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THE COMMISSIONER OF INCOME TAX (CENTRAL) Versus CHANDRASEN REDDY

2016 (5) TMI 1269 - ANDHRA PRADESH HIGH COURT

Deemed dividend under Section 2(22)(e) - Held that:- As held in Creative Dyeing and Printing P. Ltd. (2009 (9) TMI 43 - DELHI HIGH COURT ), it is only if the advance paid is for the benefit of the shareholder/director, can it be said to be “deemed dividend” within the meaning of Section 2(22)(e) of the Act. The Tribunal has rightly held that the subject transaction is not for the benefit of the assessee, but is for the benefit of the company; and it is a transaction in the ordinary course of bus .....

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ce Ramesh Ranganathan) This appeal, under Section 260-A of the Income Tax Act, 1961 (for short the Act ), is preferred by the Revenue against the order passed by the Income Tax Appellate Tribunal in I.T.A.No.376 of 2013 dated 31.10.2013 for the assessment year 2009-10. In the order under appeal, the Tribunal noted that the assessee was one of the directors of M/s.Charan Life Devices Pvt. Ltd which did not have any landed property or building of its own; the company was facing hurdles in obtainin .....

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when they had earlier applied for loans for investment in its subsidiary PHEPL; the directors entered into an agreement with the company for the sale of their properties in the latter s favour; the total value of the sale consideration was ₹ 1,70,00,000/-; copies of the agreement of sale were on record; as on date, the full consideration was not received; to facilitate transfer of property, the company had paid them an advance of ₹ 94,75,000/- as part payment; the property was not t .....

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paid by the company to the directors, towards part-payment of the sale consideration of the property, could not be treated as deemed dividend as it had not been proved that the transaction was for the benefit of the shareholders/directors. The Tribunal further observed that it was the intention of the directors to transfer the property to the company, for which they received advance; the directors were mortgaging their personal properties as security for the cash credit facilities/terms loans ex .....

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d not be treated as deemed dividend. Sri J.V. Prasad, learned Senior Standing Counsel for Income Tax, would submit that any advance by the company, in which the public has no substantial interest, to a shareholder, being a person who is the beneficial owner of the shares, would fall within the definition of dividend under Section 2(22)(e) of the Act; it is only if it falls within the exception under Clauses (i) to (v) thereunder would it not fall within the definition of dividend ; Clause (ii) o .....

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ng otherwise. On the other hand, Sri B.Chandrasen Reddy, learned counsel for the respondent-assessee, would submit that where the transaction is for the beneficial interest of the company, and not for the benefit of the director/shareholder, it would be a transaction in the normal course of business; such transaction would not fall within the definition of dividend under Section 2(22)(e) of the Act; as such transactions do not fall within the main part of Section 2(22)(e) itself, it is unnecessa .....

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o those transactions carried out in the course of business as such; in the course of business transactions between a company and a stockholder, the company may be required to give advance in mutual interest; there is no legal bar in having such transactions; what is to be ascertained is the purpose of such a transaction; if the amount is given as an advance simpliciter, without any further obligation behind receiving such an advance, it may be treated as deemed dividend ; if it is otherwise, the .....

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vidend. The Division Bench of the Delhi High Court further held that Section 2(22)(e) is in the nature of an explanation; Clause (ii) thereunder cannot have a bearing on the interpretation of the main provision of Section 2(22)(e) itself; once it is held that the business transaction does not fall within Section 2(22)(e), it is unnecessary to examine clause (ii) of Section 2(22)(e) of the Act as it gives an example of one of the situations where the loan/advance will not be treated as a deemed d .....

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