2018 (4) TMI 1119 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Differentiation between loans and advances received for business purposes or for any other purposes - Held that - Delhi High Court I CIT vs Raj Kumar (2009 (5) TMI 17 - DELHI HIGH COURT) held that a trade advance which is in the nature of money transacted to give effect to a commercial transaction would not fall within the ambit of the provisions of Section 2(22)(e) of the Act. The Bombay High Court in CIT vs Nagin Das M. Kapadia (1988 (12) TMI 89 - BOMBAY High Court) held that business transactions are outside the purview of Section 2(22)(e) of the Act. The words loans or advances can be applied to loans or advances simplicitor and not to those transactions carried out in the course of business. In the course of business between the company and a shareholder, the company may be required to give advance in mutual interest. There is no legal bar in having such transaction. By granting advance, if the business purpose of the company is served and which is not the sum, which it otherwise would have distributed as dividend, cannot be brought within the deeming provision of treating such advance as deemed dividend. Thus such advances cannot be a subject matter of section 2(22)(e) - Decided in favour of assessee

Summary

Issues:
Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend and its applicability to advances received for business purposes.

Detailed Analysis:
The case involved an appeal by the assessee against the addition of a specific amount as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The assessee had received an advance from a company in which they had substantial shareholding, leading to the addition of the advance amount to the assessee's income. The primary issue revolved around whether the advance received fell within the definition of deemed dividend under the said provision.

The Appellate Tribunal examined the nature of the transactions between the parties involved. It was noted that the assessee, a director in the company providing the advance, was actively engaged in business negotiations for the sale and purchase of ships. The company had a policy of providing advances to directors for business purposes, and the advance received was for such transactions. The Tribunal highlighted that the purpose of Section 2(22)(e) was to prevent tax avoidance by closely held companies distributing accumulated profits as loans to shareholders to avoid dividend taxation.

The Tribunal referred to legal precedents to interpret the term "advance" in conjunction with "loan" within the provision. It emphasized that a transaction involving an advance for business purposes, as in the present case, should not be treated as a deemed dividend. Citing judgments such as Creative Dyeing and Printing Pvt. Ltd., the Tribunal held that advances for business transactions should not be considered as falling under the ambit of deemed dividend provisions.

Furthermore, the Tribunal referenced the decision in CIT vs Ambassador Travels Pvt. Ltd., where it was established that transactions carried out in the normal course of business, such as those involving a travel agency and tourism companies, should not be categorized as loans or advances for the purpose of Section 2(22)(e). The Tribunal also considered the interpretation of "advance" in CIT vs Raj Kumar and highlighted that trade advances facilitating commercial transactions do not qualify as deemed dividends.

Based on the analysis of relevant legal principles and precedents, the Tribunal concluded that the advances received by the assessee for business purposes did not constitute deemed dividends under Section 2(22)(e). Therefore, the addition made by the lower authorities was deemed incorrect, and the Tribunal allowed the appeal of the assessee, directing the deletion of the addition amount from the assessee's income.

In conclusion, the Tribunal's detailed analysis and application of legal interpretations and precedents clarified the scope of deemed dividend under Section 2(22)(e) concerning advances received for business transactions, leading to the favorable decision for the assessee in this appeal.