2012 (9) TMI 759 - AT - Income Tax

Deemed Dividend - receiving of loan from company in which assessee hold more than 10% of the shares - assessee contesting the order on ground that company had advanced the loan to the assessee in ordinary course of business of granting loans and advances - Held that - There is no dispute that lending and advancing of money is one of the objects of the company. The said company had been receiving interest from loans and advances given which had been offered as business income and it was also being accepted by the department u/s 143(1). Therefore, having accepted the interest income received by the company as business income, the Revenue cannot argue that lending and advancing of money is not the business of the company. Therefore, amount was received as loan from the company in the ordinary course of business of the company and hence cannot be assessed as deemed dividend - Decided in favor of assessee Addition u/s 68 of Rs 16.50 lacs being cash deposited in the bank account of the assessee on the ground that source had not been explained satisfactorily - Held that - Assessee had explained the source as sale proceeds of land at Madurai, in which the share of assessee was Rs. 14,63,459 and income had been offered as capital gains. There is no dispute about sale of land. Cash received on account of sale was duly reflected in the balance sheet for AYs 2005 06 and 2006 07. Further, assessee had shown cash in hand of Rs. 16,46,701, as on 31st March 2006 in the balance sheet for that year which has been carried forward to the current year in which the cash was deposited in the bank. In view of aforesaid facts, AO was not justified in rejecting the explanation of the assessee only on the ground that cash had been held for a long time. There is no legal ban for keeping the money in cash. Order of Commissioner (Appeals) in deleting the addition is upheld - Decided in favor of assessee.

Summary

Issues:
1. Addition under section 2(22)(e) of the Income Tax Act, 1961 as deemed dividend.
2. Addition of cash credit under section 68 of the Act.

Issue 1: Addition under section 2(22)(e) - Deemed Dividend

The dispute in this case revolved around the assessment of Rs. 3,00,000 received by the assessee as a loan from a company in which the assessee held more than 10% shareholding, categorized as deemed dividend under section 2(22)(e) of the Act. The Assessing Officer contended that the company was not regularly involved in financing business and, therefore, treated the sum received as deemed dividend. The assessee argued that lending and advancing money was part of the company's business activities, supported by past assessments where interest income was treated as business income. The Tribunal found that the company had been accepting interest income from loans and advances as business income, as accepted by the department in previous assessments. Consequently, the Tribunal ruled in favor of the assessee, stating that the sum received was in the ordinary course of the company's business, and hence, not deemed dividend.

Issue 2: Addition of Cash Credit under section 68

Regarding the addition of Rs. 16,25,000 as cash credit under section 68 of the Act, the Assessing Officer questioned the source of cash deposits made by the assessee in the bank account. The assessee explained that the cash was from the sale of land, supported by balance sheet details. The Assessing Officer rejected the explanation, citing the prolonged holding of cash and lack of a cash book. However, the Commissioner (Appeals) accepted the assessee's explanation, noting that there was no adverse material to dispute the source of cash. The Tribunal upheld the Commissioner's decision, emphasizing that there was no evidence of the cash being utilized elsewhere and no legal prohibition on holding cash. Therefore, the addition made by the Assessing Officer was deemed unjustified, and the Commissioner's decision to delete the addition was upheld.

In conclusion, the Tribunal allowed the assessee's appeal regarding the addition under section 2(22)(e) and dismissed the Revenue's appeal concerning the addition of cash credit under section 68.