Law:

Section:

Section 2(22) of the Income-tax Act, 1961 - Deemed dividend - Assessee-company was engaged in business of dyeing and printing of cloth and was acting as an ancillary unit of company 'P' for last several years - Both, assessee-company and 'P', had common shareholders/directors - 'P' had 50 per cent shareholding in assessee-company - In order to increase its export business and to compete with international standards in garment exports, 'P' had suggested modernization and expansion of plant and machinery of assessee-company and for that purpose it advanced funds to assessee to extent of 50 per cent - Amount of advance had to be adjusted against entitlement to moneys of assessee-company payable by 'P' in subsequent years - Whether, on facts, amounts advanced for business transaction between parties, namely, assessee-company and 'P' would fall within definition of 'deemed dividend' under section 2(22)(e) - Held, no FACTS The assessee-company was engaged in the business of dyeing and printing of cloth and was acting as an ancillary unit of another company 'P' for the last several years. Both, the assessee-company and the company 'P', had common shareholders/directors. 'P' also had 50 per cent shareholding in the assessee-company. In order to increase its export business and to compete with the international standards in garment exports, 'P' had suggested modernization and expansion of the plant and machinery of the assessee-company which required a huge investment. The assessee showed its inability to invest such large amount out of the available funds at relevant time and, therefore, 'P' agreed to make available funds to the assessee to the extent of 50 per cent of the cost and the rest of 50 per cent of the project cost was to be made available by the directors of the assessee. The Assessing Officer treated the amount paid to the assessee-company by 'P' as deemed dividend in terms of section 2(22)(e) for the reason that the two directors of the assessee-company held more than 20 per cent share in the assessee-company and they also held 27.42 per cent and 29.71 per cent share, respectively, in 'P' and, thus, they had interest in the company 'P' from where the…

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