Advance for purchasing capital assets not deemed divided u/s 2(22)(e). It was a trade advance in the normal course of business – ITAT

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Advance for purchasing capital assets not deemed divided u/s 2(22)(e). It was a trade advance in the normal course of business – ITAT

Advance for purchasing capital assets not deemed divided

ABCAUS Case Law Citation:
ABCAUS 1180 (2017) (03) ITAT

The Grievance:
The appellant assessee company was aggrieved by the addition made by the Assessing Officer (‘AO’) for treating the advance received from the subsidiary company as deemed dividend under Sec.2(22)(e) of the Income tax Act, 1961 (‘the Act’)

Assessment Year : 2007-08
Date/Month of Pronouncement: March, 2017

Brief Facts of the Case:
The assessee-company was engaged in the business of export of equipments and technical services. During the assessment proceedings, the AO found that the assessee company had received Rs. 50 lakhs from its 100% subsidiary company. The reserves and surplus of the subsidiary company were to the tune of Rs. 10.03 lakhs.

The AO directed the assessee to explain as to why the amount to the extent of reserve and surplus should not be treated as dividend u/s 2(22)(e). After considering submissions of the assessee, the AO held that in the books of accounts of the subsidiary, the heading of the transaction was capital advance and in the narration the transaction was treated as temporary loan. The advances was received by the assessee company from its subsidiary for the sale of fixed assets. According to the AO, for the purpose of deemed dividend u/s 2(22)(e), there was no difference between the advance received on revenue account or capital account. Accordingly, he made an addition of Rs. 10.03 lakhs to the total income of the assessee company.

Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A). However placing reliance on the judgment of Hon’ble Madras High Court, he held that the advances received by the assessee from its subsidiary for sale of fixed assets was covered by the provisions of Sec.2(22)(e).

Contentions of the Appellant assessee:
It was submitted that the subsidiary company had agreed to purchase assets like land, building, furniture and fixtures, plant and machinery together with goodwill for a consideration of Rs. 5.14 crore, that out of the said amount in advance of Rs. 50 lakhs was received by it during the year under appeal, that the advance was received towards the sale of specified capital assets, that the amount in question was shown on liability side of the balance sheet under the head advances from subsidiary for transfer of fixed assets, that in the balance sheet of the subsidiary company it was shown under the head advances to holding company for capital expenses.

It was submitted that  that the narration appearing in the books of accounts was incorrect and it was a bona fides mistake.

It was also contended that the advances received by the assessee on account of commercial transaction were neither loan nor advances for the purpose of Sec. 2(22)(e).

Observations made by the Tribunal:
The Tribunal observed that in the instant case, the most crucial factor to treat an amount as dividend was to find out as to whether the amount received by an assessee was a loan or advance. If it fall within these two categories it had to be taxed as deemed dividend but not otherwise.

The ITAT observed that for taxation purposes, the term ‘loan’ as well ‘advance’ has special meaning. In loan /advance transactions the borrower/ receiver agrees to repay the amount received to the lender with or without interest. If such a transaction fulfills the conditions stipulated by the provisions of section 2(22)(e) of the Act, same can be taxed accordingly.  As a deeming provision, a strict compliance all the pre-conditions is a must.

It was observed that the assessee has agreed to sell its assets to the subsidiary. Both the entities had shown the transaction as advance against purchase of capital assets. The essence of the transaction has to be considered in tax proceedings. Nomenclature given by the parties or the entries in the books of accounts are important-they are only indicative. They cannot alter the real nature of transaction.

The Tribunal observed that in the instant case, there was change in the asset side of the balance sheet as well as in the chart showing depreciation. There was no doubt that money received by the assessee from its subsidiary was for purchasing capital assets. In other words it was a trade advance in the normal course of business. In short, the transaction was not a loan/ advance as envisaged by the section 2(22)(e) of the Act.

The ITAT noted that the Hon’ble Karnataka High Court, in similar circumstances had held that such a case would not be covered by the provisions of section 2(22)(e). It was noted that the CIT(A) placed reliance on the judgment Hon’ble Madras High Court which was wrong as in that matter money was received by the assessee as advance under the head rent. The Hon’ble Madras High Court had held that advance paid to the assessee was to be set off against future rent would not alter the fact that the assessee in the eye of law had received dividend from the company during the relevant accounting period and that the advance was assessable as deemed dividend.

The ITAT opined that facts of both the cases were clearly distinguishable and the decision of Hon’ble Madras High Court was not applicable to the instant case.

Held:
The order of the CIT(A) was reversed.

Advance for purchasing capital assets not deemed divided

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