HETAL KALPESH KOTHARI,RAJKOT, GUJARAT vs. DCIT/ACIT CIR 1(1), RKT, RAJKOT, GUJARAT

The grounds of appeal raised by the assessee are as under:

The facts of the case which can be stated quite shortly are as follows: In this case the return of income showing income of Rs.57,04,683/- was filed on 29- 03-2014. The return of income was processed u/s 143(1) of the Act, without making any modification to the income. No scrutiny assessment has been made in this case. The assessee, an individual has shown income from salary, as director in the company, M/s Perfect Retreads Pvt Ltd, Rajkot and income from other sources.

During the course of assessment proceedings in the case of M/s Progressive Motors Pvt Ltd for the assessment year (A.Y.) 2013-14, it was noticed from the ledger account of the assessee that during the financial year 2012-13 relevant to the assessment year under consideration, the assesses had entered into certain transactions regarding receipts and payments of loans with the said M/s progressive Motors Pvt Ltd and at a particular point of time, that is, on 24.01.2013, the company has debit balance of Rs. 56,76,364/-, in the account of the assessee. It was noticed by the assessing officer that the assessee is holding 93% shares in the said company and the said company has an accumulated profit of Rs. 1,03,16,156/-, as on 01.04.2012. Therefore, the provisions of section 2(22)(e) of the Act, are attracted in the case of the assessee and that a sum of Rs. 56,76,364/ has to be considered as deemed dividend u/s. 2(22)(e) of the Act, in the hands of Ms. Hetal S. Patel. Therefore,the case of the assessee, was reopened u/s.147 of the I.T. Act and a notice u/s 148 of the I.T. Act was issued on 17-03-2016.

In response to the notice u/s 148 of the Act, the assessee, vide its letter dated11-07-2016 submitted that the return filed by him on 29-03-2014, be treated, as if filed in response to notice u/s148 of the I. T. Act. The assessee also requested for furnishing the reasons recorded for initiating proceedings u/s.147 of the I.T. Act. Accordingly, copy of reasons recorded was furnished to the assessee, vide letter dated 03-08-2016.

The assessee was therefore requested vide, show cause notice of assessing officer, letter No. DCIT/Cir.1(1)/Show cause/HSP/2016-17, dated 08-11-2016 to show cause, as to why the amount of Rs. 56,76,364/- should not be considered, as deemed dividend u/s 2(22)(e) of the I. T. Act and added to her income, of the year under consideration.

In response to the notice of the assessing officer, the assessee submitted its reply before the assessing officer which is reproduced below:

However, the assessing officer rejected the above contention of the assessee and held that the assessee had utilized the company's funds in which she was director for the personal use and therefore debit amount of Rs. 56,76,364/-, as on 24-01-2013, was considered, as the assessee's income u/s 2(22) (e) of the I.T. Act. Accordingly, a sum of Rs. 56,76,364/-, was added to the total income of the assessee.

Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before the Ld. CIT(A), who has confirmed the action of the assessing officer, therefore, assessee is in further appeal before this Tribunal.

Learned Counsel for the assessee, vehemently argued that the assessee maintained current account with the Private Limited company, which was for the purpose of business of the company, therefore, all the transactions were, on current account. The amount in the current account, for business purpose has been received and paid within a short period for the purpose of company’s business and hence, the addition should not be made in the hands of the assessee.

On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.

We have given our thoughtful consideration to rival contention. We have perused case file as well as paper books furnished by assessee.We note that section 2(22)(e) of the Act was brought into the statute to curb the practice of a substantial shareholder withdrawing money from a company in which he / she holds substantial interest, as a loan, thus avoiding tax which dividend distribution would have otherwise attracted. As courts have time and again held that this being a deeming fiction must be construed strictly and hence cannot be applied to transactions between a shareholder and a company which are mutual & current in nature, taken during the course of the business and which constitute neither a loan or an advance. The said section does not take within its sweep a constant a substantial movement of funds inter se between a shareholder and the company more so in the nature of a current account, which financial transactions could be for a plethora of business exigencies. We note that assessee is a director in M/s Progressive Motors Pvt Ltd, and the assessee is holding a total of 32,500 shares of the above company out of total shares issued 35,000, that is, she is holding 92.86% equity. During the course of the assessment year under consideration, as is evident from the copy of the ledger account of the Company from the books of the assessee attached at Pages 1 to 6 of the paper book, we note that the assessee had entered into several financial transactions with M/s. Progressive Motors Pvt Ltd and whilst the balance largely remained as debit, it was only on 24th January 2013 that the account turned into a credit balance which was set right after 4 days on 28.01.2013, vide page 5 of the paper book. In order to appreciate the nature and character of transactions in this case, we note that all along the company owes money to the assessee & there are a series of payments made by the assessee to the company and it is only on one occasion on 24.01.2013 that there occurs a debit balance which is set right 4 days later. It is thus evident from the above that the account between the assessee and the company is mutual, open and current in nature. We observe that the entire account has several entries which clearly establish that it is a running account for the mutual accommodation of the parties and not a loan account. The assessee was also parking her surplus funds with the company as 'deposits' for their mutual benefits.

Thus, a running account maintained by two parties even if they are related does not fall within the purview of section 2(22)(e) of the Act, as entries therein are in the normal course of the business which cannot be treated as loans. As is evident from the ledger account and which facts are not even under dispute that there is a consistent inflow and outflow of funds through the account of director, can neither be considered as loan nor as an advance and being a current account in nature, the provisions of section 2(22)(e) of the Act, cannot be brought into play. We note that in the case of PCIT v. Dishman Pharmaceuticals and Chemicals Ltd. (2019) (105 CCH 342) wherein the Hon'ble Gujarat High Court dismissed the Departmental appeal and upheld the decision of the Hon'ble ITAT that question of invoking provisions of section 2(22)(e) of the Act, would not arise where transactions between the company and the substantial shareholders are in nature of current account transactions. It is an account which is in the nature of current adjustment accommodation account wherein there is a movement of fund both ways, on need basis. Unlike transactions of loans and advances, in this kind of current adjustment accommodation account, the movement of funds is both ways and the same is more in the nature of current account rather than a loan account. Considering these facts and circumstances, we delete the addition and allow the appeal of the assessee.

In the result, appeal filed by the assessee is allowed.