Deemed dividend u/s 2(22)(e) applies only to net debit balance of advances in all accounts with company

Deemed dividend u/s 2(22)(e) applies only to net debit balance of advances in all accounts where assessee is maintaining multiple accounts with the same company

ABCAUS Case Law Citation:
ABCAUS 3065 (2019) (07) ITAT

In the instant appeal had been filed by the assessee against the order of the CIT(A) in confirming 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).

The assessee was an individual. During the course of his assessment proceedings, the Assessing Officer observed that the assessee had received advances from a private limited company in which the assessee was a major shareholder.

The AO therefore, asked the assessee to explain as to why the provisions of section 2(22)(e) of the Act shall not be invoked since the company had accumulated profits and the assessee had received advances from the said company.

No convinced with the explanations given by the assessee, the AO invoked the provisions of section 2(22)(e) of the Act and made an addition towards deemed dividend u/s 2(22)(e) to the total income of the assessee.

Before the CIT(A), the assessee submitted that the assessee had also provided funds to the company to meet its business exigencies and to enable it to avail bank facilities. It was submitted that the assessee was maintaining three accounts (namely unsecured loan, advance account and current account) with the said company and when all the three ledger accounts of the assessee are taken together, in the books of the company the assessee had a credit balance, i.e. the assessee was a net depositor with the company.

However, the ld.CIT(A) was not satisfied with the arguments advanced by the assessee and sustained the addition made by the AO.

The Tribunal found merit in the contention of the assessee that the assessee was maintaining three separate accounts with the said company and cumulatively the assessee had given and not taken advance from the company.

The Tribunal noted that the submission of the assessee was not disputed by the Revenue, therefore, the Tribunal opined that provisions of section 2(22)(e) of the Act will be attracted only if the net balance is an advance to the assessee when he is maintaining three separate accounts with the same company.

Accordingly, the Tribunal opined that in the instant case the provisions of section 2(22)(e) of the Act were not applicable and the order of the CIT(A) was set aside with direction to the Assessing Officer to delete the addition.

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