2010 (1) TMI 1187 - AT - Income Tax

Summary

Issues Involved:
1. Invocation of provisions u/s 263 of the IT Act, 1961.
2. Assessment of advance as deemed dividend u/s 2(22)(e) of the IT Act, 1961.
3. Examination of whether the assessment order was erroneous and prejudicial to the interests of the Revenue.

Summary:

Issue 1: Invocation of provisions u/s 263 of the IT Act, 1961

The assessee challenged the order of the Commissioner of Income-tax-I, Ludhiana (CIT) passed u/s 263 of the IT Act, 1961, arguing that the assessment made by the AO u/s 143(3) was neither erroneous nor prejudicial to the interests of the Revenue. The CIT had issued a show-cause notice u/s 263(1) requiring the assessee to explain why the assessment order should not be treated as erroneous and prejudicial to the interests of the Revenue.

Issue 2: Assessment of advance as deemed dividend u/s 2(22)(e) of the IT Act, 1961

The CIT contended that the assessee, being a shareholder with more than 10% voting power in M/s Nexo Industries (P) Ltd., had received an advance of Rs. 69,49,203 from the company, which should be assessed as deemed dividend u/s 2(22)(e). The assessee argued that the advance was a business transaction in the normal course of business and not liable to be taxed as deemed dividend. The assessee supported this with various Tribunal decisions and a judgment from the Hon'ble Delhi High Court.

Issue 3: Examination of whether the assessment order was erroneous and prejudicial to the interests of the Revenue

The Tribunal examined whether the CIT was justified in invoking the provisions of s. 263. It was noted that the AO had made enquiries regarding the nature of the advance during the assessment proceedings and was satisfied that it was related to business transactions. The Tribunal referred to the judgment in Malabar Industrial Co. Ltd. vs. CIT, which stated that for s. 263 to be invoked, the order must be both erroneous and prejudicial to the interests of the Revenue. The Tribunal concluded that the AO had adopted a permissible view supported by case laws, and thus, the assessment could not be considered erroneous or prejudicial to the interests of the Revenue.

Conclusion:

The Tribunal set aside the order of the CIT, stating that the CIT erred in invoking the provisions of s. 263 of the Act. The appeal of the assessee was allowed.