2015 (4) TMI 1047 - AT - Income Tax

Addition u/s.2(22)(e) for deemed dividend - CIT(A) deleted the addition - advance received from M/s.Giriraj Developers Pvt. Ltd. as unsecured loan - Held that - CIT(A) having considered the submission on behalf of assessee observed that as per CBDT s Circular No.495 dated 22.09.1987 i.e. Explanatory Notes on provisions of Finance Act, 1987, payment of any kind received by assessee is to be taxed as deemed dividend u/s. 2(22)(e) in the hands of concern received in the payment and not the shareholder. ITAT Special Bench in case of Bhaumik Colour P. Ltd. (2008 (11) TMI 273 - ITAT BOMBAY-E ) held that such deemed dividend is to be assessed only in the hands of shareholder and not the borrowing concern in which such shareholder is a member or partner having substantial interest. In view of above addition u/s. 2(22)(e) was directed to be deleted in the hands of assessee. This reasoned finding of CIT(A) needs no interference from our side. We uphold the same. - Decided in favour of assessee Addition u/s 41(1) on account of cessation of liabilities - CIT(A) deltd the addition - Held that - CIT(A) held that merely because of lapse of period of three years, it cannot be said that liabilities had ceased or were remitted. Assessee is liable to pay certain amounts and liability. Once assessee recognize this as its liability, it does not cease to be its liability. Provisions of limitations are not applicable to the person liable for making payment. Under the facts and circumstances, CIT(A) was justified in deleting the addition - Decided in favour of assessee

Summary

Issues: Disallowance under Section 2(22)(e) of the Act, Addition under Section 41(1) for cessation of liabilities, Interest under Section 234A/234B/234C/234D, Penalty under Section 271(1)(c).

Analysis:
1. Disallowance under Section 2(22)(e) of the Act:
The first issue in the Revenue's appeal pertains to the disallowance of an advance received by the assessee under Section 2(22)(e) of the Act. The assessee had received an unsecured loan from a company with common directors/shareholders. The Assessing Officer taxed the loan amount in the hands of the assessee invoking Section 2(22)(e). However, the CIT(A) ruled in favor of the assessee, citing CBDT's Circular and the decision of ITAT Special Bench in the Bhaumik Colour case. The CIT(A) held that the deemed dividend should be assessed only in the hands of the shareholders of the lending company. The ITAT upheld the CIT(A)'s decision to delete the addition in the hands of the assessee and directed the taxing of the deemed dividend in the hands of the common shareholders of the companies involved.

2. Addition under Section 41(1) for cessation of liabilities:
The next issue in the Revenue's appeal concerns the addition made under Section 41(1) due to the cessation of liabilities. The Assessing Officer added outstanding liabilities that remained unpaid for more than three years. However, the CIT(A) held that the mere lapse of the three-year period does not imply the cessation of liabilities. The CIT(A) emphasized that as long as the assessee recognizes the liability, it remains enforceable. Consequently, the CIT(A) deleted the addition under Section 41(1), which was upheld by the ITAT.

3. Interest under Section 234A/234B/234C/234D and Penalty under Section 271(1)(c):
The issue of interest under Sections 234A/234B/234C/234D was considered consequential, while the initiation of penalty under Section 271(1)(c) was deemed premature. The ITAT dismissed the Revenue's appeal for the relevant assessment year and partly allowed the assessee's appeal. The similar issues in the subsequent assessment year were decided based on the same reasoning applied in the earlier year, resulting in a partial allowance of the assessee's appeal for that year as well.

In conclusion, the ITAT's judgment addressed various issues related to the disallowance of advances, addition for cessation of liabilities, and the applicability of interest and penalty provisions. The decisions were based on the interpretation of relevant legal provisions, precedents, and factual considerations specific to each issue, resulting in the dismissal of the Revenue's appeal and partial allowance of the assessee's appeals for the respective assessment years.