2010 (11) TMI 981 - AT - Income Tax

Summary

Issues Involved:
1. Legitimacy of proceedings initiated under Section 153C of the Income Tax Act.
2. Applicability of Section 2(22)(e) of the Income Tax Act regarding deemed dividends.
3. Computation of current year's profit.
4. Levy of interest under Section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Legitimacy of Proceedings Initiated under Section 153C:
The assessee argued that the provisions of Section 153C were not applicable as no incriminating material was found during the search. The AO should not have invoked Section 153C based on regular books of accounts. The CIT(A) upheld the AO's decision, stating that the same AO had jurisdiction over both the searched entity and the assessee, negating the need to hand over books of accounts to another AO. The Tribunal agreed with the CIT(A), stating that the AO was justified in issuing the notice under Section 153C, dismissing the assessee's objection.

2. Applicability of Section 2(22)(e) Regarding Deemed Dividends:
The AO treated amounts received by the assessee from BDPL as deemed dividends under Section 2(22)(e), citing that the payments were unsecured loans. The CIT(A) upheld this view, stating the assessee failed to prove the advances were for business purposes. The Tribunal, however, found that the funds were provided for business exigencies and not as loans or advances. It cited the Supreme Court's ruling in S.A. Builders v. CIT, emphasizing commercial expediency. The Tribunal concluded that the amounts received were not deemed dividends under Section 2(22)(e), reversing the CIT(A)'s decision.

3. Computation of Current Year's Profit:
Given the Tribunal's decision that Section 2(22)(e) was not applicable, the issue of reducing the actual tax liability of the relevant current year from the profits for the purposes of computing accumulated profits was not addressed.

4. Levy of Interest under Section 234B:
The Tribunal upheld the levy of interest under Section 234B, stating that it is mandatory and consequential in nature.

Conclusion:
The appeal was partly allowed. The Tribunal ruled that the AO was not justified in invoking Section 2(22)(e) for the assessment year in question, and the CIT(A)'s support of the AO's findings was not justifiable. However, the levy of interest under Section 234B was upheld.