No deemed dividend u/s 2(22)(e) when loan received for commercial transaction & interest paid

No deemed dividend u/s 2(22)(e) when loan was received for commercial transaction and interest was paid on it

In a recent judgment ITAT has held that there is no deemed dividend u/s 2(22)(e) when loan was received for commercial transaction and interest was paid on it

ABCAUS Case Law Citation:
ABCAUS 3856 (2024) (02) ITAT

Important Case Laws relied upon by parties:
Pradip Kumar Malhotra (2011) 338 ITR 538
PCIT vs. Mohan Bhagwat prasad Agrawal (2020) 115 taxmann.com 69
Jesons Industries and others vs. ITO

In the instant case, the assessee had challenged the order passed by the CIT(A) in upholding that provisions of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961 (the Act) were attracted to the assessee.

The return filed by the assessee was subjected to assessment under section 143(3) of the Act. In the course of assessment, the Assessing Officer (AO) inter alia observed that the assessee has received certain loans and advances from a company where the assessee was a beneficial owner of shares in excess of 10% voting power.

The AO thus invoked the provision of section 2(22)(e) of the Act and made an addition in the hands of assessee under section 2(22)(e) of the Act.

Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) however did not find any error in the assessment order.

Further aggrieved, the assessee preferred appeal before the Tribunal.

The assessee submitted that the lower authorities have misdirected themselves in law in applying the provision of section 2(22)(e) of the Act to reckon the money received by the assessee from lender to the deemed income of the assessee being shareholder of the lender company.

The assessee submitted that the provision of section 2(22)(e) of the Act are not applicable for multiple reasons; (i) the amount received from the lender company were offshoot of business/commercial transaction in the ordinary course of trade and such transactions were not covered within the ambit of section 2(22)(e) of the Act (ii) the assessee has paid interest on such loans/advances and therefore, the transactions are characterized by commercial spirits

It was submitted that the case of the assessee for the immediately preceding year was reopened on the same facts in issue. However, while framing the reassessment order, the Assessing Officer found that the impugned transactions giving rise to loans and advances receipts by way of in the hands of assessee fall outside the ambit of section 2(22)(e) of the Act. The reassessment order was accordingly passed without making any adjustment on same very point for which the case was reopened. Hence, the principle of consistency should apply to the present proceedings as well and the AO was not entitled to take diametrically opposite view in two different assessment years.

The Tribunal noted that as pointed on behalf of the assessee, the case was reopened under section 147 r.w.s 148 of the Act on identical point namely; breach of section 2(22)(e) of the Act involving identical set of facts. The assessee contended that despite the case having been reopened on the same point, the assessment framed thereafter in pursuance of such reopening was without any additions of this score.

The Tribunal opined that impliedly the Assessing Officer was satisfied with the explanation offered by the assessee that the receipt of money by the assessee from the said limited company did not fall within the sweep of section 2(22)(e) of the Act. A different view was thus not warranted in the identical facts.

It was further observed by the ITAT that assessee had all along pointed out that interest had been paid on such outstanding attributable to company. The factum of interest and deduction of TDS thereon was also reflected in the ledger account and the confirmation thereof by the corresponding party. Hence, the advances made by the lender company to the assessee was not a loan/advance simplicitor but is beset with the character of quid pro quo owing the charge of interest for the benefit of lender company.

The Tribunal noted that in the identical circumstances, the Hon’ble High Court had observed that advances given by lender firm was not for the individual benefit of the share holder but for business purposes and therefore, such transaction could not fall within the sweep of deeming fiction created under section 2(22)(e) of the Act. This reason, on a standalone basis, is sufficient to exclude the applicability of section 2(22)(e) of the Act on the money received by the assessee. Similar view has been followed by the Co-ordinate Bench of the Tribunal.

Accordingly, the Tribunal set aside the order of the CIT(A) and the additions made by the AO under section 2(22)(e) of the Act was quashed.

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