Regular trading transactions between shareholder and the company shall not attract sec. 2(22) (e)

Where there were regular trading transactions between shareholder and company and the payments received against sales made during course of commercial transactions, provisions of section 2(22)(e) were not applicable.   image1

Case: Smt. Uma Pandey vs. Income Tax Officer

Facts:

The assessee was an individual. It was engaged in dealing in trading of yarn as proprietor of M/s Shweta Enterprises. It was also the shareholder of company AIL, holding 31.77 per cent shares of the company. In the preceding year as well as in the subsequent year, the assessee sold yarn to AIL and others and also purchased yarn from AIL and others.

During the assessment proceedings, the AO treated all the payments made by AIL to M/s Shweta Enterprises, proprietary concern of the assessee as deemed dividend under Section 2(22)(e) and made addition.

The Commissioner (Appeals) upheld the decision of the AO.

There was difference of opinion among the members of the Tribunal. The Judicial member was of the opinion that the addition of payment made was the payment made during the course of trading business of supply of yarn by the assessee to AIL. Therefore, the same could not be treated as deemed dividend.

On the other hand, the Accountant Member agreed with the view of the Assessing Officer as well as the Commissioner (Appeals) and was of the opinion that the payment had been rightly treated as deemed dividend under section 2(22)(e) by lower authorities.

On reference to Third Member.

Held:

The Third Member viewed that the assessee in its proprietorship firm viz., SE was carrying on the business of trading of yarn. The assessee sold the yarn to AIL and it also purchased the yarn from AIL. From the complete date-wise details of transactions between the assessee and AIL, it was seen that the assessee sold the yarn to AIL on day-to-day basis and the amount paid by AIL was also on day-to-day basis. Thus, the total amount received/ paid by the assessee from/ by AIL was almost equal to the yarn supplied/ purchased by the assessee.

On the above basis the assessee contended that the amount received by the assessee from AIL was not by way of loan or advance but the amount was received against the supply of the yarn. The amount received by it was during the course of trading business and therefore not covered by section 2(22)(e).

Thus, the Third Member opined that there were regular trading transactions of yarn between the assessee and AIL. The payments were made for the yarn purchased and the payments were received for the yarn sold. It was clear that even if there was some debit or credit balance, it cannot be held to be a transaction of loan or advance when the transactions are clearly in the nature of trading transactions.

It was also noticed that there was a debit balance in the last year and it was not treated as deemed dividend under section 2(22)(e) which implies that in the preceding year, the revenue accepted the transactions to be in the nature of trading.

Thus, the amount received by the assessee shall not be treated to be deemed dividend in the hands of the assessee as per provisions of section 2(22)(e) of the Income-tax Act, 1961.

Therefore, regular trading transactions between shareholder and the company shall not attract sec. 2(22) (e).

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