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Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri Mahavir Singhand Shri Waseem Ahmed
आदेश/O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal by the assessee is arising out of order of Commissioner of Income Tax (Appeals)-XVI, Kolkata in appeal No.50/CIT(A)-XVI/Cir.29/09-10 dated 15.06.2010. Assessment was framed by ACIT, Circle-29, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 29.12.2009 for assessment year 2007-08.
Only issue raised by assessee in his appeal is that Ld. CIT(A) has erred in confirming the addition of Rs.32,38,5215/- on account of deemed dividend income in terms of Sec. 2(22)(e) of the Act.
Briefly stated acts are that assessee is an individual having income under the head “salary, business & other sources”. At the time of assessment Md. Ahmed v. ACIT, Cir-29, Kol. Page 2 proceedings, Assessing Officer noticed that assessee has taken a loan from a company an amount of Rs.36,21,600/- from M/s Ahmed Tannery Pvt. Ltd. where assessee was a Director and shareholder holding beneficial owner of share more than 10% of the voting power. The Assessing Officer treated this loan transactions ad deemed dividend by virtue of provision of u/s 2(2)(e) of the Act and several notices were issued upon the assessee to explain as to why this transactions should not be treated as deemed dividend income. However, no suitable reply was made by the assessee. Therefore, same has been treated the income of assessee. Aggrieved, assessee preferred appeal before Ld. CIT(A). Before Ld. CIT(A) it was demonstrated by Ld. AR of assessee that assessee has not taken any loan from the above stated company. It was an advance against business work to be carried out by assessee. Since there has been a business relation between the assessee and the said company for the last many years,therefore, holding this business transactions as advance and consequently deemed dividend under section 2(22)(e) of the Act is not appropriate. Assessee has also cited case law in support of its claim as under:- a) CIT v. John 181 ITR 1 (Kar) b) CIT v. Rajkumar 318 ITR 462 (Del) c) Tarulata vs. CIT 108 ITR 345 (SC) It was also submitted that job work done by assessee for the aforesaid company was subject to TDS u/s 194C of the Act and same was duly deducted and deposited in Govt. account. However, Ld. CIT(A) disregarded the claim of assessee. Ld. CIT(A) has cited several case law for not allowing the claim of assessee and produced the extract of the case of Smt. Tarulata (supra) where the Hon'ble Supreme Court has held:- “once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be.”
Md. Ahmed v. ACIT, Cir-29, Kol. Page 3 It is observed by Ld. CIT(A) in the case of CIT v. Mukundray K. Shah in 290 ITR 433 (SC); in the case of Smt. Tarulata Shyam and Ors. Vs. CIT , wherein the decision of Hon'ble jurisdictional High Court in 82 ITR 485 was affirmed and jurisdictional High Court in the case of M.D. Jindal v. CIT 164 ITR 28 (Cal); wherein the head note of the said decision is as under:- “Dividend – deemed Dividend – Advance to shareholder – Scope of Sec. 2(22)(e) – Assessee and his wife only directors of company dealing in iron materials – Flats under construction by assessee and his wife – Agreement with company for sale of flats in 1965 – Completion of construction and sale in 1968 – Iron rods supplied by company to assessee and his wife – Finding by Tribunal that iron rods supplied by the company benefited assessee and that agreement was made to circumvent provisions of section 2(22) – Vale of iron rods received by assessee can be treated as dividends – Income-tax Act, 1961, S(22)(e).”
Now, aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us. Shri S.M. Surana, Ld. Authorized Representative appearing on behalf of assessee and Shri Niloy Baran Som, Ld. Departmental Representative appearing on behalf of Department.
We have heard rival parties and perused the materials available on record. Before us Ld. AR of assessee submitted paper book containing pages 1 to 120. The assessee has submitted that he had commercial transactions with the company for the last many years and never in the part or in the subsequent year where the advance received were treated as deemed dividend income. Ld. AR drew our attention on pages 85 to 103 of the paper book, where the detailed job work in the current account were furnished and in this regard he referred several orders or judgments where it was held that business transactions cannot be treated as deemed dividend. After careful analysis of assessment order and the order of Ld. CIT(A) and submission made by assessee which reveals that AO found that assessee is a shareholder in the company and assessee is holding more than 10% Md. Ahmed v. ACIT, Cir-29, Kol. Page 4 shareholder of the said company and the aforesaid purported loan received by assessee was treated as deemed dividend u/s 2(22)(e) of the Act. We may note that Explanation furnished by assessee was that aforesaid amount was not a loan and in fact there was a business transaction between assessee and the above stated M/s Ahmed Tannery Pvt. Ltd. and there was a running account maintained by assessee and showing those transactions, so it is clear that sub-section 2(22)(e) of the Act is not applicable in the erstwhile case.
We have gone through the facts of the case and on perusal of ledger account of assessee’s books of account it is found that the assessee is maintain a running accounts with that of aforesaid company. Through the ledger account of assessee’s previous years i.e 2005-06, 2006-07 and 2007- 08. it was observed that assessee is raising the bill on continuous basis to the aforesaid company and that company was making the payment to the assessee after deducting the TDS and the ledger account of assessee further revealed that no interest was charged by aforesaid company for advancing money to the account which was current account in nature. The transaction was pure a commercial transaction and it was not case of loan to attract the provision of Sec.2(2)(e) of the Act. This issue has been answered by Hon'ble jurisdictional High Court in the case of Pradip Kumar Malhotra vs. CIT 338 ITR 538 (Cal), wherein it was held:- “The phrase “by way of advance or loan” appearing in sub-clause (e) of section 2(22) of the Income-tax Act, 1961, must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power; but if such loan or advance is given to such company received from such a share-holder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of the Act. Thus, gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder.” From the above facts and legal proportion decided by Hon'ble jurisdictional High Court, it is clear that section 2(22)(e) of the Act was inserted to bring within the purview of taxation those amounts which are actually a distribution of profits but are disbursed as a loan so that tax thereon can be avoided. It is pertinent to note here that Md. Ahmed v. ACIT, Cir-29, Kol. Page 5 when dividends are declared by a company, it is solely the shareholders who benefit from the transaction. No benefits accrue to the company by way of dividend distribution Thus. Section 2(22)(e) of the Act covers only such situations, where the shareholder alone benefits from the loan transaction, because if the company also benefits from the said transaction, it will take the character of a commercial transaction and hence will not qualify to be dividend. In the case of the assessee, by giving and taking financial assistance from each other, both the assessee and the company were benefited and such transactions between them were nothing but commercial transactions and dividend attributable to the shareholder is nothing to do with such business transaction. From the above discussions it can be said that sec. 2(22)(e) of the Act covered only those transactions which benefit the shareholder alone and results in no benefit to the company. On the other hand, if the transaction is mutual by which both sides are benefited, it is undoubtedly outside the purview of provisions of sec. 2(22)(e) of the Act. From the above, it is clear that the loan account differs from current account and the provisions of section 2(22)(e) of the Act, being a deeming section, cannot be applied to current account. In such circumstances, we delete the addition and this common issue of assessee’s appeals is allowed.”
From the facts of assessee, it is clear that the transaction is out of the purview of the deeming fiction of income as provided in the section of 2(22)(e) of the Act, hence we allowed this issue in favour of the assessee.