Deemed dividend applies only where there is ‘actual payment’ & not on transaction in kind

Deemed Dividend – For invoking provisions of Section 2(22)(e) there should be actual payment, existence of Reserves at the time of making payment – Credit sale is not ‘loan’ or ‘advance’ for purpose of S.2(22)(e) – ITAT Indore Bench

Please find attached a recent decision of Parag Desai v. Addl. CIT (ITA 488/Ind/2013) by ITAT Indore Bench as under:

The Assessee was a significant shareholder in a company – The company sold building to shareholder on credit – Department treated it as ‘loan’ or ‘advance’ for invoking Section 2(22)(e). CIT(A) upheld the addition on the ground that since the unpaid purchase price has not been paid till date the addition is justified. ITAT reversed the order of CIT(A) and while allowing the appeal the following Broad Principles were laid down:

- Deemed dividend does not apply to credit sale of goods or stock in trade.

- Deemed dividend is applicable only where there is ‘actual payment’ and not on transaction in kind

- Before making distribution the company should possess accumulated profits

Held by Tribunal that:

“The main thrust of these decision is that the provision of Section 2(22)(e) itself is a “fiction section” hence while applying this section it is presumed that a dividend is earned and distributed so held that it is improper to introduce another fiction. Further it is held that it is wrong and unjust to impose one fiction over another fiction. Therefore, following these decisions, we hereby hold that merely on presumptions the provisions of Section 2(22)(e) were wrongly invoked; hence, the addition in question deserves to be deleted.”

Followed CIT v. Savithri Sam (263 ITR 1003)(Mad.), CIT v. Parle Plastics(332 ITR 63)(Bom), CIT v. P.V. John (181 ITR 001)(Ker)

(Contrast with M.D. Jindal v. CIT [1986] 164 ITR 28 (Cal.))