposes. It upheld the Commissioner of Income-tax (Appeals)'s decision that the payments made by the assessee for business purposes and reimbursed by the company did not constitute deemed dividend under section 2(22)(e). However, it remanded the issue to the Assessing Officer for verification of any personal expenditures reimbursed by the company to the assessee, which would then be treated as deemed dividend under the Act.