Deemed Dividend can’t be attributed as Assessee have Regular Business Connection with Company and Transactions constitute ‘Trade Advances’: ITAT [Read Order]

Deemed Dividend - Taxscan

The Income Tax Appellate Tribunal (ITAT), Hyderabad bench has held that the provisions of deemed dividend cannot be applied when the assessee has a regular business connection with the Company and the transactions would amount to trade advances.

The Assessing Officer, while completing the assessment proceedings against the assessee noticed that the assessee has received loan/advance from M/s. Malpani Cottons Pvt. Ltd., Adilabad. It was further noticed that the assessee is having 12.42% of the shareholding in Malpani Cottons Pvt. Ltd., and the company is not a company in which public are substantially interested.

On appeal, the assessee contended that he is having bulk transactions with the said company and therefore, the disputed amount would be nothing but trade advances and therefore, the provisions of deemed dividend cannot be attracted.

Allowing contentions of the assessee, the Tribunal noted that the bulk amounts which were paid and received by the assessee are Rs. 65 Lakhs, Rs. 45 Lakhs, Rs. 1 Crore, Rs. 50 Lakhs and Rs. 10 Lakhs. It was also observed that the assessee has paid those advances initially and received back the same subsequently.

“However, we noticed that when the assessee is having a regular business connection with the company and in that process, assessee receives or pays certain advances, they can be considered as ‘trade advances’ and not otherwise. In the given case, certain transactions which were treated by the Assessing Officer as loans and advances as highlighted by the Ld.AR, the initial payments were made by the assessee and subsequently the company has repaid the same. To attract the deemed dividend provision, it should be otherwise around. Further, we noticed that the opening balance stood as on 01-04-2003 was Rs.1,05,15,883/- as debit balance which means assessee owes to the company and at the end of the year, closing balance stood at Rs. 85,56,232/- the debit balance which means still assessee owes to the company. while comparing opening and closing balances, it is noticed that about Rs. 20 Lakhs was reduced that means assessee has repaid Rs. 20 Lakhs to the company. It clearly shows that assessee has not taken any fresh loan from the company during the current assessment year,” the Tribunal said.

It was further added that “to invoke Section 2(22)(e) of the Act during this year, the assessee should have received loans or advances and pays the same subsequently. In the given case, no such things were noticed. Therefore, in our considered view, the assessee is having a business connection and in that process, the assessee may have received certain advances which can be treated as ‘trade advances’. Therefore, we cannot cherry pick certain transactions and term them as ‘loans and advances’ in order to invoke the provisions of Section 2(22)(e) of the Act. Therefore, the ground raised by the assessee is allowed.”

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