2017 (11) TMI 506 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - whether there is no loan received by the Director but it is a current running account of a Director with company in normal course of business - Held that - Assessee was having an opening credit balance of ₹ 4.28 crores in the books of M/s. Monachem Additives Pvt Ltd. There are regular transactions for movement of funds to and from between the two parties. The company is regularly providing for interest on the unsecured loans taken from the assessee. As discussed above, that the company was in urgent need of finance/credit facilities and on the insistence of the HDFC Bank, the credit facility was transferred from individual account to the company account. From perusal of all these transactions of movements of fund, we can clearly envisage that these were regular business transactions which cannot be categorized as loan and advance transactions with the intention to provide facility to the shareholder. We find that the judgment of Hon ble jurisdictional High Court in the case of Schutz Dishman Bio-tech Pvt (2016 (1) TMI 84 - GUJARAT HIGH COURT) is squarely applicable on these facts and we are therefore of the view that the alleged transactions between the sole proprietary concern of assessee M/s. Monachem Corporation and M/s. Monachem Additives Pvt Ltd are in the form of current accommodation adjustment entries and movement of funds are both ways on need basis and therefore, cannot be treated as loan and advance as contemplated in Section 2(22)(e) of the Act - Decided in favour of assessee. Default u/s 201(1)/201(1A) - addition on account of deemed dividend under Section 2(22)(e) - Held that - As the business transactions of the assessee cannot be categorized as loan and advance transactions with the intention to provide facility to the shareholder and, therefore, cannot be treated as loan and advance as contemplated in Section 2(22)(e) of the Act and accordingly the addition has been deleted. In view of the matter, the question of demand under Section 201(1)/201(1A) of the Act does not arise; therefore, the same is cancelled - Decided in favour of assessee.

Summary

Issues:
1. Addition on account of deemed dividend u/s 2(22)(e) of the Income Tax Act.
2. Confirmation of order invoking provisions of Sec. 201(1)/201(1A) of the Act and raising a demand.

Analysis:
1. Issue 1 - Addition on account of deemed dividend u/s 2(22)(e) of the Income Tax Act:
- The assessee, a director of a company, received a loan of ?21,77,500 from the company, which was treated as deemed dividend under section 2(22)(e) of the Act by the Assessing Officer.
- The assessee contended that the amount was not a loan but a current running account in the normal course of business, supported by interest transactions with the company.
- The CIT(A) upheld the addition as deemed dividend, leading to the appeal before the ITAT.
- The ITAT considered the nature of transactions, shareholder's history, and business needs, concluding that the transactions were not loans but current accommodation adjustments. Citing relevant case law, the ITAT allowed the appeal, deleting the addition.

2. Issue 2 - Confirmation of order invoking provisions of Sec. 201(1)/201(1A) of the Act and raising a demand:
- The company, in a related appeal, challenged the order invoking Sec. 201(1)/201(1A) due to the addition of deemed dividend to the director.
- The ITAT, referring to the decision in the director's appeal, held that since the addition of deemed dividend was deleted, the demand under Sec. 201(1)/201(1A) did not stand. Consequently, the demand was cancelled, and the appeal was dismissed as infructuous.

In conclusion, the ITAT allowed the appeal of the director, deleting the addition on account of deemed dividend, and dismissed the company's appeal concerning the demand under Sec. 201(1)/201(1A) as the basis for the demand was no longer valid.