CIT v. Creative Dyeing & Printing (P) Ltd.
INCOME TAX ACT, 1961
Dividend- Deemed dividend under section 2(22)(e)-Advance received by holding company whose directors were common-Taxability of
Assessee-company was engaged in business of dyeing and printing of cloth and was acting as an ancillary unit of another company for last several years. Both assessee-company and another company, had common shareholders/directors. That company also had 50 per cent shareholding in assessee-company. In order to increase its export business and to compete with international standards in garment exports, that company had suggested modernization and expansion of plant and machinery of assessee-company which required a huge investment. Assessee showed its inability to invest such large amount out of available funds at relevant time and, therefore, that company agreed to make available funds to assessee to the extent of 50 per cent of the cost and the rest of 50 per cent of the project cost was to be made available by the directors of assessee. AO treated amount paid to assessee-company by another company as deemed dividend in terms of section 2(22)(e) for reason that two directors of assessee-company held more than 20 per cent share in the assessee-company and they also held 27.42 per cent and 29.71 per cent share, respectively, in that company and they had interest in that company from where amount had been received. Tribunal held that amount paid by that company to assessee-company did not bear characteristics of loans and advances, rather the amount had been paid by that company in its own interest and that too for the purpose of business because the ultimate beneficiary of proposed expansion of the plant and machinery was that company itself. Tribunal, therefore, held that amount received by assessee from that company was not deemed dividend within the meaning of section 2(22)(e) and deleted impugned addition made by AO. Held:Tribunal was found that transaction in question was a business transaction and it would have benefited both, assessee-company and that company. Revenue had also conceded that amount was not a loan but only an advance because amount paid to assessee-company would be adjusted against the entitlement to moneys of assessee-company payable by that company in subsequent years. [Para 10]
Revenue contended that since that company was not in the business of lending money, the payments made by it to assessee-company would be covered by section 2(22)(e)(ii) and payment even for business transactions would be a deemed dividend. There was no merit in the contentions of the revenue. Provision of section 2(22)(e)(ii) is basically in the nature of an explanation. That cannot, however, have bearing on interpretation of the main provision of section 2(22)(e) and once it was held that the business transactions did not fall within section 2(22)(e), there is no need to go further to section 2(22)(e)(ii). The provision of section 2(22)(e)(ii) gave an example only of one of the situations where the loan/advance would not be treated as a deemed dividend. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of section 2(22)(e).[Para 11]
Therefore, Tribunal was correct in holding that amount advanced for business transaction between the assessee-company and that company was not such to fall within definition of the deemed dividend under section 2(22)(e). [Para 12]
Income-tax Act, 1961 Section 2(22)(e)
Case Law Analysis:CIT v. Raj Kumar [2009] 181 Taxman 155 (Delhi) [Para 11] followed.
Decision: In favour of Assessee.