Advances given in Return for an Advantage by the Shareholder is not Dividend u/s 2(22)(e): ITAT [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that advances which are in the nature of commercial transactions would not fall under the purview of the “advance” in Section 2(22)(e) of the Income Tax Act, 1961 and shall not be considered as deemed dividend.

The assessee, Subhash Chander, is a proprietor of M/s Paros Corp and is a shareholder holding 35% shares in M/s AGIV India Pvt Ltd. which deals in Broadcast system integration with intellectual capabilities and other business interests and facilities. M/s AGIV India Pvt. Ltd. was developing a joint venture project with IND-AGIV Commerce Ltd. and RST Technologies Ltd. and held 72% shares in IND-AGIV Commerce Ltd. and 90% shares in RST Technologies Ltd.

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Further, discussions were initiated by AGIV India with M/s FOR-A group Japan for selling their stakes. However, the Japan group was only interested in Prime Broadcast System Integration Business and taking over the intellectual properties of M/s AGIV India Pvt.

Accordingly, it was agreed that AGIV India Pvt. Ltd. shall advance an amount of ₹1,20,06,226 to Paros Corp for purchase of shares of IND-AGIV Commerce ltd. and RST Technologies for completion of deal with FOR-A group Japan. It was further agreed that the said advance cannot be used by M/s Paros Corp for any other purpose.

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As per the assessee, the aforesaid arrangement was necessary as M/s AGIV India Pvt. Ltd. had taken a loan from Canara Bank, Mumbai and for that purpose, the assessee has provided his personal assets as collateral security and also stood as a personal guarantor along with his wife.It was also agreed that M/s Paros Corp shall return the entire amount to M/s AGIV India Pvt. Ltd. after the assessee receives the sale proceeds of shares which will be sold to M/s FOR-A Group Japan. 

Since, the payments were made by way of advances by AGIV India to Paros Corp in which it was substantially interested and the shareholding was also not less than 10% of voting power of the company, the Assessing Officer proceeded to consider the said payment as deemed dividend under Section 2 (22) (e)  of the Income Tax Act, 1961 and added the same to the total income of the assessee.

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The counsel for the assessee, Dharan Gandhi, contended that the transaction in question is on account of business expediency and therefore not covered under the provisions of Section 2(22)(e) of the Act, 1961. It was further pleaded that advancing the sum of ₹1,20,06,226 by AGIV India to Paros Corp was to give effect to the transaction entered into between M/s AGIV India and FOR-A Group Japan which was for the benefit of AGIV India.

The Departmental Representative for Revenue Kishor Dhule, on the other hand, contended that extending the loan by M/s AGIV India to Paros Corp has nothing to do with any direct commercial benefit to AGIV India.

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The bench comprising of Sandeep Singh Karhail (Judicial Member) and Amarjit Singh (Accountant Member) ,on a perusal of the shareholding of M/s AGIV India, observed that the fact that all shareholders including the assessee still hold minority shareholding goes on to prove that the sole purpose of advancing the amount to Paros Corp was for commercial expediency in order to complete the transaction between AGIV India and FOR-A Japan group, so that the company becomes part of large Japanese conglomerate.

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Reliance was also placed on the decision of the Hon’ble Calcutta HIgh Court in Pradip Kumar Malhotra vs CIT (2011) wherein it was held that gratuitous loan or advance given by the company to its shareholders would come within the purview of Section 2 (22) (e) but not cases where loan or advances are given in return to an advantage conferred upon the company by such shareholder.

Thus, it was held that the advance amount in the present case was in return for an advantage conferred upon AGIV India by the assessee. Therefore, the transaction being completely of commercial nature would not fall within the ambit of Section 2 (22)(e) and was deleted from the total income.

Hence, the appeal was allowed.  

To Read the full text of the Order CLICK HERE

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