MEWAR POLYTEX LTD. vs. A.C.I.T.CIRCLE-1,UDAIPUR

ITA/28/2012HC RajasthanRJHC01027934201222 December 201619 pages
AI SummaryDismissed

What were the facts?

The assessee, Mewar Polytex Ltd., is appealing against an order of the Income Tax Appellate Tribunal (ITAT) for Assessment Years 2006-07 and 2007-08. The Assessing Officer (AO) added back Rs. 55,00,000 for AY 2006-07 and Rs. 18,40,000 for AY 2007-08 to the assessee's income under Section 2(22)(e) of the Income Tax Act, 1961, treating loans received from Sun Polytex Pvt. Ltd. as deemed dividend. The assessee contended that these were inter-corporate deposits in the ordinary course of business. The CIT(A) deleted the additions, holding they were not loans for the purpose of Section 2(22)(e). The ITAT, however, restored the issue for AY 2007-08 to the AO for further ascertainment while upholding the addition for AY 2006-07.

What did the High Court hold?

The High Court held that the ITAT had not erred in construing Section 2(22)(e) of the Act. Regarding the first issue, the Court found that money lending could not be treated as a substantial part of the business of the closely held company, Sun Polytex Pvt. Ltd., thus the exception under Section 2(22)(e)(ii) was not applicable. The Court distinguished the present case from precedents cited by the assessee, noting that the loan advanced was found to be gratuitous and not in return for an advantage conferred upon the closely held company. Therefore, the loan advanced by Sun Polytex Pvt. Ltd. was correctly treated as 'deemed dividend' taxable in the hands of the assessee. Concerning the second issue, the Court held that 'deemed dividend' under Section 2(22)(e) is not covered by the exemption under Section 10(34) read with Section 115-O. While actual dividends paid by a company are exempt in the hands of the shareholder and taxed at the company level, 'deemed dividend' is included within the definition of 'income' under Section 2(24) and remains taxable in the hands of the recipient unless specifically excluded. Thus, the appeals were dismissed.

What were the issues?

1. Whether the ITAT erred in misconstruing Section 2(22)(e) by ignoring the exception in sub-clause (ii) and not appreciating that transactions in the ordinary course of business are not hit by Section 2(22)(e)? (Assessee's contention: The amounts were inter-corporate deposits, not loans, and even if considered loans, they were in the ordinary course of business. Reliance was placed on the Memorandum of Association of Sun Polytex Pvt. Ltd. indicating financing as part of its business. Revenue's contention: Money lending was not a substantial part of Sun Polytex Pvt. Ltd.'s business, thus the exception under Section 2(22)(e)(ii) was not applicable.) 2. Whether the ITAT's order is liable to be set aside in view of Section 10(34) read with Section 115-O, as dividend income is exempt in the hands of the shareholder? (Assessee's contention: Dividend income is exempt under Section 10(34) r.w.s. 115-O. Revenue's contention: Deemed dividend under Section 2(22)(e) is not covered by the exemption under Section 10(34).)

Which sections of the Income-tax Act were involved?

Section 260A,Section 2(22)(e),Section 10(34),Section 115-O,Section 2(22),Section 2(24)

AI-generated summary — verify with the full judgment below

(1 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR D.B.INCOME TAX APPEAL NO. 28 / 2012 Mewar Polytex Ltd., Through its Managing Director, Babulal Hastimal Bapna, aged 73 years, S/o Late Hastimal Bapna, 207- A, Mewar Industrial Area, Madri, Udaipur. ----Appellant Versus Assistant Commissioner of Income Tax, Circle-1, Udaipur. ----Respondent Connected With D.B.INCOME TAX APPEAL No. 29 / 2012 Mewar Polytex Ltd., Through its Managing Director, Babulal Hastimal Bapna, aged 73 years, S/o Late Hastimal Bapna, 207- A, Mewar Industrial Area, Madri, Udaipur. ----Appellant Versus Assistant Commissioner of Income Tax, Circle-1, Udaipur. ----Respondent _________________________________________________ For Petitioner : Mr. Anjay Kothari Mr. Bhagirath Patel For Respondent : Mr. K.K. Bissa Mr. G.S. Rathore

(2 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] HON'BLE MR. JUSTICE SANGEET LODHA HON'BLE MR. JUSTICE VINIT KUMAR MATHUR Judgment By the Court: (Per Hon’ble Mr.Sangeet Lodha, J.):- Reportable Date

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