Whether pure commercial transactions are deemed dividend u/s 2(22)(e)?

 Whether pure commercial transactions are deemed dividend u/s 2(22)(e)?  Compliances
Apr 222021
 

The assessee was a shareholder and director in M/s Associated Cine Exploiters Pvt. Ltd. (ACEL) and obtained a loan of Rs.1,00,000/-.

Reason for such advance: The assessee has received Rs.1,50,000/- as commercial advance for granting rights for distribution of the movie and the amount was paid to M/s Sukrit Pictures on 03.05.2010 was a commercial advance for screening of the movie. It is a fact on record that the amount received from ACEL which is running a Cinema Theatre in Rohtak has given a loan to Sukrit Pictures which is the distributor. Thus, this is the amount received from the theatre owner to the distributor of the films.

Whether 2(22)(e) is attracted on commercial transactions:

To attract the provision of section 2(22)(e), the important consideration is that there should be a loan and/or advance by a company to its shareholder. Every payment by a company to its shareholder may not be a loan/advance. To treat the payment as a loan following is worthwhile to note:

  • Amount paid must make the company a creditor of shareholder
  • If at the time of making payment, the company is already a debtor, the payment would merely a repayment by the company.
  • If, an amount so paid exceeds the already existing debt, the amount so exceeds will be treated as a loan to the assessee and would attract section 2(22)e).
  • If, the assessee has a current account with the company, the above position as regards each debit will have to be considered individually. However, credits to the account will have to be completely ignored.
  • Thus, the amount does not bear the characteristics of loans, and advance section 2(22)(e) is not applicable.
  • Even, advance given by the company in exchange for an advantage conferred upon the company by such shareholders can not be treated as deemed dividend.
  • Section 2(22)(e) is applicable even if the whole amount is repaid before the close of the previous year.
  • Also, a bona fide loan, whether in the form of overdraft or otherwise, for a short duration is treated as a dividend if all the conditions of section 2(22)(e) are satisfied.
  • This section is applicable even if the loan is given in kind.

Thus, section 2(22)(e) covers not only advances and loans to shareholders but any other payments by the company on behalf of or for the individual shareholders, such as payment of shareholders’ personal expenses, insurance premia, etc., to the extent of the accumulated profits of the company.

The distinction between the other dividend and deemed dividend u/s 2(22)(e):

Dividend declared by a company or deemed dividend falling under section 2(22)(a) to (d) Deemed dividend u/s 2(22)(e)
If the dividend is covered by the above sections, the dividend distribution tax is paid by the assessee company and what the assessee would receive is the tax-free income. However, this situation is changed with budget 2020. In case of deemed dividend under section 2(22)(e) – the same is taxable in the hands of shareholders since the inception at the applicable slab rate of shareholder. However, after the applicability of budget 2020, TDS have to be deducted in both cases.

 

Conclusion:

Where amounts are advanced to the assessee by another company for business purpose wherein both entities are having common directors and if it is in nature of a commercial transaction, provisions of section 2(22)(e) are not attracted.

Whether trust is eligible for claiming deduction in respect of House Property Income?

 Whether trust is eligible for claiming deduction in respect of House Property Income?  Compliances
Apr 192021
 

Facts of the case:

Rental receipt of trust Rs. 1,16,88,161/-
standard deduction u/s 24(a) of the IT Act of Rs. 35,06,448/- (30% of rental receipts)

Now, the issue arises, whether the computation of trust income is to be made on purely commercial considerations or as per taxation law. If income is to be computed on commercial considerations the deduction of Rs 35,06,448/- would have not been allowed. However, from a taxation point of view assessee trust is eligible for deduction.

Section 24 of the act:

Deductions from income from house property.

  1. Income chargeable under the head “Income from house property” shall be computed after making the following deductions, namely:—

(a) a sum equal to thirty per cent of the annual value;

(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:

A bare reading of the above makes it amply clear that the provisions of the Act do not provide any restriction whatsoever that any category of the taxpayer is excluded from this deduction.

It is settled law that the provisions of the Act have to be construed in a strict manner when there is no ambiguity whatsoever in the provisions of the Act. Hence, extrapolation made by learned CIT(A) that the Trust shall not be entitled to deduction u/s. 24 of the Act in computation of income from house property is totally unsustainable in law.

In the case of CIT v. Institute of Banking Personnel Selection, wherein capital expenditure for acquiring asset which was already shown as the application of income was held to be eligible for depreciation which was denied by the Revenue.

Conclusion:

Hence, the assessee trust is eligible for standard deduction from income from house property and thus, 30% of rental income is deemed to be utilized for purposes of the trust.

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