2012 (3) TMI 189 - AT - Income Tax

Deemed dividend - transfer of amount through journal entries - Revenue pointed out that the amounts were accounted under the head Advances both in the books of the assessees as well as in the books of the company, which proved that the amounts are covered by the definition of section 2(22)(e) of the Act - The Commissioner of Income-tax(Appeals) said that the credit entries would not amount to deemed dividends under section 2(22)(e) just for the reason that the credits were passed by means of journal entries. - Held that - It is not proper on the part of the Commissioner of Income-tax(Appeals) to hold that credit entries made in the accounts of the assessees by the company would not fall under section 2(22)(e) only for the reason that the credits were provided through journal entries - The assessing authority should have examined every journal entry conferring credit to the assessees and verify whether any fund/benefit has been transferred by the company to the assessees directly or indirectly - issue is remitted back to the Assessing Officer to re-examine the nature and character of the journal entries directing the assessee to provide evidence to prove his case.

Summary

Issues:
- Interpretation of section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividends.
- Treatment of journal entries crediting accounts of assessees as deemed dividends.
- Assessment of amounts paid by the company to directors for purchasing properties.
- Violation of Rule 46A in considering fresh materials in the assessment process.

Interpretation of section 2(22)(e) - Deemed Dividends:
The appeals involved a dispute over the application of the deeming provisions of section 2(22)(e) of the Income-tax Act, 1961 against three assessees who were directors of a company. The Revenue contended that journal entries crediting the accounts of the assessees should be treated as deemed dividends. However, the Commissioner of Income-tax(Appeals) held that such entries did not qualify as deemed dividends. The Tribunal emphasized that the form of benefit transfer is not crucial; rather, the substance of the transaction is significant. It was deemed necessary for the assessing authority to scrutinize each journal entry to determine if any fund or benefit was transferred to the assessees directly or indirectly. The Tribunal set aside the previous orders and directed the Assessing Officer to re-examine the nature of the journal entries to make a lawful conclusion.

Treatment of Journal Entries as Deemed Dividends:
The Tribunal criticized the Commissioner of Income-tax(Appeals) for overlooking the need to investigate the context and purpose of journal entries crediting the assessees' accounts. It stressed the importance of verifying if funds were drawn by the assessees following these credits. The Tribunal found that the assessing authority had not conducted a thorough inquiry into these matters, leading to an incorrect conclusion by the Commissioner of Income-tax(Appeals). Consequently, the Tribunal remitted the issue back to the Assessing Officer for a detailed examination and verification of each journal entry.

Assessment of Amounts for Property Purchase:
Regarding the assessment year 2008-09, the Tribunal noted that the Commissioner of Income-tax(Appeals) relied on new materials presented by the assessees without the assessing authority's prior examination, violating Rule 46A. The Tribunal set aside the orders for this assessment year and instructed the assessees to provide evidence to support their claim that the amounts received were for property acquisition. The issue was remitted back to the assessing authority for proper consideration.

Violation of Rule 46A - Fresh Materials in Assessment:
The Tribunal highlighted the violation of Rule 46A due to the introduction of new materials during the appeal process without prior examination by the assessing authority. This breach led to the orders being set aside for the assessment year 2008-09, necessitating the assessees to present evidence before the assessing authority to substantiate their claims.

In conclusion, the Tribunal allowed all the appeals filed by the Revenue for statistical purposes, setting aside the orders of both the assessing authority and the Commissioner of Income-tax(Appeals) for all four assessment years and remitting the files back to the assessing authority for a thorough re-evaluation based on proper examination of the facts and evidence presented.