2016 (5) TMI 1269 - HC - Income Tax

Deemed dividend under Section 2(22)(e) - Held that - As held in Creative Dyeing and Printing P. Ltd. (2009 (9) TMI 43 - DELHI HIGH COURT ), it is only if the advance paid is for the benefit of the shareholder/director, can it be said to be deemed dividend within the meaning of Section 2(22)(e) of the Act. The Tribunal has rightly held that the subject transaction is not for the benefit of the assessee, but is for the benefit of the company; and it is a transaction in the ordinary course of business. The conclusion of the Tribunal, that such transactions would not fall within the definition of deemed dividend under Section 2(22)(e) of the Act, is in accordance with law. No substantial question of law arises for consideration in this appeal - Decide against revenue

Issues:
- Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.
- Whether the advance paid by the company to a shareholder falls within the definition of 'dividend.'
- Application of the judgment of the Delhi High Court in Commissioner of Income Tax vs. Creative Dyeing and Printing P. Ltd. (2009) 318 ITR 476 (DELHI) to the present case.

Analysis:

1. Interpretation of Section 2(22)(e) of the Income Tax Act:
The High Court considered the appeal under Section 260-A of the Income Tax Act, 1961, filed by the Revenue against the order of the Income Tax Appellate Tribunal. The Tribunal noted the circumstances where the directors of the company decided to transfer their personal assets to the company to facilitate obtaining loans. The Tribunal observed that the transaction was not beneficial to the shareholders but was in the interests of the company. The Tribunal concluded that the advance paid by the company to the directors could not be treated as deemed dividend as it was not for the benefit of the shareholders/directors.

2. Deemed Dividend and Ordinary Course of Business:
The Senior Standing Counsel for Income Tax argued that any advance by the company to a shareholder would fall within the definition of 'dividend' under Section 2(22)(e) of the Act unless falling within specific exceptions. However, the counsel for the respondent-assessee contended that transactions in the normal course of business for the benefit of the company do not constitute 'dividend' under the Act. Reference was made to the judgment of the Delhi High Court in Commissioner of Income Tax vs. Creative Dyeing and Printing P. Ltd., which clarified that transactions in the ordinary course of business would not fall within the ambit of Section 2(22)(e) of the Act.

3. Application of Delhi High Court Judgment:
The High Court analyzed the Delhi High Court's decision in Creative Dyeing and Printing P. Ltd. and emphasized that for an advance to be considered 'deemed dividend,' it must be for the benefit of the shareholder/director. In the present case, the Court agreed with the Tribunal's finding that the transaction was in the normal course of business and for the benefit of the company, not the shareholders. Therefore, the Court upheld the Tribunal's decision that the transaction did not fall within the definition of deemed dividend under Section 2(22)(e) of the Act.

In conclusion, the High Court dismissed the appeal, affirming the Tribunal's decision that the advance paid by the company to the directors was not deemed dividend as it was in the interests of the company and not the shareholders. The Court found no substantial question of law necessitating interference under Section 260-A of the Act and dismissed the appeal, along with any pending miscellaneous petitions.

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