2019 (10) TMI 385 - AT - Income Tax

Deemed dividend addition u/s.2(22)(e) - advances given to sister concern without interest - HELD THAT - Perusal of the order of CIT(A) and documents on record reveal that both the entities have been engaged in trading operations with each other. We also note that the substantial payment is coming over from the earlier year as opening and no disallowance was made by the Revenue qua the opening balance as deemed dividend in the earlier year. It was also stated before us that in the earlier year the amount coming over from the earlier years was on account of trading operation only. Similarly in the current year we observe that major payments were made towards opening balances balance and thereafter against the various expenses and JV amounts payable. Under these circumstances we are of the view that to hold the transactions of trading in nature entered into in the ordinary course of business as deemed dividend would be against the spirit of law as all these transactions seems to be necessitated by the business relationship between the two entities though the shareholder is common on both the entities. Transactions were purely out of trading transactions between the two concerns the assessee and the sister concern are entered into in the ordinary business operations and therefore does not fall within the ambit of section 2(22)(e) - Decided in favour of assessee.

Summary

Issues:
- Appeal against the part confirmation of addition under section 2(22)(e) of the Income Tax Act.

Analysis:
1. The appeals were filed against separate orders of the Commissioner of Income Tax (Appeals)-20, Mumbai, by two assessees. The issue being common in both appeals, they were heard together and decided through a common order. The first appeal, ITA No.01/Mum/2017, focused on the part confirmation of addition by the Ld.CIT(A) amounting to ?50,78,658 under section 2(22)(e) of the Act.

2. The history of the case revealed that it was the third round of litigation before the Tribunal. The matter was initially sent back to the Ld.CIT(A) for fresh adjudication, leading to subsequent appeals and orders. The AO, after providing an opportunity to the assessee, made an addition of ?74,32,885, claiming it as deemed dividend under section 2(22)(e) of the Act. The Ld.CIT(A) partially allowed the appeal, considering accumulated profits as of a certain date for the purpose of deemed dividend, resulting in a confirmed addition of ?50,78,658.

3. The Ld.CIT(A) supported the addition with a detailed chart and held that the specified amount must be treated as deemed dividend. However, upon reviewing the facts and documents, the Tribunal observed that the entities involved were engaged in trading operations with each other, advancing money without interest. Despite the common shareholder, the transactions seemed to be necessitated by the business relationship, falling within the ordinary course of business operations. Therefore, the Tribunal concluded that treating these transactions as deemed dividend under section 2(22)(e) would go against the spirit of the law. Consequently, the Tribunal set aside the order of the CIT(A) and directed the AO to delete the disallowance.

4. In the second appeal, ITA No.02/Mum/2017, the issue was identical to the first appeal, and the findings in the first appeal applied mutatis mutandis. The Tribunal allowed this appeal as well, resulting in both appeals being allowed. The final order was pronounced on 01.08.2019, wherein both appeals were allowed, and the additions under section 2(22)(e) of the Act were set aside.