Deemed dividend upheld when amount was parked in long term investments and hence could not qualify as to be made in the course of business – High Court
ABCAUS Case Law Citation:
ABCAUS 2219 (2018) (02) HC
The case law involves an appeal filed by the Income Tax Department (Revenue) against the order of the Income Tax Appellate Tribunal (ITAT/Tribunal) in deleting the addition made by the Assessing Officer (AO) on account of deemed· dividend u/s 2(22)(e) of the Income Tax Act, 1961 (the Act) and also the disallowance of amount paid as guarantee commission.
Important Case Laws Cited/relied upon by the parties:
Navnit Lal. C. Jhaveri v. K.K. Sen 1965 (56) ITR 198; Tarulata Shyam v. CIT 1977 (108) ITR 345; CIT v. Sunil Chopra 242 CTR (Del) 498; CIT v. Creative Dyeing and Printing Private Limited 2009 318 ITR 476; CIT v. Atul Engineering Udyog 2015 228 Taxmann 295 (All) and CIT v. Nagindas. M. Kapadia1997 (177) ITR 393
Brief Facts of the Case:
The respondent assessee in its books of account had shown an outstanding liability payable to a company (sundry creditor). It was explained to the AO that the assessee company had was in the business of sale and purchase of import licenses. It tied up with the sundry creditor for procurement of License and received advance for procurement of license. It was also stated that another company stood as guarantor to the sundry creditor for the safe custody of the funds and as per the tripartite agreement the other company was to be paid 2.5% as guarantee commission.
The AO observed that the assesse company was holding more than 10% equity shares in the said sundry creditors company. The AO considered the payment of guarantee commission on net of advance as admission of fact the assessee was benefited just by virtue of receiving the advance to such an extent that it could pay a commission out of its own resources. Also, the AO noted that the advance received was parked in investments in shares and loans and advances to several parties whereas as per the agreement the assessee was required to mobilize these funds within 3 days, if the sundry creditor company recalled it or within a day if it was required to block deals in purchase of licenses. Further, the rate of interest charged on these loans and advances was approx. @ 12% per annum which clearly showed that the loans were taken for medium to long term. According to the AO, it showed that the assessee could not have and did not have the intention to purchase the shares.
On appeal, the CIT (Appeals) held that the amount received could not have been treated as “deemed dividend”. The ITAT confirmed the conclusions of the CIT (A) and held that it was a business transaction.
Contentions made on behalf of the Petitioner Revenue:
It was submitted that no import licences were purchased and sold. In fact there was no transaction whatsoever between the assessee and the sundry creditor company. It is submitted that the alleged agreement was vague, merely a cover up and camouflage, ambiguous and advance of money under such an agreement cannot be regarded as a genuine business transaction
It was argued that in terms of the alleged agreement, the assessee was not liable to pay any interest and substantial amounts were paid to him though the deal had not materialized.
Observations made by the High Court:
The Hon’ble High Court opined that whether amounts advanced by a company in which public does not have any substantial shareholding to a shareholder holding shares in excess of 10% amounts to a trading transaction or deemed dividend, there can be no bright line test. The Revenue has to conduct a fact-based inquiry each time such contention is urged by the assessee.
The Hon’ble High Court opined that all the facts which were analyzed meticulously by the AO, were completely overlooked by the lower appellate authorities who virtually made short work of the findings recorded with respect to the applicability of Section 2(22)(e).
The Hon’ble High Court observed the assessee by advancing substantial amounts at commercial rates of interest could not be conceivably attributable to short term deposits and also for the purpose of yielding income, i.e. by investing with the object of trading in shares.
The Hon’ble High Court opined both the lower authorities overlooked that the real intent of advancing the sums to the assessee was to share its profit by way of deemed dividend. The sum.
Regarding the issue of guarantee commission, the Hon’ble High Court observed that the AO was of the opinion that the agreement was of a self–serving nature and meant for purposes other than of business intended.
The CIT (A) and the ITAT deleted the disallowance holding that the original transaction of advance was genuine and a trading one and furthermore that the commission was paid through payment channels in terms of the tripartite agreements. It was also observed that there was no interrelationship between the assessee and the other company with which the license arrangements were sought to be entered into directly.
The Hon’ble High Court opined that since the commission payment was premised upon the assessee’s claim about the genuineness of the underlying transaction, i.e. that it was an advance, the findings on deemed dividend logically would result in the second question too being answered in the revenue’s favour.
The questions were answered in favour of the assessee and against the Revenue.