2022 (10) TMI 532 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - monies advanced to the assessee are not in the natural course of the business and in no way, the assessee is not in the business of money lending as substantial part of his the business - accumulative profit up to the date of loan on 28/03/2013 was Rs. 4052528/- and on pro rata basis the balance of security premium was of Rs. 72.00 lacs - HELD THAT - No one off loan that was given to the assessee nor have any funds of the company been divested; what exists is a current account which keeps fluctuating as per requirement of the funds. The fluctuating balances correlates to requirement that arise in the ordinary course of business and hence cannot be treated as deemed dividend under section 2(22)(e). We find that the case of the assessee throughout the proceedings is that the appellant was having two accounts with the said company; one is a loan account wherein appellant has received loan to the extent of Rs. 1,58,20,000/- whereas another account is a Trade account of appellant s proprietary concern, in which the appellant has credit balance of Rs. 5,36,20,634/-. The details of both the accounts were furnished to the Range head during the proceedings under section 144A and to the CIT(A) at the time of first appellate stage. We find that Hon'ble Punjab High Court in the case of CIT Vs Suraj Devi Dada 2014 (5) TMI 625 - PUNJAB HARYANA HIGH COURT held that where assessee had running current account with a company and it had been advancing money to it for business purposes, and had not gained any benefit from funds of company, and there was credit period only for 55 days, said credit in account could not be treated as deemed dividend under Section 2(22)(e) in the hands of assessee. Hon'ble Andhra Pradesh High Court in India Fruits 2014 (10) TMI 749 - ANDHRA PRADESH HIGH COURT held where subsidiary company was advancing money to assessee company for purchase of raw material and to make payments to a company to meet their business liabilities, said amount could not be considered as deemed dividend income of assessee company within purview of Section 2(22)(e). Tribunal in Iswar Chand Jindal 2015 (8) TMI 119 - ITAT DELHI held that nomenclature cannot be a basis to conclude that business transactions between two entities constitute deemed dividend under Section 2(22)(e), therefore, current account transactions between two group companies which were business/commercial transactions could not be regarded as deemed dividend under Section 2(22)(e). Thus in view of the aforesaid factual and legal discussion, we find that merits in the submissions of the Ld. AR of the assessee no funds of the company is divested; there exists a current account which keeps fluctuating as per requirement of the funds that arise in the ordinary course of business and hence cannot be treated as deemed dividend under section 2(22)(e). DR for the revenue that the Ld. CIT(A) reduced the accumulated profit of Rs. 40,52,528/- on the date of loan as on 28.03.3013 to Rs. 13,52,095/- on whims and fences and without basis is absolutely baseless as this appeal is filed by the assessee, if the Ld. DR for the revenue has any grievances against the finding, he should have file cross objection or cross appeal against the finding in the impugned order. Thus, the assessee succeeded on primary submissions of the assessee. hence, ground No. 1 2 of the appeal is allowed.

Issues Involved:
1. Sustaining addition of Rs. 13,52,095/- under section 2(22)(e) of the Income Tax Act.
2. Justification for distinguishing judgments of the Gujarat High Court and ITAT in similar cases.
3. Exclusion of share premium account from accumulated profits.
4. Restriction of addition to the percentage of the assessee's shareholding.

Detailed Analysis:

1. Sustaining Addition of Rs. 13,52,095/- under Section 2(22)(e):
The appeal concerns the addition of Rs. 13,52,095/- under section 2(22)(e) of the Income Tax Act, which pertains to deemed dividends. The Assessing Officer initially made an addition of Rs. 1,12,52,528/- after noting that the assessee had taken a loan of Rs. 1,58,20,000/- from Shubham Buildmart Pvt. Ltd., where the assessee held a 22.22% shareholding. The assessee argued that the accumulated profits should not include the share premium account and that the loan account should be considered in conjunction with the trading account, which had a credit balance. The CIT(A) partially upheld the addition, restricting it to Rs. 13,52,095/-, the accumulated profit as of 01.04.2012.

2. Justification for Distinguishing Judgments:
The assessee cited judgments from the Gujarat High Court and ITAT in similar cases (Chunilal Haribhai Gajera and Vasantlal Haribhai Gajera) to argue against the addition. However, the Joint CIT and CIT(A) found these cases distinguishable on facts, particularly because the trading account and loan account could not be consolidated for the purpose of section 2(22)(e).

3. Exclusion of Share Premium Account from Accumulated Profits:
The assessee contended that the share premium account should not be included in accumulated profits as it is not available for dividend distribution. The CIT(A) agreed, noting that the share premium reserve cannot be used for dividend distribution under the Companies Act. Thus, the accumulated profit considered for the addition was Rs. 13,52,095/- as of 01.04.2012, excluding the share premium.

4. Restriction of Addition to the Percentage of the Assessee's Shareholding:
The assessee argued that any addition should be restricted to 22.22% of the accumulated profits, corresponding to the shareholding percentage. The CIT(A) did not explicitly address this argument, but the Tribunal found merit in the primary submission that the accounts in question were current accounts with fluctuating balances, which should not be treated as deemed dividends. Therefore, the Tribunal allowed the appeal, negating the need to address the shareholding percentage argument further.

Conclusion:
The Tribunal concluded that the nature of the accounts (current accounts with fluctuating balances) did not warrant the treatment of the transactions as deemed dividends under section 2(22)(e). Consequently, the appeal was allowed, and the addition of Rs. 13,52,095/- was overturned. The judgment emphasized that no funds of the company were divested and that the transactions were in the ordinary course of business. The Tribunal also noted that all relevant details were provided to the authorities, and any objections regarding the genuineness of the trading account were unfounded.

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