2010 (11) TMI 998 - AT - Income Tax

Summary

Issues Involved:
1. Initiation of proceedings 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 the current year's profit.
4. Levy of interest under Section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Initiation of proceedings under Section 153C of the Income Tax Act:
The assessee contended that the provisions of Section 153C were not applicable since no incriminating documents were found during the search, only regular books of accounts were seized. The CIT(A) upheld the AO's action, stating that the same AO had jurisdiction over both the searched entity (BDPL) and the assessee, thus no need to hand over documents to another AO. The Tribunal agreed with the CIT(A), emphasizing that the AO was within his rights to invoke Section 153C as the documents seized belonged to a person other than the one referred to in Section 153A.

2. Applicability of Section 2(22)(e) of the Income Tax Act regarding deemed dividends:
The AO treated amounts received by the assessee from BDPL as deemed dividends under Section 2(22)(e), citing that the beneficial owner of shares in BDPL also held substantial interest in the assessee company. The CIT(A) upheld this decision, noting the lack of evidence to prove the advances were for business purposes. The Tribunal, however, found that the funds were provided for business expediency and not as loans or advances. The Tribunal referred to the Supreme Court ruling in S.A. Builders v. CIT, which emphasized commercial expediency. The Tribunal concluded that the amounts received were for business purposes, not loans or advances, and thus not deemed dividends under Section 2(22)(e).

3. Computation of the current year's profit:
This issue was not directly addressed in the Tribunal's decision as the primary contention regarding the applicability of Section 2(22)(e) was resolved in favor of the assessee. The Tribunal's finding that the amounts received were not deemed dividends implicitly resolved the computation issue.

4. Levy of interest under Section 234B of the Income Tax Act:
The Tribunal upheld the CIT(A)'s decision on the levy of interest under Section 234B, stating that it is mandatory and consequential in nature. The assessee's contention on this ground was dismissed.

Conclusion:
The Tribunal concluded that the AO was justified in initiating proceedings under Section 153C but erred in applying Section 2(22)(e) to treat the amounts received as deemed dividends. The levy of interest under Section 234B was upheld. Consequently, the assessee's appeal was partly allowed.