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2013 (11) TMI 1676 - AT - Income TaxAddition of deemed dividend u/s 2(22)(e) - Held that - CIT(A) has rightly decided that the case of Sunil P.Mantri clearly falls u/s 2(22)(e) of the Act. However we are inclined to accept the alternate arguments of the Ld.AR that the additions are to be restricted only to the extent of the accumulated profits of the lender concern up to March 31st of the previous years relevant to the assessment years under consideration during which the loans/advances have been made to various concerns. Therefore as regards the additions made in the hands of Sunil P.Mantri for assessment years 2008-09 and 2009-10 we direct the AO to restrict the additions based on the accumulated profits of M/s Sunil Mantri Realty Ltd as on 31.03.2007 and 31.03.2008 respectively corresponding to the loans/advances made for the relevant assessment years i.e. 2008-09 and 2009-10. Deleting the additions made by the AO in respect the sums repaid by the recipient concerns to the lender company for the A.Y 2009-10 the decision of the Ld.CIT(A) restricting the additions to the extent of the accumulated profits of the lender concern the decision of the Ld.CIT(A) that the gross rent estimated by AO @ 7% of cost of the property interest in respect of the property located at Ambey Valley Lonawala is reasonable and the decision of the Ld.CIT(A) that the assessee is eligible for claim of deduction in respect of interest paid are upheld. Decision of the Ld.CIT(A) resulting in the deletion of the additions made in the hands of the recipient concerns on protective basis we are of the considered view that the Ld.CIT(A) has correctly relied on the decisions of Special Bench in the case of ACIT Vs. Bhaumik Colour P. Ltd. reported in (2008 (11) TMI 273 - ITAT BOMBAY-E ) wherein it has been held that the intention behind the provision of section 2(22)(e) is to tax dividend in the hands of share-holder. The deeming provisions as it applies to the case of loans or advances by a concern to concern in which its share-holder has substantial interest is based on the presumption that the loans or advance would ultimately be made available to the share-holder of the concern giving the loans or advances. The intention of the legislature is therefore to tax dividend only in the hands of the share-holder and not in the hands the concern
Issues Involved:
1. Addition of deemed dividend under section 2(22)(e) of the Income Tax Act. 2. Deletion of addition made on account of loans/advances received by Sunil Mantri Trinity Projects Pvt. Ltd. 3. Deletion of additions made in respect of sums repaid by recipient concerns. 4. Restriction of addition to the extent of accumulated profit of the lender concern. 5. Estimation of gross annual value and allowability of interest expenses. 6. Deletion of additions made on protective basis in the hands of recipient concerns. Detailed Analysis: 1. Addition of Deemed Dividend under Section 2(22)(e): The first common issue pertains to the addition of deemed dividend under section 2(22)(e) of the Income Tax Act. The AO treated the advances/loans made by M/s Sunil Mantri Reality Ltd to various concerns as deemed dividend in the hands of Sunil P. Mantri, who held substantial shares in both the lender and recipient concerns. The Ld.CIT(A) confirmed these additions but restricted them to the extent of the accumulated profits of the lender concern. The Tribunal upheld the CIT(A)'s decision, noting that Sunil P. Mantri's shareholding pattern clearly attracted the provisions of section 2(22)(e). However, the Tribunal directed the AO to restrict the additions based on the accumulated profits of M/s Sunil Mantri Realty Ltd as on 31.03.2007 and 31.03.2008 for the relevant assessment years. 2. Deletion of Addition Made on Account of Loans/Advances Received by Sunil Mantri Trinity Projects Pvt. Ltd: For the assessment year 2008-09, the Ld.CIT(A) deleted the addition made on account of loans/advances received by Sunil Mantri Trinity Projects Pvt. Ltd, as Sunil P. Mantri was not a shareholder of the recipient concern during the period when the loans/advances were made. The Tribunal upheld this decision, agreeing with the CIT(A)'s findings. 3. Deletion of Additions Made in Respect of Sums Repaid by Recipient Concerns: For the assessment year 2009-10, the Ld.CIT(A) deleted the additions made by the AO in respect of sums repaid by the recipient concerns to the lender company. The Tribunal found no infirmity in this decision, which was in line with the ratio of the Hon'ble Bombay High Court in the case of P.K.Baddiani. 4. Restriction of Addition to the Extent of Accumulated Profit of the Lender Concern: The Ld.CIT(A) restricted the addition to the extent of the accumulated profits of the lender concern, M/s Sunil Mantri Realty Ltd. The Tribunal upheld this decision, noting that it is an accepted principle of law that the addition of deemed dividend under section 2(22)(e) can only be made to the extent of the lender concern's accumulated profits. 5. Estimation of Gross Annual Value and Allowability of Interest Expenses: The AO estimated the gross annual value of the property at Ambey Valley, Lonavala, at 7% of the cost of acquisition and determined the income from house property after allowing a 30% standard deduction under section 24(a). The Ld.CIT(A) confirmed this estimation. The Tribunal upheld the CIT(A)'s decision, noting that the assessee did not provide municipal valuation to substantiate a lower value. The Tribunal also upheld the CIT(A)'s decision that the assessee is eligible for a deduction in respect of interest paid on borrowed capital. 6. Deletion of Additions Made on Protective Basis in the Hands of Recipient Concerns: The Ld.CIT(A) deleted the additions made on a protective basis in the hands of the recipient concerns, relying on the Special Bench decision in the case of ACIT Vs. Bhaumik Colour P. Ltd. The Tribunal upheld this decision, noting that the intention of section 2(22)(e) is to tax dividend in the hands of the shareholder, not the concern. Judgment Outcome: - Appeals filed by Sunil P. Mantri were partly allowed. - Cross appeals filed by the Revenue in the cases of Sunil P. Mantri were dismissed. - Other appeals filed by the Revenue in respect of the recipient concerns were dismissed. - Cross objections filed by the recipient concerns became infructuous and were dismissed. Order pronounced in the open court on the 14th day of November, 2013.
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