2016 (5) TMI 1095 - AT - Income Tax

Revision u/s 263 - enhancement of income in the form of deemed dividend u/s 2(22)(e) - Held that - The assessee is holding more than 10% of the voting power in M/s. Ganesh Wheat Product (P)Ltd. It is not in dispute that the said company is having accumulated profits of ₹ 81,57,815/-. We find that the assessee had frequently drawn moneys from the said company and has also repaid moneys to the said company on several dates. Both the transactions are interest free and we also find that on several occasions that the balance outstanding is in favour of the assessee and also in favour of the said company. As relying on Pradip Kumar Malhotra vs CIT reported in(2011 (8) TMI 16 - CALCUTTA HIGH COURT) we find that the transactions in the form of current account should not be construed as loan or advances within the meaning of section 2(22)(e) of the Act. Accordingly grounds raised by the asessee are allowed and order of the ld.CIT u/s 263 of the Act is quashed. - Decided in favour of assessee

Summary

Issues:

1. Whether the CIT was justified in invoking revisionary proceedings u/s 263 of the Income Tax Act for enhancing income in the form of deemed dividend.

Analysis:

Issue 1: Enhancement of income in the form of deemed dividend

The appeal arose from the CIT's order under section 263 of the Income Tax Act, concerning the enhancement of income in the form of deemed dividend u/s 2(22)(e) of the Act. The assessee, an individual, earned income from various sources, including advances received from M/s. Ganesh Wheat Products Pvt. Ltd. The CIT initiated proceedings under section 263 to enhance the amount of deemed dividend by ?27,68,646, which the assessee contested. The assessee argued that a previous tribunal decision had already ruled in their favor regarding the addition made towards deemed dividend. The CIT, however, supported the order.

Upon review, the Tribunal found that the assessee held more than 10% voting power in M/s. Ganesh Wheat Product (P) Ltd., which had accumulated profits. The transactions between the assessee and the company were interest-free, resembling a running or current account. Referring to a previous tribunal decision and the Calcutta High Court case of Pradip Kumar Malhotra v. CIT, the Tribunal concluded that the transactions were mutual in nature and did not qualify as deemed dividend under section 2(22)(e) of the Act. The Tribunal emphasized that the provision was intended to tax distributions of profits disguised as loans, benefiting only the shareholder, not both parties. As the transactions between the assessee and the company were commercial in nature and mutually beneficial, the Tribunal allowed the appeal and quashed the CIT's order under section 263.

In conclusion, the Tribunal ruled in favor of the assessee, holding that the transactions in the form of a current account did not constitute deemed dividend under section 2(22)(e) of the Act. The Tribunal's decision was based on the mutual nature of the transactions and the legal interpretation provided by the Calcutta High Court, resulting in the quashing of the CIT's order under section 263.