ITAT Upholds CIT(A) Ruling, Excludes Business Advances from Deemed Dividend u/s 2(22)(e) [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench ‘F’, has dismissed the Revenue’s appeal against the deletion of an addition made under Section 2(22)(e) of the Income Tax Act, ruling that the payment in question was a business transaction and not a deemed dividend.

The case involved Windlass Steel Crafts LLP, which was originally a partnership firm and later converted into a limited liability partnership on February 25, 2014. During the scrutiny assessment for Assessment Year 2014–15, the Assessing Officer (AO) noticed that the assessee had received advances from Windlass Engineers and Services Pvt. Ltd. (WESPL), a closely held company where two of the partners—Sudhir Kumar Windlass and Pradeep Kumar Windlass—held significant shareholding as well as substantial interest in the assessee firm.

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The AO treated the payments made by WESPL as deemed dividend under Section 2(22)(e), citing the fact that WESPL had sufficient accumulated profits, and the shareholders had controlling interests in both entities. The AO held that since the assessee had received loans from the company in which its partners were significant shareholders, the transaction fell within the scope of deemed dividend provisions.

However, on appeal, the Commissioner of Income Tax (Appeals) found that the assessee was neither a registered nor a beneficial shareholder in WESPL. The CIT(A) observed that the transactions were carried out in the normal course of business between two entities with a commercial relationship and backed by agreements and resolutions dating back to 2010.

The CIT(A) relied on key judgments including Madhur Housing & Development Company (2017) and Ankitech Pvt. Ltd. (2011), which held that Section 2(22)(e) applies only to shareholders and not to concerns where shareholders hold interests.

The Tribunal, consisting of S. Rifaur Rahman (Accountant Member) and Anubhav Sharma (Judicial Member), agreed with the CIT(A)’s findings. The Bench noted that the AO had failed to demonstrate that the advances were given for the individual benefit of the shareholders or that the transactions were in the nature of loans simpliciter rather than business dealings.

Further, the Tribunal observed that the ledger showed a running account where both debits and credits occurred throughout the year, indicating a pattern of commercial transactions rather than unilateral loans. It also highlighted that there was no evidence of diversion of funds to the shareholders or their family members.

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Considering the above facts, the Tribunal concluded that the payments could not be taxed as deemed dividend. It held that the Revenue had not discharged its burden to prove that the transaction was not in the ordinary course of business or that it was made for the personal benefit of the shareholders.

The Tribunal also upheld the CIT(A)’s decision to reduce the disallowance of vehicle expenses claimed by the assessee from 20% to 10%, observing that the AO had made the disallowance without specific evidence of personal use.

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