2005 (6) TMI 214 - AT - Income Tax

Addition as deemed dividend under the provisions of section 2(22)(e) - Whether an advance or loan in lieu of business venture or a commercial obligation fall within the purview of section 2(22)(e) - HELD THAT - There is no dispute as to the fact that the assessee is a shareholder of SPPL having substantial interest in it. There is also no dispute that SPPL is a company in which the public are not substantially interested. The main objects of the provisions of section 2(22)(e) of the Act are to treat the loan granted by a closely held company to any of the shareholders in the same manner as it treats dividend distributed by it to them. The justification is that SPPL is a company there is a group of members controlling its affairs and possessing a block of majority shares since there are accumulated profits in g the company this group if they choose can have distribution arranged on such profit to its shareholders in which event the shareholders will not be liable to pay any tax. In order to avoid such a tax liability the company may grant loan. When such loan is advanced to shareholder who has substantial interest in the company the inference is irresistible that the loan is a made up affair and there is every reason for treating such loan as dividend. The provisions of section 2(22)(e) themselves carve out certain exceptions in the same clause. One such exemption is that the term dividend does not include any advance or loan made to a shareholder or the said concern by a company in the course of its business and the lending of money is a substantial part of the business of the company Nowhere in section 2(22)(e)(ii) there is a requirement that assessee should only receive a return in the income or interest for the loan advanced. So what requires is that the loan must have been granted to a shareholder in the ordinary course of its business where the lending of the money is a substantial activity of the company. The material placed before us in the form of agreements and other information as discussed in the two impugned orders clearly show that the loans have been lent by the company to the assessee who is a shareholder in the ordinary course of the business of the former and the lending of the money is only business activity of the company. The fact that the company did not have any valid money-lending licence in our view does not make any difference. The phrase in the ordinary course of its business implies that where loans are granted by a company to its shareholders not in the ordinary course of its business but are so arranged just to defeat the tax liability such a loan shall be dividend and would be liable to tax. In our view on the facts that are stated before us it cannot be said that the loans are arranged just to defeat the tax liability and not in the ordinary course of business of money lending. When it is manifest and evident that the advance was made in the ordinary course of its business in our view the revenue authorities are not justified in treating the loan as dividend. Accordingly the addition made on this count is deleted. In the result the appeal is partly allowed.

Summary

Issues:
- Addition of deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.
- Disallowance of the assessee's claim of loss on the sale of a flat.

Analysis:

1. Deemed Dividend Addition:
The appeal arose from the CIT(A)'s order for the assessment year 2000-01, specifically concerning the addition of Rs. 2,02,07,515 as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961. The assessee, an individual with a proprietary business, was a substantial shareholder of a company, SPPL, from which the assessee had taken a loan. The Assessing Officer contended that the transaction fell under section 2(22)(e) despite the assessee's argument that it was a business transaction. The Tribunal considered the nature of the agreements between SPPL and the assessee, highlighting that the loans were part of SPPL's ordinary business activity of financing films. The Tribunal noted that the loans were not arranged to evade tax liability but were made in the ordinary course of business. Citing exceptions in section 2(22)(e), the Tribunal found that the revenue authorities were unjustified in treating the loan as dividend, ultimately deleting the addition.

2. Disallowance of Loss on Sale of Flat:
The second issue related to the disallowance of the assessee's claim of loss amounting to Rs. 12,07,797 from the sale of a flat. During the hearing, this ground was not pressed, leading to its rejection. Consequently, the Tribunal partly allowed the appeal, overturning the deemed dividend addition while rejecting the claim for loss on the sale of the flat.

In conclusion, the Tribunal's decision favored the assessee by ruling that the loan from SPPL did not constitute deemed dividend under section 2(22)(e) as it was part of SPPL's ordinary business activity. The Tribunal also addressed and rejected the disallowance of the loss on the sale of a flat, resulting in a partial allowance of the appeal.