Current account transaction cannot be taxed “Deemed Dividend”

Section 2(22) (e)




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Current account transaction cannot be taxed “Deemed Dividend”

Issue

Whether provisions of section 2(22)(e) would applicable where transactions between shareholder and company were in nature of current account?

Provision

Section 2(22) (e) of Income Tax Act 1961

Dividend includes any payment by a company, not being a company in which public are substantially interested of any sum by way of loan or advance

  • to a shareholder, being a person who is the beneficial owner of the shares ,holding not less than 10% of the voting rights, or
  • to any concern in which such shareholder is a member or a partner and in which he has a substantial interest, or
  • on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.

 M/s Mirik Commercial Pvt. Ltd. Vs Pr. Commissioner of Income Tax (ITAT Kolkata)

 Assessee is a private limited company and declared its income under the head business and profession. Thereafter scrutiny assessment was made u/s 153C/143(3) of the Income Tax Act 1961 at the income declared in the return. Subsequently, the Ld. Pr. CIT observed that assessee availed a loan from M/s Design Vinimoy Pvt. Ltd, in which assessee is holding shares to the tune of 27.1%. Thus, Ld. PR. CIT found that assessee was holding substantial interest in DVPL and accordingly the provisions of deemed dividend are attracted u/s 2(22)(e) of the Income Tax Act 1961 to the amount of loan received by assessee to the extent the amount of accumulated profit

shown by M/s Design Vinimoy Pvt. Ltd. However the Pr. CIT observed that Assessing Officer has not looked into the matter of deemed dividend as specified u/s 2(22)(e) of the Income Tax Act 1961  during the course of assessment proceedings. Accordingly, Ld. Pr. CIT issued notice u/s 263 of the Income Tax Act 1961 for seeking clarification from the assessee in connection with the application of provision of deemed dividend to the amount of loan received by it during the year. In compliance thereto, assessee submitted that no loan / advance was received from M/s Design Vinimoy Pvt. Ltd during the financial year.

The assessee further submitted that if at all the loan has been shown by the assessee then it represents the loan taken in the earlier years. Therefore, there is no question of applying the provision of section 2(22)(e) of the Income Tax Act 1961 to the amount of loan. However, Ld. Pr. CIT disregarded the contention of assessee and held that the order passed by AO is erroneous in so far as prejudicial to the interest of revenue.

Being aggrieved by order of Ld. Pr. CIT assessee has come up in appeal before ITAT.

After going through the material ITAT officer found that initially the assessee has given loan to M/s Design Vinimoy Pvt. Ltd and similarly on later occasions, assessee has taken loan / advance from M/s Design Vinimoy Pvt. Ltd. Thus, it cannot be termed as advance taken by assessee.

ITAT held that there remains no doubt that the transactions between assessee and M/s Design Vinimoy Pvt. Ltd is representing current account transactions. Therefore, the provision of Section 2(22)(e) of the Income Tax Act 1961 cannot be attracted to such transactions

Conclusion

Thus provision of section 2(22)(e) of the Income Tax Act 1961 is not applicable on current account transaction.

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