Income: Deemed dividend: Section 2(22)(e): A. Y. 2007-08: Where assessee, a builder and managing director of a company in which he was holding 63 % shares, received a construction contract from said company, in view of fact that assessee executed said contract in normal course of his business as builder, advance received in connection with construction work could not be taxed in assessee’s hands as ‘deemed dividend’ u/s. 2(22)(e):

The assessee is the proprietor of Shri Vekkaliamman Builders and Promoters and he also happens to be the Managing Director of Southern Academy of Maritime Studies Private Limited, in which he holds share of 63%. For the A. Y. 2007-08, the Assessing Officer added a sum of Rs.87,57,297/- to the assessee’s income u/s. 2(22) (e) of the Income-tax Act, 1961 as deemed dividend, rejecting the assessee’s contention that the company awarded construction contract to the assessee’s proprietary concern after completing with the procedures of the Companies Act. The Assessing Officer rejected the contention of the assessee that it being a normal business transaction, the amount received as advance for the purpose of executing the construction work, it would not fall within the scope of ”loans and advances” u/s. 2(22)(e) of the Act. CIT(A) agreed with the assessee that he was rendering services to his client M/s. Southern Academy Maritime Studies P. Ltd. by constructing building; that the advance money received was towards construction of the building for the said private limited company and that the trade advance was in the nature of money given for the specific purpose of constructing the building for the private limited company and hence the payment could not be treated as deemed dividend falling within the ambit of section 2(22)(e) of the Act. Thus, the Commissioner allowed the assessee’s appeal. The Tribunal, confirmed the view of the Commissioner.

On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:

“i) Going by the undisputed fact that the Revenue had not disputed the fact that the assessee had executed work for the company in the nature of construction of buildings and the said transaction being in the nature of a simple business transaction, we do not find any justifiable ground to bring the case of the assessee within the definition of deemed dividend u/s. 2(22) (e) of the Act. In the circumstances, we reject the Revenue’s case at the admission stage itself.

ii) In the result, the Tax Case (Appeal) is dismissed.”