By TIOL News Service

CHENNAI, JAN 19, 2017: THE ISSUE IS - Whether advances paid to a closely held company on account of contractual obligation, can be treated as deemed dividend u/s 2(22)(e), merely because the payer was a shareholder having substantial voting rights in the said company. NO is the verdict.

Facts of the case:

The assessee carries on the business of Real Estate Development as a proprietorship under the name and style of Ceebros Property Development ('CPD'). It entered into an Agreement with an entity named as 'CHPL', sub-contracting a construction contract to it. AO noted that the financials revealed an amount of Rs.1.61 crores due from CPD to CHPL. Since CPD was a share holder in CHPL, a closely held company, holding substantial voting rights and CHPL had accumulated profits as on 31.03.2001, the provisions of Section 2(22)(e) were invoked. The assessment was completed invoking the provisions of Sec 2(22)(e) and bringing to tax the aforesaid amount as deemed dividend. The decision of Calcutta HC in the case of M.D.Jindal vs. CIT was relied upon to counter the objection of assessee to the effect that the credit arose out of a business transaction to which the provisions of section 2(22)(e) would not stand attracted. The officer pressed into service clause (ii) of the exclusion to section 2(22)(e) to state that only ordinary business transactions carried on by companies engaged substantially in the business of money lending would stand excluded from the mischief of section 2(22)(e).

On appeal, the HC held that,

++ it is seen that the credit arises by virtue of a contractual obligation and a business transaction and has been settled the very next year. There is no individual benefit derived by the Assessee. Moreover, the credit does not satisfy the definition of 'advance' or 'loan'. The fiction thus fails on several counts. In the present case, there are no withdrawals and as the findings of fact by the lower authorities reveal, the frequency of advances by Assessee to the company was more than in the reverse. The Calcutta HC, in the case of M.D.Jindal, dealt with a transaction that was found to be colourable. The concurrent finding of fact in that case was to the effect that the transaction was a device designed to circumvent the provisions of Section 2(22)(e). The veil was thus lifted and the true facts brought to light. In the present case, there is no such allegation and on the contrary, the concurrent finding is to the effect that no benefit has accrued to the assessee, the credit is the result of a business transaction and is neither in the nature of a loan or a deposit. Therefore, the provisions of Sections 2(22)(e) does not stand attracted.

(See 2017-TIOL-129-HC-MAD-IT)