Provisions relating to ‘Deemed Dividend’ can’t be invoked since Advances were given to Shareholder for Business Purpose: ITAT [Read Order]

Deemed Dividend - ITAT - Taxscan

The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) has held that the income tax department cannot invoke the provisions relating to “deemed dividend” under Section 2(22)(e) of the Income Tax Act, 1961if the advances were given to the shareholder for the purpose of business and not for their individual benefits.

The Assessing Officer while concluding the assessment proceedings against the assessee, a private limited company, noticed that they had availed unsecured loan from group concern M/s. Krishna Sheets Processors Pvt. Ltd. (lender) to the tune of Rs.19,65,00,000/-. It was found that the assessee is holding 21.45% shareholding in the lender company. The AO accordingly made an addition of unsecured loan equivalent to Rs.19,65,00,000/- observing that the amount of loans received from the sister concern falls within the ambit of provisions of Section 2(22)(e) of the Act and consequently, susceptible to tax as deemed dividend.

However, the first appellate authority deleted the addition.

While considering the departmental appeal, the division bench comprising Judicial Member Madhumita Roy and Accountant Member Pradeep Kumar Kediarelied on the decision of the Calcutta High Court in the case of Pradip Kumar Malhotra vs. CIT wherein it was held thatthe advances given by the lender was not for the individual benefit of the shareholder but for business purposes and therefore such transactions would not fall within the sweep of deeming fiction created under s.2(22)(e) of the Act.

“This reason on a standalone basis is sufficient to exclude the applicability of Section 2(22)(e) of the Act on the money received by the assessee,” the Tribunal bench said.

While upholding the order of the first appellate authority, the bench held that “we also simultaneously find merit in the other line of argument advanced on behalf of the assessee. It is case of the assessee than money lent to the assessee was received in the ordinary course of business for fulfillment of business supply through consolidated negotiation. It is also demonstrated by the assessee that similar advance was obtained in the earlier years right from AY 2010-11 where assessee was not a shareholder in the lender company at all.”

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