2005 (5) TMI 543 - AT - Income Tax

Unexplained Cash credits - source of source is not properly explained - deemed dividend u/s 2(22)(e) - HELD THAT - It is difficult to understand as to how is this relevant for examining explanation of a credit in the case of this assessee. The law is very well settled that while examining applicability of section 68, source of source cannot be investigated, but then this is precisely what the CIT(A) ended up doing. The factum of borrowing can also not be in dispute as the assessee has borrowed the money by way of an account payee cheque. The identity can not be said to be in doubt either. The means of the lender have been proved inasmuch as he was clearly in possession of this fund received from the shareholders. The CIT(A) was, therefore, clearly in error in confirming the addition under section 68 on account of money received from Cyberspace Films Private Limited. In any event, the purpose of section 2(22)( e ) is to tax the receipts from the company which are out of the accumulated profits available for distribution of dividends. The share forfeiture amount is not available for distribution of dividend, and, therefore, a borrowing from the company, when such a company has no amount available for distribution of dividend, cannot be treated as deemed dividend either. The addition fails on this test as well. Coming to the addition, we have noticed that not only the source of this amount is free from doubt, even the source of source is clearly established. As evident from the paper book filed before us, the source of money was withdrawal from the saving bank account and maturity of fixed deposit. The copies of bank accounts and copies of accounts have also been filed before, and perused by us. The income-tax return and the certification regarding her earnings is also placed in paperbook before us.The identity of lender and the means of lender are, in our humble understanding, beyond any doubt. The factum is not in dispute either. In these circumstances, CIT(A) was also in error in confirming the addition u/s 68 in respect of money received from Mrs. Prity Dadlani. We cannot approve this action either. Thus, we deem it fit and proper to direct the Assessing Officer to delete the impugned additions. The assessee gets the relief accordingly. In the result, the appeal is allowed

Summary

Issues Involved:
1. Addition of Rs. 9,75,000 from Cyberspace Films Private Limited as unexplained.
2. Treatment of loan from Cyberspace Films Private Limited as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.
3. Addition of loan from Mrs. Prity Dadlani for Rs. 1,20,000 as unexplained.

Analysis:

Issue 1: Addition of Rs. 9,75,000 from Cyberspace Films Private Limited as unexplained:
The Assessing Officer added back the loans as unexplained cash credits despite being received by account payee cheques and the existence of the lenders. The CIT(A) confirmed these additions, questioning the sources of funds of the shareholders who invested in Cyberspace Films Private Limited. The CIT(A) raised concerns about the substantial investments in an unknown private limited company where the assessee and his mother were main shareholders. However, the Tribunal found that the source of the money from Cyberspace Films Pvt. Ltd. was not properly disputed, and the addition under section 68 was unjustified. The Tribunal emphasized that the source of source cannot be investigated while applying section 68, and the addition was erroneous.

Issue 2: Treatment of loan from Cyberspace Films Private Limited as deemed dividend:
The CIT(A) treated the receipt of Rs. 9,75,000 from Cyberspace Films Private Limited as taxable deemed dividend under section 2(22)(e) of the Act. The CIT(A) contended that even if the company did not have distributable profits, any loan to shareholders from accumulated profits is taxable as deemed dividend. However, the Tribunal disagreed with this interpretation, citing a previous case where capital receipts were not considered part of accumulated profits. The Tribunal held that borrowing from a company without available profits for dividends cannot be treated as deemed dividend, and thus, the addition of Rs. 9,75,000 was deemed unjustified.

Issue 3: Addition of loan from Mrs. Prity Dadlani for Rs. 1,20,000 as unexplained:
The CIT(A) confirmed the addition of Rs. 1,20,000 as unexplained cash credit from Mrs. Prity Dadlani. However, the Tribunal found that the source of this amount was clear, supported by bank account details and income certification. The Tribunal concluded that the addition under section 68 for this loan was unwarranted, and directed the Assessing Officer to delete both the additions of Rs. 9,75,000 and Rs. 1,20,000.

In conclusion, the Tribunal allowed the appeal, directing the deletion of the impugned additions based on the detailed analysis and findings for each issue presented during the proceedings.