Whether when assessee holds substantial shares in partnership firm and also company, any trade advance given by company to firm is to be treated as deemed dividend in hands of assessee - NO: ITAT

THE issue before the Bench is - Whether when the assessee holds substantial shares in a partnership firm and also a company, any trade advance given by the company to the firm is to be treated as deemed dividend in the hands of the assessee u/s 2(22)(e). And the verdict goes against the Revenue.

Facts of the case

The assessee is partner in M/s Shri Ram Gum & Chemicals and also director in a company named M/s Shri India Sino Gum (P). Ltd. He filed his Return of Income [ROI] in Form No. 2D declaring total income of Rs. 1,20,320/-. Subsequently, a notice u/s 148 was issued after recording requisite reasons for reopening. The assessee complied with this notice and also filed objections against the reassessment proceedings. However, assessment was completed on 20.12.2010 u/s 143(3) r.w.s 148 of the Act at a total income of Rs. 63,74,845/-. The A.O. made addition of Rs. 62,54,525/- u/s 2(22)(e) of the Act. The assessee was stated to be the key management personnel holding 2,50,100 shares valued at Rs. 25,01,000/- in the company. Thus, he was holding 50% share of M/s Shree India Sino Gum (P). Ltd. As per the audit report, there had been transactions within the company and the firm. He was also having substantial interest in the firm. During the year, as per the assessment order, M/s Shree Ram Gum & Chemicals took loan of Rs. 1,31,20,000/- from M/s Shree India Sino Gum (P). Ltd. According to the A.O., this amount taken by the firm as loan from the company attracted the provisions of section 2(22)(e) of the Act as the assessee had ultimate beneficiary having substantial interest in both these concerns. After seeking explanation from the assessee, the A.O. restricted the deemed dividend to Rs. 1,25,09,050/- being accumulated profit and after treating 50% share holding in the company as the deemed dividend in the hands of this assessee had been worked out to Rs. 62,54,525/- and had been added in his hands. On appeal, the CIT(A) deleted the additions.

On appeal, the Tribunal held that,

++ we have carefully perused the entire material on record. We have found it for a fact that the assessee Shri Om Prakash Soni has 25% share holding in the firm and 50% share holding in the company. The case of the revenue is that any loan or advance made by the company to the firm in which both the assessee has substantial interest would attract deeming provision of section 2(22)(e) of the Act. As per the assessee, there has been no advance by the company as has been alleged by the A.O. But this advance is in relation to business transactions entered into legally between the firm and the company. Therefore, business transactions cannot fall under the category of advance in the sense in which it has been envisaged in section 2(22)(e) of the Act. It is found from records that the firm and the company are indulging in ordinary course of business for last several years. We have found for a fact that the assessee has not received any loan either from the company or from the firm. At any point of time, no investment of the assessee in the firm has been negatived and there was debit balance. The assessee did not receive any loan or advance from the firm. Thus, no amount can be stated to have been, directly or indirectly, diverted to him;

++ as per the CIT(A)’s order, the assessee had submitted copy of bank book on 1.4.2002 and 31.32007 before the A.O. and from this bank book, it is clearly established that no amount was advanced by the firm to the partners and there was credit balance in the accounts of the partner and at no point of time there was debit balance in the account of the partners from this bank book. It was also established that there were transactions between the firm and company in the ordinary course of business and no amount received by the firm had been utilized in giving advance to any of the partners, including this assessee. Before the A.O., the assessee filed copy of bank book, copy of bank account and copies of books of account of the firm to show that no fund was transferred to the partners so as to attract the provisions of section 2(22)(e) of the Act. There was sufficient capital in the name of the partner in the books of the firm. Thus, in this background, the CIT(A) has concluded that the firm received trade advances from the company for supply of particular type of guwar gum powder. It is noticed that in the preceding year also the firm has been receiving such advances and selling guwar gum powder to the company. Thus the trade advances were for supply of goods and failing to supply the agreed quality and quantity of guwar gum powder, it would return the money back without interest. Thus from the records, we have also concluded that the transactions between the company and firm are business transactions and amounts advanced by this company to the firm is only advance for business purpose and not as loan. In the balance sheet of the company, the amount has been shown as advance for business purposes. Likewise in the balance sheet of the firm, this amount has been shown under the head "unsecured loan". We are in agreement with the counsel that the nature of the transactions has to be decided on the basis of true nature of transactions and not as per nomenclature given in the books;

++ in A.Y. 2005-06, similar transactions have been accepted by the A.O. himself while passing the order u/s 143(3) of the Act on 20.12.2007. We have found that similar transactions between the company and the firm were carried out in the earlier years and on the same facts, no adverse inference was ever drawn by the A.O. In the subsequent years also, similar transactions have been carried on by the assessee. Therefore, the rule of consistency demands that no such adverse inference should be drawn in this year also. After examining extracts of the books of account produced vis-a-vis the assessment order, the CIT(A) has found that this is not a case where the firm has been used as a conduit to pass on the money received by the assessee from the company. He has also observed that no loan has been taken by the assessee from the firm. He has further observed that it is not a case of the A.O. that the advance from the company has been routed through some indirect circuitous way to ultimately reach the assessee. The deeming provisions of section 2(22)(e) of the Act is based on such a presumption only. It is settled position of law that advances made during normal course for commercial expediency do not constitute loan for the purpose of section 2(22)(e) of the Act and cannot be taxed as deemed dividend;

++ but, the CIT(A), Bikaner, in assessee's own case while passing order u/s 201(1)/201(1A) for A.Ys. 2003-04 to 2009-10 passed by the DCIT[TDS], Jodhpur in the case of M/s Shree India Sino Gums (P) Ltd. has held that the said company having failed to deduct tax at source u/s 194 of the deemed dividend paid by the company to the partners of the firm was assessee in default u/s 201(1) of the Act. Against the said order, the CIT(A) has observed that a perusal of the copies of account of the assessee-company showed that they were normal business transactions. From the account statement, it was not established that they were for the benefit of the shareholders who were also partners in the firm. Therefore, it cannot be said that these amounts constitute a dividend even under the deeming provisions. The above order of the ld. CIT(A), Bikaner was challenged before the ITAT, who, vide their order dated 31.7.2013 have categorically mentioned in order that provisions of section 2(22)(e) of the Act are not attracted in this case. Thus, we find that the payments in question were normal business transactions. It is not a case where one concern is dealing in cheese and the other in chalk. These payments by the company to the firm were for business purposes. Accordingly, we do not find any infirmity in the order of the CIT(A) and therefore, cannot allow this appeal.