2024 (1) TMI 265 - AT - Income Tax

Deemed dividend u/s. 2(22)(e) - sum owed by assesee-director to SHPL as at the year-end was inferred by the Revenue as deemed dividend u/s. 2(22)(e) of the Act as his shareholding was in excess of 10% - HELD THAT - All the debits in the account, to be maintained/tabulated separately, would stand to be adjusted first, i.e., where there is no debit balance in the current account; the balance, both in the current account as well as Flat account being reckoned date-wise and, in any case, month-wise, as the credit for the remuneration is on a monthly basis. As shown to us during the course of hearing, the amount due on sale of villa stands paid in full in the following year, i.e., f.y. 2011-12. That being the case, we do not think the same could be regarded as a loan or advance so as to attract section 2(22)(e) of the Act. SHPL, the company in which the assessee has substantial interest, is in the business of real estate, selling residential houses. The assessee, it s Director, with substantial interest therein, in purchasing one for himself, deals with the company in the capacity of a customer. Revenue has no case that in doing so there has been any under-selling by the company, as discount allowed to him, which, where so, would rather attract section 56 of the Act. True, he has been extended a credit, which it may not to it s other customers, as would be the inference arising as the assessee has, despite the AO clearly stating so, not adduced any material may, not even made any contention in rebuttal, i.e., to the effect of it similarly allowing credit to it s other customers. The payment for the Flat, adjusting the credits arising to the assessee, stands made latest by the end of the following year. The same would not, in our view, alter its character to a loan or advance, which would, we may add, surely be the case where an extended credit, dehors the trade practice, is allowed. The company paying the remuneration to an extent of Rs. 50 lakhs per annum to the assessee assumes a limited financial risk when it extends credit to him. No inference of diversion of funds, representing the profit of the company, arises under the circumstances, to ascribe it as coming within the mischief of section 2(22)(e) of the Act. This is of course subject to the nature of credit for Rs. 10 lac, forming part of Rs. 54.04 lacs, being clarified. Assessee s other, i.e., current, account comprises of Direct transfer of funds by the company the assessee and Monies received from the company s customers - Both qualify to be regarded as loans of advances within the meaning of the term u/s. 2(22)(e), case law on which, including by the Hon'ble Apex Court, is legion. Why, no objection or any contention in this regard stands made at any stage, including before us, nor could possibly be; it being the clear case of company s monies being advanced to the Director, falling within the mischief of section 2(22)(e) of the Act. We may, nevertheless, dilate upon the second category (b) with a view to allay any doubt in its respect as qualifying to be deemed as dividend u/s. 2(22)(e). As queried by the Bench during hearing, to no answer, if the assessee had any authorization to accept trade debts. Further, even assuming that he being a Director had the implied authority, the same is to be deposited forthwith with the company, and there is no question of it debiting him for the same, which implies it allowing him to retain the same. It is this retention which translates into a debit balance that assumes the form of loan or advance, attracting section 2(22)(e) of the Act. It would though be a different matter where the assessee has a credit balance on the relevant date, in which case there is no question of any loan or advance by the company to him, who thereby only receives from the company, albeit through its customer/s, monies due to him. Both the categories of amounts would, thus, need to be clubbed and maintained (tabulated) in separate accounts, which shall stand to be credited, similarly, when sums are paid or transferred to the company, as well as remuneration from it. Any debit balance in the account, even if adjusted subsequently, shall attract section 2(22)(e) of the Act A surviving issue would be the date of the debits or credits in respect of transactions by way of journal entries. This is as money (money s worth) stand already received or, as the case may be, discharged, though given effect to later (or, perhaps, even earlier). The transactions shall have to be reckoned, irrespective of the date of journal entry, with reference to the actual date of the transactions. The matter shall, accordingly, travel back to the file of the AO for determination of deemed dividend u/s. 2(22)(e) afresh along the lines indicated. The assessee shall provide necessary details and working, which the AO shall verify, including seeking clarification/s in its respect, duly supported by evidences. The difference between the amount debited in account and the cost as per the document, would need to be reconciled and explained. Any fresh/new facts (inasmuch as Ms. Krishna, the ld. counsel for the assessee, could not provide reconciliation, despite being allowed time during hearing, with the information furnished before us being again so in a piecemeal manner), coming to the notice of the AO would again require being considered as per law, for which guidance may be taken by him from the instant order. Appeal by the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Validity of the addition by way of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.

Summary:

Issue: Validity of the Addition by Way of Deemed Dividend under Section 2(22)(e) of the Income Tax Act, 1961

The appeal by the assessee contests the order dated 20.01.2023 by the National Faceless Appeal Centre, Delhi (NFAC), which dismissed his appeal regarding the assessment under section 147 read with section 143(3) of the Income Tax Act, 1961 for Assessment Year 2011-12. The primary issue is the validity of the addition of Rs. 62,44,215 as deemed dividend under section 2(22)(e) of the Act.

The assessee, a Director in Shwas Homes Pvt. Ltd. (SHPL), did not file any return of income for the year under section 139 but admitted an income of Rs. 48,48,717 on account of remuneration from SHPL in a return filed on 25.01.2016 after being issued a notice under section 148(1) on 06.08.2014. The Revenue inferred the sum of Rs. 62.44 lakhs owed by him to SHPL as deemed dividend under section 2(22)(e) because his shareholding in SHPL exceeded 10%, and the company had reserves in excess of that sum. The assessee explained that the amount was due to the purchase of a Villa from the company and monies received from the company's customers on its behalf. However, both the assessing and first appellate authority found the explanation untenable, treating the amounts as loans or advances under section 2(22)(e).

Upon reviewing the ledger account, it was noted that the transactions included payments to the assessee through bank and cash, adjusted against monthly remuneration, and journal entries for monies received on the company's account. The Tribunal examined each transaction category separately to determine their implications under section 2(22)(e).

For the sale of the Villa, the Tribunal found that the company had correctly reflected the transactions in its accounts. The payment for the Villa was made in full by the end of the following year, and thus, it could not be regarded as a loan or advance attracting section 2(22)(e). The Tribunal noted that the company, being in the real estate business, had extended credit to the assessee in his capacity as a customer, and there was no evidence of under-selling or diversion of funds.

Regarding the current account, the Tribunal held that both direct transfers of funds by the company to the assessee and monies received from the company's customers qualified as loans or advances under section 2(22)(e). The Tribunal emphasized the need for authorization for the assessee to accept trade debts and the requirement to deposit such monies with the company immediately. Any debit balance in the account, even if adjusted later, would attract section 2(22)(e).

The Tribunal directed the matter back to the Assessing Officer (AO) for a fresh determination of deemed dividend under section 2(22)(e), with the assessee required to provide necessary details and working for verification. The AO was instructed to consider any new facts and take guidance from the Tribunal's order.

The appeal by the assessee was allowed for statistical purposes. The order was pronounced on October 30, 2023, under Rule 34 of The Income Tax (Appellate Tribunal) Rules, 1963.