INTERNATIONAL CREATIONS PRIVATE LIMITED,SURAT vs. INCOME TAX OFFICER, WARD-1, SURAT

Facts of the case in brief are that in this case, an information was received from ITO, Ward – 1(2)(2), Surat regarding non deduction of TDS u/s.194 of the Act. As per the information, the assessee-company had given loans and advances of Rs.39,50,000/- without charging any interest in the FY 2014-15 to M/s. Gulmohar Knitting and Director of which had substantial interest in assessee-company having 33.36% share in the assessee-company. It was further informed that the director was having substantial interest in the company and therefore, loans of Rs.39,50,000/- given was required to be treated as deemed dividend u/s.2(22)(e) of the Act to the extent of accumulated profit. Therefore, TDS as per provisions of Section 194 of the Act was required to be deducted by the assessee-company, which it failed to do. As per the provisions of section 194 of the Act, the Principal Officer of an Indian company or a company which has made the prescribed arrangement for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment in cash or before issuing any cheque or warrant in respect of dividend within the meaning of sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income tax at the rate in force, i.e., 10% for the FY 2014-15 and deposit the same to the Government Account.

Since the assessee failed to deduct the TDS as per provisions u/s 194 of the Act, therefore, show cause notices were issued to the assessee as to why the proceedings u/s 201(1) and 201(1A) of the Act should not be initiated for the above default. In compliance, the assessee company submitted that inference drawn by ITO is completely wrong and unjustified since no advance or loan was given by assessee company to M/s. Gulmohar Knitting. The assessee company became partner of the firm by partnership deed executed on 02.06.2014 and amount given by it was not loan but investment made as partner. It was further stated that M/s. Gulmohar Knitting was formed to install knitting machine, however, for requirement of funds, two companies were also included as partners. Subsequently, loan was sanctioned and directors became interested in becoming partners, therefore, both the companies were retired from partnership firm by a deed executed on 27.03.2015. Directors of the company and partners of the firm accepted the fact and furnished copies of both partnership deeds. It was further stated that since the assessee company had made payment to a non-shareholder, thus provisions of section 194 was not applicable. Credit was given as partners’ capital and no advance or loan was given to M/s. Gulmohar Knitting without any obligation of payment, thus, aforesaid payment was not covered u/s.2(22)(e) as deemed dividend.

The aforesaid reply of the assessee was not found acceptable by the AO, who observed that the director of assessee company had substantive interest in M/s. Gulmohar Knitting with more than 10% of shareholding. From the A.Y 15-16 International Creations Pvt. Ltd. unsecured loan account confirmation submitted during assessment proceedings, it was established that loan/advance was given and it was the liability of the company to deduct TDS at applicable rate on amount of Rs.39,50,000/- as per provisions u/s 2(22)(e) of the Act. The assessee company had failed to deduct TDS as well as failed to deposit the same into the Government account and as per the balance-sheet, it was seen that the reserve and surplus in the FY 2014-15 was Rs.6,04,35,062/-, therefore, as per the Act, the amount of Rs.39,50,000/- was required to be treated as deemed dividend in the hand of recipient.

The AO held that TDS of Rs.3,95,000/- (10% of Rs.39,50,000/-) was required to be deducted u/s.194 of the Act by the deductor assessee on aforementioned deemed dividend of Rs.39,50,000/- and deposited in the government account within prescribed time limit provided as per IT Act, but the deductor assessee failed to do so. Therefore, assessee was deemed to be an assessee in default within the meaning of section 201 of the Act in respect of such tax (TDS) and for non deduction of TDS amount, interest u/s.201(1A) of the Act was also chargeable on the amount of TDS of Rs.3,95,000/-, which comes to Rs.3,31,800/-. Accordingly, order u/s 201(1) r.w.s. 201(1A) of the Act passed by the ITO, TDS Ward -1, Surat on 22.03.2022, wherein tax payable u/s 201(1) of the Act was determined at Rs.3,95,000/- and interest payable u/s 201(1A) of the Act was determined at Rs.3,31,800/-, thereby raising demand amounting to Rs.7,26,800/- upon the assessee.

