Provisions of Deemed Dividend applicable when Assessee diverted Advance amount received for procuring Import Licences for Purchase of Shares: Delhi HC [Read Judgment]

While hearing the case of Commissioner of Income Tax vs M/s Prasidh Leasing Limited, the Delhi High Court ruled that Provisions of Deemed Dividend applicable when Assessee diverted Advance amount received for procuring import licences for purchase of shares under Section 2(22)(e) of the Income Tax Act 1961.

The Assessee Company M/s Prasidh Leasing Ltd filed its return of income for the relevant assessment year. During the course of assessment proceedings the Assessing Officer (AO) noticed that the Assessee shown an amount of Rs. 17,40,20,000 due in its balance sheet under the head sundry creditors in the name of Ginza Industries Limited. The AO further noticed from the list of closing stock of shares for the financial year 1994-1995 filed with the return of income that the Assessee held 17,67,642 of the aforesaid creditor company. Subsequently the Assessee Company was asked to furnish details regarding shareholding.

In response the Assessee submitted that during the year the Assessee Company had indulged in the business of sale and purchase of import license and it tied up with Ginza Industries for the procurement of license worth Rs.50 crores and had asked for advance of Rs.20 crores for the license procurement.

A survey under Section 133A of the Income Tax Act was conducted by the AO in the office premises of Ginza Industries Limited and ascertained that interest free advance of Rs. 17.4 crores given by the Company to the Assessee Company which covered under the definition of ‘deemed dividend’ under section  2(22) of the Act and accordingly the AO brought to tax the said amount by holding that the amount paid by Ginza Industries to the Assessee Company would be fall within the description of the term ‘deemed dividend’ under the said section.

On appeal both the lower authorities such as CIT (A) and Income Tax Appellate Tribunal (ITAT) granted relief to the Assessee Company and rejected the findings of the AO by holding that the transaction between the Assessee Company and Ginza Industries were normal business transaction. Aggrieved by the order of the authorities the Revenue approached the Court on appeal.

Before the Court the Revenue submitted that the lower authorities failed to notice that no import licenses were purchased or soled to M/s Ginza Industries and there was no transaction whatsoever between them. The agreement between the Assessee Company and Ginza was ambiguous which rate/discount on purchase of import licenses and giving interest free advance of Rs. 20 crores under such an agreement cannot be regarded as a genuine business transaction.

While upholding the findings of the Revenue, the division bench comprising of Justice S.Ravindra Bhat and Justice A.K.Chawla observed that “the AO completely overlooked by the lower appellate authorities who virtually made short work of the findings recorded with respect to the applicability of section 2(22)(e) of the Act. All indications were that the Assessee was sanguine and assured about the nature of the amount given by Ginza which could not be conceivably attributable to short term deposits and also for the purpose of yielding income by investing with the object of trading in shares. The Court further held that both the lower authorities, in the opinion of the Court overlooked that the real intent of Ginza in advancing the sums it did to the assessee was to share its profit by way of deemed dividend. The sum of Rs. 6.16 crores clearly fell within the description of “deemed dividend” under Section 2(22)(e) of the Act”.