By TIOL News Service:

AHEMDABAD, NOV 30, 2016: THE dispute is - Whether 'debit balances' existing in the name of Director, in the books of account of a company at the close of year, are to be treated as 'trade advances' ordinarily made in the course of business, and cannot be termed as deemed dividend u/s 2(22)(e). YES IS THE VERDICT.

Facts of the case:

The assessee is an individual and director of M/s Trivedi Corporation Pvt. Ltd. During the subject year, a search action u/s 132(4) was carried out in the group cases of Trivedia–Sompura. Consequently, notice u/s 153A was issued to the assessee, in compliance to which returns were filed by the assessee for all the three AYs 2005-06, 2006-07 & 2007-08. During the course of assessment proceeding, AO observed that M/s Trivedi Corporation Pvt. Ltd. having accumulated profits has advanced amount to the assessee through her salary a/c. On perusal of the ledger account it was observed that director's salary was monthly booked through journal entries and various payments on account of credit cards, travel expenses, personal expenses are paid by the company on behalf of the assessee. During the year at some particular date or at the close of the year there stood debit balance in the name of assessee in the books of account of Trivedi Corporation Pvt. Ltd. AO invoked provisions of section 2(22)(e) and made addition for deemed dividend for the impugned debit balances in the ledger account at Rs. 2,25,180/-, 4,15,910/- and Rs.1,58,390/- for AYs 2005-06, 2006-07 & 2007-08. On appeal, CIT(A) confirmed the additions for all the three years.

On appeal, the Tribunal held:

++ There is no dispute to the fact that assessee is a director and getting salary from the company towards the services provided. This fact is evident from the ledger account of assessee in the books of account of Trivedi Corporation Pvt. Ltd. shown in the assessment order itself. The clear picture which comes out from going through the ledger account is that as on 1.4.2004 there was a credit balance and during the year monthly entries of salary have been provided and salary payments have been made either in cash payment of credit cards dues & travel expenses. TDS deducted and payment by bank. During AY 2005-06 the balance remained credit at various points of time. Similar is the situation for AY 2006-07 an 2007-08;

++ It is further observed from the judgment of the Allahabad High Court in the case of Shyama Charan Gupta vs. CIT, wherein it has been held that "advance payment of salary or commission to managing director is a trade advance ordinarily made in the course of business so that such advance is not covered u/s 2(22)(e)." We find that the facts of the present case are quite similar to the facts adjudicated by Allahabad HC in the case of Shyama Charan Gupta vs. CIT so much so that in the case of assessee also the debit balance at certain point of time are in the nature of advance salary. We, therefore, are of the view that the impugned debit balances cannot be termed as advance in the form of deemed dividend u/s 2(22)(e) as they are trade advance ordinarily made in the regular course of business. We delete the additions for all the three years.

(See 2016-TIOL-2086-ITAT-AHM)