Aggrieved by the order of AO u/s.201(1) rws 201(1A) of the Act, assessee preferred appeal before CIT(A). The CIT(A) after hearing the Ld. Authorized Representative of the assessee and on perusing the submissions made by him observed that the provision of Section 194 of the Act was squarely applicable in the case of the assessee as deemed dividend u/s 2(22)(e) was also subject to TDS u/s 194 of the Act. Therefore, CIT(A) held that the action of the AO is totally within the four corners of law. Accordingly, the order of the AO was upheld and appeal of the assessee was dismissed by CIT(A).

Aggrieved by the order of CIT(A), the assessee has filed present appeal before the Tribunal. The Ld. AR of the assessee filed a paper book containing copy of submission made before the CIT(A), copy of partnership deed of M/s. Gulmohar Knitting, copy of assessee’s ledger in books of M/s. Gulmohar Knitting, retirement deed of M/s. Gulmohar Knitting, assessment order issued in case of Shri Ashok Kr. Jindal and copy of order of CIT(A) passed in case of Shri Ashok Kr. Jindal, where the CIT(A) has allowed the appeal of the assessee under similar facts.

On the other hand, Ld. Sr. DR for the revenue supported the findings and observations made by AO and CIT(A) and requested to uphold the order of Ld. CIT(A)

We have heard both the parties and perused the materials available on record. We have also deliberated on the decisions relied upon by the Ld. AR. Section 2(22)(e) of the Act treats certain loans and advances given by a company to a concern in which a substantial shareholder has interest as deemed dividend, provided the payment is not in the ordinary course of business. The key elements required for applicability are: (i) that the payer company must be a closely held company; (ii) that the payment must be by way of loan or advance; (iii) that the recipient must be a concern (firm in this case); (iv) that the person with substantial interest in the company (shareholder with ≥10%) must also have substantial interest in the concern; and (v) that there must be accumulated A.Y 15-16 International Creations Pvt. Ltd. profits in the payer company. On examining the partnership deed dated 26.09.2014, it is seen that the assessee company was admitted as a partner in M/s. Gulmohar Knitting. The amount of Rs.39,50,000/- was credited as partner's capital and not as a loan. The retirement deed dated 27.03.2015 confirms that the company retired from the firm and any withdrawal made was on account of retirement proceeds and not a repayment of loan. The AO failed to consider these supporting documents while passing the assessment order. In the appellate order in the case of Shri Ashok Kumar Jindal, the transaction was analyzed by the CIT(A) who categorically held that the capital contributions by the companies including the appellant did not constitute loans or advances and hence it was not a deemed dividend u/s 2(22)(e) of the Act. The Ld. Sr-DR has not been able to controvert the finding of the CIT(A) in the above case and explain as to why the findings shall not be applicable to the case of the appellant. 9.1 Reliance is also placed on the decisions in case Creative Dyeing & Printing Pvt. Ltd. (supra) and Pradip Kumar Malhotra (supra), wherein it is held that contributions made for business exigencies and commercial considerations are outside the scope of deemed dividend. In view of the above facts and judicial precedents, it is held that the amount of Rs.39,50,000/- was a capital contribution towards the partnership firm and not a loan or advance. The transaction was for a commercial purpose for facilitating bank loan. Accordingly, no TDS was deductible u/s. 194 of the Act and the assessee cannot be treated as an assessee in default u/s. 201(1), nor is it liable for interest u/s 201(1A) of A.Y 15-16 International Creations Pvt. Ltd. the Act. In view of the above findings, we hold that the action of the AO in treating capital contribution as deemed dividend u/s. 2(22)(e) is not in accordance with the provisions of law. Hence, the demand raised u/s 201(1) and interest charged u/s 201(1A) of the Act are hereby deleted. The ground of assessee is allowed.

In the result, the appeal of the assessee is allowed.