2012 (8) TMI 1050 - AT - Income Tax

Summary

Issues Involved:
1. Deduction u/s 80IB(11) on gross profit from potato trading.
2. Set off of interest paid on loan for potato trading.
3. Addition u/s 56 treating loan as deemed dividend u/s 2(22)(e).

Summary:

Issue 1: Deduction u/s 80IB(11) on Gross Profit from Potato Trading
The assessee claimed deduction u/s 80IB(11) on profits from potato trading, arguing that their cold storage operations, which included trading of potatoes, qualified for this deduction. The AO and CIT(A) rejected this claim, stating that u/s 80IB(11) does not envisage deductions for trading activities. The Tribunal upheld this view, noting that the deduction is only for income derived from operating cold storage facilities, and trading of potatoes is not connected to this operation. Thus, the claim for deduction on potato trading profits was rightly rejected.

Issue 2: Set Off of Interest Paid on Loan for Potato Trading
The assessee alternatively claimed that if the deduction u/s 80IB(11) was not allowed, then the interest paid on a cash credit limit for potato trading should be set off against the gross profit. The Tribunal found that the matter required reconsideration by the AO, as the assessee provided a bank certificate indicating that the loan was for potato trading. The Tribunal set aside the orders of the authorities below and restored the issue to the AO for reconsideration, directing that reasonable opportunity be given to the assessee.

Issue 3: Addition u/s 56 Treating Loan as Deemed Dividend u/s 2(22)(e)
The AO added Rs. 5,27,446/- to the assessee's income u/s 56, treating it as deemed dividend u/s 2(22)(e), since the assessee had taken a loan from its sister concern, M/s. Balaji Preservers Pvt. Ltd. The assessee argued that it was not a shareholder in the lending company, citing precedents where such additions were not made in similar circumstances. The Tribunal agreed with the assessee, referencing the ITAT Agra Bench's decision in a similar case and judgments from higher courts, which held that deemed dividends should be taxed in the hands of the shareholder, not the recipient firm. Consequently, the Tribunal deleted the addition, setting aside the orders of the authorities below.

Conclusion:
The appeal was partly allowed. The Tribunal dismissed the claim for deduction u/s 80IB(11) on potato trading profits but remanded the issue of interest set off to the AO for reconsideration. The addition made u/s 56 treating the loan as deemed dividend u/s 2(22)(e) was deleted.