Advances made to group concerns short of funds to honour cheques not deemed dividend

Advances made to group companies who were short of funds in order to honour cheque not deemed dividend but advances for business purpose.

ABCAUS Case Law Citation:
ABCAUS 2755 (2019) (01) ITAT

Important Case Laws Cited/relied upon by the parties
Bright Enterprises Pvt. Ltd. Vs. CIT (2016), 381 ITR 107 (P&H)
CIT Vs. Creative Dyeing & Printing P. Ltd., 318 ITR 476
M/s Bagmane Constructions Pvt. Ltd. Vs. ACIT
S.A. Builders Ltd. Vs. CIT & Another, 288 ITR 1 (SC)

The assessee had challenged the order of the Commissioner of Income Tax (Appeals) in relation to the addition made on account of deemed dividend as per the provisions of section 2(22)(e) of the Income Tax Act, 1961 ( the Act ).

The assessee was directed to get his accounts audited from the duly appointed Special Auditor u/s 142(2A) of the Act.

The Special Auditor pointed out in its report that the assessee was a shareholder in a number of companies having substantial interest and these companies had given loans to the assessee or the concerns in which the assessee had substantial interest.

The Assessing Officer (AO) held that the conditions enumerated in section 2(22)(e) of the Act, of the said payments being in the nature of deemed dividend, stood fully satisfied and confronted the same to the assessee.

In response, due reply was filed by the assessee stating that the impugned advance did not qualify as deemed dividend u/s 2(22)(e) of the Act since they had been made out of business expediency and in the ordinary course of business.

Finding the said explanation unacceptable and not supported by any evidence, the AO treated the payments as deemed dividend in the hands of the assessee, as per section 2(22)(e) of the Act, and subjected the same to tax.

The CIT(A) gave only part relief.

Before the Tribunal, the assessee submitted that the payment was not in the nature of any loans or advances but was done only in a situation where the bank balance was short in one of the bank account of group concerns and there was need to cover the bank balance in order to honour the cheque.

It was contended that the amount was given in order to avoid any loss of goodwill of the concern and thus the transaction was on account of commercial expediency only being in the nature of financial help by one concern to another in the group.

The Tribunal observed that the qualifying conditions for treating any payment is dividend as per the provisions of section 2(22)(e) of the Act are;

(i) the payment is in the nature of loan or advance;

(ii) the payment is made to a shareholder who has not less than 10% voting power interest he company;

(iii) or the payment is made to another company in which such shareholder has substantial interest, which has been defined as being beneficial and entitled to not less than 20% income of the said company.

The Tribunal further observed that the present case fall in the third category, the loans and advances having been made by a company in which the assessee has beneficial interest to another company in which the assessee has substantial interest. The sole dispute was whether the amount advanced in the present case qualifed as business advances or not.

The Tribunal noted that the advances were made to the concerns which fell in the same group i.e. and the Directors and shareholders in the said concerns were common. Thus the business interest of all the concerns was clearly interrelated.

The Tribunal noted that it was not disputed that the impugned advances were given to keep the cash credit account of the receiver in limit and thus clear the cheques issued by it.

In biew of the above, the Tribunal agreed with the assessee that the advances given by one concern to another concern to tide over short term deficiency of funds was in the nature of commercial expediency since the financial position of all the group concerns were interrelated and interlinked and undisputedly the goodwill of the group also rested on the financial results and stability of the all group concerns. Any financial instability in one company effecting its results would have impacted the goodwill and ultimately the business of the other concerns in the group.

Therefore the Tribunal opined that advances made to tide over short term deficiencies of fund, qualified as advances for business purpose and not in the nature of loans and advances simpliciter benefiting any substantial or beneficial shareholder only.

Accordingly, the Tribunal held that the said advances did not qualify as loans and advances for the purpose of treating them as deemed dividend as per the provisions of section 2(22)(e) of the Act.

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