Case Note & Summary
The Revenue filed an appeal under Section 260A of the Income-Tax Act, 1961 against the order of the Income-Tax Appellate Tribunal, Chennai 'C' Bench dated 10.02.2011 in ITA 1016/Mds/2010 for assessment year 2006-07. The assessee, M/s. Ready Test Go Pvt. Ltd (now C.S.S. Corp. P.Ltd), had filed its return in time. During assessment, the assessing officer noted that the assessee had received a sum of Rs.8,32,31,520/- from its sister concern Cybernet Software Systems (CSS) and proposed to treat it as deemed dividend under Section 2(22)(e). The assessee contended that it was not a shareholder in CSS and that the amounts were received in the course of business. The assessing officer overruled these submissions and passed an assessment order on 02.12.2008. On first appeal, the Commissioner of Income Tax (Appeals) accepted the assessee's argument that the amounts were paid in the ordinary course of business, relying on the Delhi High Court decisions in CIT v Ambassador Travels P Ltd and CIT v Vikramjit Sen and Rajiv Shakdher. The CIT(A) found that the advances were for software testing and development and were adjusted against bills raised by the assessee, thus constituting normal business transactions. The Revenue appealed to the Tribunal, which upheld the CIT(A)'s order. The High Court admitted the appeal on two questions of law: whether the advance amounted to deemed dividend under Section 2(22)(e), and whether the Tribunal was right in holding that the advances could not be treated as loan/advance under Section 2(22)(e) as they were made in the ordinary course of business. The High Court, after hearing both sides, found that the CIT(A) had recorded a specific finding of fact that the amounts were advanced towards software testing and development and adjusted against bills, which was not shown to be perverse. The court held that no substantial question of law arose and dismissed the appeal, confirming that the provisions of Section 2(22)(e) do not apply to business transactions in the ordinary course.
Headnote
A) Income Tax - Deemed Dividend - Section 2(22)(e) of the Income-Tax Act, 1961 - Business Transaction Exclusion - The assessee received Rs.8,32,31,520/- from its sister concern for software testing and development, adjusted against bills raised. The court held that such advances made in the ordinary course of business do not fall within the ambit of deemed dividend under Section 2(22)(e). The finding of fact by the CIT(A) that the payments were towards pure business/trading transactions was upheld. (Paras 2-5) B) Income Tax - Deemed Dividend - Section 2(22)(e) of the Income-Tax Act, 1961 - Advance in Ordinary Course of Business - The Revenue argued that there is no exclusion for advances paid ahead of due time. However, the court, relying on CIT v Ambassador Travels P Ltd and CIT v Vikramjit Sen and Rajiv Shakdher, held that the provisions of Section 2(22)(e) are not applicable to normal business transactions. The appeal was dismissed as no substantial question of law arose. (Paras 4-6)
Issue of Consideration
Whether advances received by the assessee from its sister concern in which directors were substantially interested amount to deemed dividend under Section 2(22)(e) of the Income-Tax Act, 1961, and whether such advances can be excluded on the ground that they were made in the ordinary course of business.
Final Decision
The High Court dismissed the appeal, holding that no substantial question of law arises. The finding of fact by the CIT(A) that the advances were for software testing and development and adjusted against bills, being in the ordinary course of business, was not perverse. The provisions of Section 2(22)(e) are not attracted.
Law Points
- Deemed dividend under Section 2(22)(e) of the Income-Tax Act
- 1961 does not apply to advances made in the ordinary course of business
- Advances from sister concern for software testing and development adjusted against bills are normal business transactions
- No exclusion from Section 2(22)(e) for advances paid ahead of due date but business purpose overrides
