Facts of the Case

The assessee, an individual deriving income from salary, house property, capital gains, and interest, was a director and 50% shareholder in a closely held company, M/s Charu Home Products (P) Ltd. During Assessment Year 2010–11, the assessee received amounts aggregating to approximately ₹1.81 crore from the company.

The Assessing Officer initiated proceedings under Section 143(3) and issued a show cause notice proposing addition under Section 2(22)(e) of the Income Tax Act, 1961 (deemed dividend). The assessee contended that the amount represented advance received pursuant to an agreement to sell property to the company. However, the transaction was later cancelled, and the amounts were refunded within a period of six months.

The CIT(A) accepted the assessee’s explanation based on additional evidence such as agreement to sell, cancellation deed, and bank statements. However, the ITAT reversed this finding, treating the transaction as a loan attracting deemed dividend provisions.

Issues Involved

  1. Whether the amount received by the assessee from a closely held company constitutes “deemed dividend” under Section 2(22)(e) of the Income Tax Act, 1961.
  2. Whether the transaction of advance under an agreement to sell property can be treated as a genuine commercial transaction outside the ambit of deemed dividend.
  3. Whether the ITAT was justified in reversing the findings of CIT(A) based on appreciation of facts.

Petitioner’s Arguments (Assessee)

  • The transaction was a genuine business transaction, being advance received against sale of property.
  • The agreement to sell and subsequent cancellation deed substantiate the nature of the transaction.
  • The amount was fully refunded within a short period, negating any intention of loan or benefit.
  • Once additional evidence was admitted under Rule 46A and verified through remand proceedings, the ITAT should not have interfered with the findings of CIT(A).
  • Genuine commercial transactions are outside the purview of Section 2(22)(e).

Respondent’s Arguments (Revenue)

  • The assessee failed to provide satisfactory explanation and supporting evidence during assessment proceedings.
  • The agreement to sell and cancellation appeared to be a facade to camouflage a loan transaction.
  • There was no credible evidence of efforts by the company to arrange funds or complete the transaction.
  • Timing of payments and cancellation raised serious doubts regarding genuineness.
  • The assessee, being a substantial shareholder, received funds which squarely fall within the ambit of deemed dividend.

Court’s Findings / Order

The Delhi High Court upheld the decision of the ITAT and dismissed the appeal of the assessee.

Key observations:

  • The ITAT conducted an independent and detailed analysis of facts and found the transaction to lack genuineness.
  • The alleged agreement to sell and its cancellation were considered a camouflage for advancing loans to the assessee.
  • The assessee failed to provide reliable, cogent, and credible evidence supporting the business nature of the transaction.
  • The Court held that the ITAT’s conclusion was a possible and reasonable view based on facts, and therefore not open to interference under Section 260A.

Important Clarification

  • Mere labeling of a transaction as a business advance does not exclude it from Section 2(22)(e) unless supported by credible evidence.
  • Transactions between a closely held company and its substantial shareholder are subject to strict scrutiny.
  • The burden lies on the assessee to prove that the transaction is a genuine commercial arrangement.
  • Courts will examine substance over form, especially where arrangements appear structured to avoid tax liability.

Sections Involved

  • Section 2(22)(e) – Deemed Dividend
  • Section 143(3) – Scrutiny Assessment
  • Section 260A – Appeal to High Court
  • Rule 46A – Additional Evidence before CIT(A)

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:1415-DB/PRJ06032019ITA2172019.pdf

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