The Delhi bench of the Income Tax Appellate Tribunal, in a recent ruling, held that section 2(22)(e) of the Income Tax Act, 1961 is not applicable to pure business transactions. While quashing the order of the assessing authority and the adjudicating authority, the Tribunal observed that the advances made by the assessee company based on an unregistered MOU, cannot be treated as “deemed dividend” for the reason that section 2(22)(e) cannot be invoked in case of normal business transactions.
The assessee, in the instant case, has entered into a Memorandum of Understanding with M/s Landmark Apartments Pvt. Ltd to establish I.T. Park/call centre. For this purpose, the assessee had to arrange funds under the aid MOU. Subsequently, the Assessee entered into a Joint Investment with another Company to invest into M/s Landmark Apartments Pvt. Ltd on a condition that the profit arising out of the said joint investment will be shared equally among them. The assessing officer observed that the MOU has no legal value and even the MOU is neither registered nor notorised. Accordingly, the sum advanced by such companies should be treated as deemed dividend and not business transaction under section 2(22)(e) of the Income Tax Act, 1961.
The Commissioner of Income Tax (Appeals) confirmed the said order on appeal filed by the assessee. Therefore, the assessee approached the ITAT by filing a second appeal challenging the impugned order.
The Tribunal observed that the impugned order is not justified by holding that “from the terms of the MOU it was clear that such companies have joined hands with the assessee for making investment in M/s Landmark Apartments Pvt. Ltd and it has also been agreed that profit arising from the investmentwould be shared in the proportion of the investment. That merely because the MOU was not registered or not notarised or transaction did not fructify, does not mean that advance was not for the purpose of business. AO also went wrong in holding that MOU has no legal value as it is settled law that even the oral contract are binding. In the instant case, terms of the understanding are clearly stipulated and under such terms sums have been advanced to the assessee. This understanding cannot be ignored. In fact it is not in dispute that under the MOU dated 20.01.2007 with M/s Landmark Apartments Pvt. Ltd., assessee has made investment with such company and since the venture did not materialize as such, such invested by the assessee has finally been returned. Hence in such circumstances, we hold that the such advanced by such companies were clearly for the purpose of the business and purely on commercial consideration and hence such sums cannot be termed as deemed dividend.”
The Tribunal noticedthe decision of Delhi High Court in CIT vs. Ambassador Travels (P.) Ltd. reported in [2009] 318 ITR 376 (Delhi), in which it was held that if the transactions are normal business transactions, which were carried out during the course of the relevant previous year, they cannot be described as advances or loans, which form a distinct category of financial transactions and therefore the provisions of section 2(22)( e) of the Act were not at all applicable.
In another similar case, the same Court observed that “Trade advance which are in the nature of money transacted to give effect to a commercial transactions would not, fall within the ambit of the provisions of section 2(22)( e) of the Act.”
Following the above and various other judicial pronouncements, the Tribunal held that “That since in the instant case, sum advanced to the assessee by the aforesaid three companies were purely on commercial consideration and was business advance as such, same cannot be treated as deemed dividend u/s2(22)(e) of the Act, hence we hold that authorities below are not right intreating the aforesaid sums as deemed dividend. The AO isaccordingly directed to delete the addition.”
Read the full text of the order below.
