April 2010
Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 : Assessee company received funds from sister concern PE Ltd. for expansion of production capacity as advance for commercial purpose to be adjusted against monies payable by PE Ltd. in subsequent years
By K. B. Bhujle | Advocate
New Page 1
3. Deemed
dividend : S. 2(22)(e) of Income-tax Act, 1961 : Assessee company received funds
from sister concern PE Ltd. for expansion of production capacity as advance for
commercial purpose to be adjusted against monies payable by PE Ltd. in
subsequent years : Provisions of S. 2(22)(e) not attracted.
[CIT v. Creative Dyeing &
Painting (P) Ltd., 229 CTR 250 (Del.)]
The assessee company was engaged
in dyeing and printing of cloth and was acting as an ancillary unit of PE Ltd.,
a sister concern, for the last several years. In order to increase its export
business and to compete with the international standards and garment exports
M/s. PE Ltd. suggested modernisation and expansion of the plant and machinery of
the assessee company. Towards this project M/s. PE Ltd. paid to the assessee
company an amount equal to 50% of the project cost as advance to be adjusted
against the entitlement of the moneys of the assessee company payable by PE Ltd.
in the subsequent years. The Assessing Officer treated the said advance amount
as deemed dividend u/s.2(22)(e) of the Income-tax Act, 1961 and made addition
accordingly. The Tribunal deleted the addition, holding that the payment of an
advance for a commercial purpose to the assessee company by its sister concern
is not deemed dividend u/s.2(22)(e) of the Act.
On an appeal filed by the
Revenue, the Delhi High Court upheld the decision of the Tribunal and held as
under :
“(i) The contention that
since PE Ltd. is not into the business of lending of money, the payments
made by it to the assessee company would be covered by S. 2(22)(e)(ii) and
consequently payments even for business transactions would be a deemed
dividend is not acceptable.
(ii) The provision of S.
2(22)(e)(ii) is basically in the nature of an Explanation. That cannot
however, have bearing on interpretation of the main provision of S. 2(22)(e)
and once it is held that the business transactions do not fall within S.
2(22)(e), one need not go further to S. 2(22)(e)(ii).
(iii) The provision of S.
2(22)(e)(ii) gives an example only of one of the situations where the
loan/advance will not be treated as a deemed dividend, but that’s all. The
same cannot be expanded further to take away the basic meaning, intent and
purport of the main part of S. 2(22)(e). This interpretation is in
accordance with the legislative intention of introducing S. 2(22)(e).
(iv) Therefore, the Tribunal
was correct in holding that the amounts advanced for business transaction
between the parties, namely, the assessee company and PE Ltd. was not such
to fall within the definition of deemed dividend u/s.2(22)(e).”
