The Delhi Bench of Income Tax Appellate Tribunal ( ITAT ) upheld the Commissioner of Income Tax(Appeals)[CIT(A)]’s deletion of a Rs.6.43 crore addition, ruling that the loan received from a wholly owned subsidiary was not to be treated as a deemed dividend under Section 2(22)(e) of the Income Tax Act,1961.
The revenue-appellant challenged the order of the CIT(A), which deleted an addition of Rs.6,43,40,824 made by the Assessing Officer (AO) as deemed dividend under Section 2(22)(e) of the Act. This amount was received by Uniparts India Ltd.,the respondent-assessee from its wholly owned subsidiary, Gripwel Fasteners Pvt. Ltd(GFPL).
During the assessment, the AO identified a loan taken by the assessee from GFPL and questioned its treatment as deemed dividend, noting that GFPL was closely held with 70.79% shareholding by four family members.
In response, the assessee argued that Section 2(22)(e) applied only to closely held companies. It claimed that both the assessee and GFPL were not classified as closely held since over 20% of the share capital was held by non-promoter parties, including foreign investment companies. The assessee also contended that all shares were freely transferable, countering the AO’s classification of the companies as closely held.
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The assessee clarified that the funds received from GFPL were reimbursements for expenses incurred on behalf of GFPL, including travel, food, conveyance, and taxes, and should be considered current account transfers rather than loans. It emphasized that under Section 2(22)(e), any deemed dividend would be limited to the accumulated profits of the lending company, which totaled Rs.2,25,17,222 as of April 1, 2013. Thus, the assessee argued that the total loans could not be classified as deemed dividend since the actual accumulated profits were significantly lower than the amount deemed by the AO.
The AO rejected the assessee’s arguments, asserting that the significant family shareholding and restrictions on share transfer in the Articles of Association supported classifying the loan as deemed dividend. He referenced previous case law to reinforce his position and concluded that the amount received from GFPL should be treated as deemed dividend under Section 2(22)(e) of the Act.
Upon appeal, the CIT(A) found merit in the assessee’s arguments, determining that the transactions between the two companies were of a current account nature rather than loans. The CIT(A) noted that there was no outstanding loan balance from GFPL in the assessee’s ledger accounts and concluded that the transactions primarily involved reimbursements for expenses incurred on behalf of GFPL. As a result, the CIT(A) deleted the addition made by the AO, ruling that the amounts should not be classified as deemed dividend.
The tribunal reviewed the submissions and evidence from both parties, concluding that the transactions involved advances for expenses rather than loans. It agreed with the CIT(A) that the nature of these transactions did not support classification as deemed dividend.
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The two member bench comprising Sudhir Pareek (Judicial Member) and S.Rifaur Rahman(Accountant Member) upheld the CIT(A)’s decision to delete the addition of Rs.6,43,40,824, siding with the assessee’s characterization of the transactions as current account transfers and reimbursements.
Ultimately, the tribunal dismissed the revenue’s appeal, affirming the CIT(A)’s findings and rationale.
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