2017 (2) TMI 271 - AT - Income Tax

Deemed Dividend addition u/s 2(22)(e) - Held that - Assessee is also a director in the said company M/s Prescomec Autocomp Pvt.Ltd. and is also a principal shareholder. The assessee has a running account with the company in which the amount contributed by the assessee is added and the amount drawn by the assessee is reduced. During the year on 27.04.2006, 22.05.2006 and 10.06.2006 the assessee withdrew amounts of ₹ 5,00,000/-, ₹ 10,00,000/- and ₹ 10,00,000/- respectively which led to a creation of a debit balance in the company amounting to ₹ 11,55,936.84. The assessee has given personal Guarantee for availing of the working capital loan by M/s Prescomec Auto Co.Pvt. ltd. where the assessee is a Director and in terms of the aforesaid Resolution the Directors in lieu thereof the assessee too has been permitted to make temporary drawings of advances to the maximum limit of ₹ 50 lakhs. It is seen that there is no change in facts and circumstances of the case. No distinguishing fact or circumstance has been canvassed by the Revenue to take a contrary view. In the absence of any distinction on facts or law respectfully following the order of the ITAT, the appeal of the assessee is allowed.

Summary

Issues:
Appeal against addition of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.

Analysis:
1. The appeal challenges the addition of ?11,55,937 as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.
2. The appellant argued that a similar case decided by ITAT favored the assessee, where personal guarantees were provided for a company's loan, and temporary advances were allowed to directors.
3. The Revenue failed to provide reasons to disregard the ITAT decision.
4. The Judicial Member found that the appellant, a director and principal shareholder, withdrew amounts leading to a debit balance in the company. Personal guarantees were given for working capital loans, allowing temporary advances.
5. The decision relied on a Calcutta High Court case emphasizing loans given for benefits to the company are not deemed dividends under section 2(22)(e).
6. Another Tribunal case from Chennai highlighted that withdrawals for short-term cash needs, due to offering guarantees, do not constitute deemed dividends.
7. The CIT(A) wrongly interpreted these cases, stating they apply only when assets are pledged as collateral.
8. The Judicial Member disagreed, noting that providing guarantees benefitted the company and led to the deletion of the addition as it was not a gratuitous act.
9. The appeal was allowed, and the addition was deleted.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the reasoning behind the decision to allow the appeal against the addition of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.