2019 (1) TMI 405 - HC - Income Tax

Deemed dividend as per Section 2(22)(e) - family arrangements - The material on record indicated that MEL had paid a sum of ₹ 11.05 Crores to M/s. Solid Real Estate Private Limited (for short SREL ) on various dates. Thereafter, SREL in turn paid a sum of ₹ 10.80 Crores to shareholder. - conclusions were drawn by the Assessing Officer, holding that SREL has no transaction other than those mentioned in the books of accounts and that the Directors of SREL were not aware as to what are the other transactions - Held that - In the facts of the present case, the transaction between M/s.MEL and M/s.SREL being admittedly a business transaction, as is evident from the evidence on record, Section-2(22)(e) is not applicable. Tribunal held that the same constitutes a business transaction and therefore, the provisions of Section 2(22)(e) would not be applicable. We do not find any reason to take a different view of the matter. The material on record would indicate that all transactions are routed through bank channels. Hence, it cannot be construed as mere journal entries and therefore, it is a business transaction between the assessee and M/s.SREL. Hence, the second substantial question of law is held against the Revenue and in favour of the assessee.

Summary

Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act.
2. Nature of the transaction between M/s. MEL, M/s. SREL, and Smt. Vandana Poddar.
3. Consideration of material evidence by the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)].

Issue-wise Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income Tax Act:
The core issue was whether the payment of ?11.05 Crores by M/s. MEL to M/s. SREL and subsequently to Smt. Vandana Poddar constituted a "deemed dividend" under Section 2(22)(e) of the Income Tax Act. The Tribunal concluded that Section 2(22)(e) was inapplicable, as the transactions were business-related and not for the personal benefit of the assessee. The Tribunal cited the High Court of Kolkata's judgment in SHRI. NANDLAL KANORIA VS. CIT, which held that transactions in the ordinary course of business are outside the purview of Section 2(22)(e). The High Court upheld this view, emphasizing that the transactions were routed through proper banking channels and were not mere journal entries.

2. Nature of the Transaction:
The Tribunal found that the transactions between M/s. MEL, M/s. SREL, and Smt. Vandana Poddar were commercial in nature. M/s. MEL provided an inter-corporate deposit to M/s. SREL, which in turn paid interest to M/s. MEL and loaned money to Smt. Vandana Poddar. The interest payments were reflected in the books of accounts and assessed to tax. The Tribunal noted that the AO had accepted these transactions as business transactions in the assessments of M/s. MEL, M/s. SREL, and Smt. Vandana Poddar. The High Court agreed with this assessment, stating that the transactions were backed by relevant bank entries and constituted business transactions.

3. Consideration of Material Evidence:
The Revenue argued that the AO and CIT(A) had correctly identified the transactions as attempts to avoid tax, pointing to the seized documents indicating a settlement plan between the assessee and his wife. However, the Tribunal found that these documents did not establish a direct nexus with the transactions in question. The High Court supported the Tribunal's view, noting that the AO had accepted the transactions in the assessments of M/s. MEL and Smt. Vandana Poddar, making it inconsistent to question them only in the case of the assessee.

Conclusion:
The High Court upheld the Tribunal's decision to set aside the findings of the AO and CIT(A), concluding that the transactions were commercial and not aimed at tax avoidance. The first and second substantial questions of law were decided against the Revenue and in favor of the assessee, rendering the third question academic. Consequently, the appeal was disposed of.