2011 (6) TMI 200 - AT - Income Tax

Addition - Deemed dividend - Scrutiny - The assessee filed an application under rule 46A for leading additional evidence - it is clear that sub-clause (e) of section 2(22) which is pari materia with clause (e) of section 2(6A) of the Indian Income-tax Act, 1922, plainly seeks to bring within the tax net accumulated profit which are distributed by closely held companies to its shareholders in the form of loans - It appears that assessee has developed this defence after the assessment proceedings. No agreement was brought to the notice of the Assessing Officer during the course of assessment proceedings - The only suspicion which surfaced during the course of hearing is whether it is a story concocted by the assessee subsequent to the assessment order - It is a settled position of law that if any plea permissible legally even if not taken before the Assessing Officer then it can be taken before the Learned First Appellate Authority - Decided in favour of the assessee

Summary

Issues Involved:

1. Applicability of Section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividend.
2. Admission of additional evidence under Rule 46A.
3. Interpretation of the terms "loan" and "advance" in the context of Section 2(22)(e).

Issue-wise Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividend:

The primary issue in this case was whether the amount of Rs. 85,81,348 received by the assessee from its sister concern, M/s. Excel Cars (P.) Ltd., should be treated as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961. The Assessing Officer (AO) added this amount as deemed dividend, asserting that the assessee held a substantial interest in M/s. Excel Cars (P.) Ltd., and the amount was received as an advance. However, the assessee contended that the amount was not a loan or advance but part payment towards the sale consideration of shares of M/s. Anoop Kothari (P.) Ltd., a 100% subsidiary of the assessee. The CIT (Appeals) accepted this explanation, noting that the transaction was supported by an agreement dated 4-5-2005, and thus, the amount did not fall within the ambit of Section 2(22)(e). The CIT (Appeals) relied on the Delhi High Court decisions in CIT v. Raj Kumar and CIT v. Creative Dyeing & Printing (P.) Ltd., which clarified that trade advances in the ordinary course of business are not covered under Section 2(22)(e).

2. Admission of additional evidence under Rule 46A:

The assessee filed an application under Rule 46A to submit additional evidence, including the agreement dated 4-5-2005, which was not presented during the assessment proceedings due to the non-appearance of the Chartered Accountant (CA) on the specified dates. The CIT (Appeals) admitted this additional evidence, noting that the AO did not object to its admission in the remand report. The CIT (Appeals) found that the assessee was prevented from producing the evidence earlier due to the CA's failure to attend the proceedings, and thus, admitted the evidence in the interest of justice.

3. Interpretation of the terms "loan" and "advance" in the context of Section 2(22)(e):

The CIT (Appeals) and the Tribunal examined the distinction between "loan" and "advance" in the context of Section 2(22)(e). The CIT (Appeals) referred to the Delhi High Court's decision in CIT v. Raj Kumar, which held that the term "advance" must be read in conjunction with "loan" and should carry an obligation of repayment to fall within the ambit of Section 2(22)(e). Trade advances or advances in pursuance of business transactions, which do not have the characteristics of loans, are not covered under this section. The Tribunal upheld this interpretation, noting that the amount received by the assessee was part payment for the sale of shares and not a loan or advance in the ordinary sense.

Conclusion:

The Tribunal dismissed the revenue's appeal, agreeing with the CIT (Appeals) that the amount received by the assessee was part payment towards the sale of shares and not a loan or advance falling under Section 2(22)(e). The Tribunal emphasized that the AO did not investigate the transaction from this angle during the remand proceedings and that the CIT (Appeals) had thoroughly examined the issue. The Tribunal also noted that the revenue did not object to the admission of additional evidence in the grounds of appeal.