The Income Tax Appellate Tribunal (ITAT), Chennai bench directed readjudication in respect of addition made towards deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961 received from shareholder company.
The assessee Venkatachalam Mohan filed his return of income for the assessment year 2011-12. The case was selected for scrutiny.
During the course of assessment proceedings, on examination of books of accounts of the assessee and his ledger account with M/s. Mayflower Enterprises Pvt Ltd., it was found that the assessee has a running account with the company.
Since, the assessee is holding more than prescribed percentage of beneficial interest in shareholding of the company, the Assessing Officer treated the debit balance of above three dates as deemed dividend under Section 2(22)(e) of the Income-tax Act.
The Assessing Officer also mentioned that the assessee got Rs. 12,50,000/-from the company on December 31, 2010, however this payment is not shown in the assessee’s current account with the company. Consequently, the aforementioned payment has been recognized as a dividend.
Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income TAx (Appeals)[CIT(A)] dismissed the appeal and upheld the action of AO. Therefore, the assessee filed a second appeal before the tribunal.
On behalf of the assessee T. Banuseka, submitted that transactions between the appellant and company is in the nature of current account, in the normal course of business of the assessee, but not a loan or deposit as per section 2(22)(e) of the Act
Furthermore, it was stated that on May 25, 2010, the Assessing Officer took into consideration a debit entry of Rs. 9,26,257/-, and that this entry was squared off within five days by paying the firm back.
Because of this, the debit balance cannot be regarded as a deemed dividend for a brief period of five days when the appellant has lent money to the company throughout the year and there has always been a credit balance.
V. Sreenivasan, counsel for revenue submitted that The company’s loan or advance to the shareholder amounted to the withdrawal by the shareholder with a considerable interest; however, the fact that the loan or advance was finally compensated at the end of the year will not change the situation.
It was observed by the tribunal that appellant is a shareholder holding more than 10% voting power in the company and also the company is having accumulated profit, which attracted provisions of Section 2(22)(e) of the Income Tax Act. Further, it is not a solitary transaction of loan or advance to the assessee.
Further, it was also observed that there are a number of transactions between the assessee and the company, where various payments are routed through the current account of the assessee, including remuneration and other expenses reimbursed to the assessee.
The bench noted that if the debit balance is only because of an inadvertent error and the same has been squared off within a short period, then the same cannot be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act.
After reviewing the facts and records, the two-member bench of Manjunatha.G (Accountant member) and Mahavir Singh,(Vice President ) directs readjudication in respect of various transactions and addition made towards deemed dividend under Section 2(22)(e) of the Income Tax Act received from shareholder company.
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