The division bench of the Madras High Court, in the case of CIT Chennai v. Mr. C. Subba Reddy, held that the provisions relating to ‘deemed dividend’ does not attract in a case where the credit is the result of a business transaction and not in the nature of a loan or a deposit.
In the instant case, the assessee-respondent is a proprietor of Ceebros Property Development (‘CPD’). While completing assessment, the AO noted that the assessee was ashare holder in a company, called Ceebros Hotels Private Limited (‘CHPL’), holding substantial voting rights and CHPL had accumulated profits as on 31.03.2001 and therefore, attracts s. 2(22)(e) of the Income Tax Act. Accordingly, assessment of the assessee was completed by treating the amount received under the above transaction as ‘deemed dividend’ of the assesee.
The bench noted 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.
The Revenue relied upon the decision of the Apex Court in Miss P.Sarada vs. Commissioner of Income Tax and the decision of the Calcutta High Court in M.D.Jindal vs. Commissioner of Income Tax wherein the Courts pointed out certain circumstances to invoke the provisions of deemed dividend.
Rejecting the contentions of the assessee, the division bench comprising of Justice Huluvadi G. Ramesh and Justice Anita Sumant noted that “In the first case, the assessee had made withdrawals from out of accumulated profits that were deemed to be dividend u/s 2(22)(e) of the Act. The defence taken was that the withdrawals could be taken to have been paid from out of monies lying to the credit of another shareholder. This was negatived by the Supreme Court. In the present case, there are no withdrawals and as the findings of fact by the lower authorities reveal, the frequency of advances by the Assessee to the company was more than in the reverse. The Calcutta High Court, 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) of the Act. 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. The decisions relied upon by the revenue do not advance its case, being distinguishable on facts.”
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