2012 (12) TMI 842 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - reopening of assessment after expiry of four years - assessee had not furnished share holding pattern in respect of ITL Industries Ltd. for assessment year 2002-03 - Held that - The assessee had let out the properties to M/s. ITL Industries Ltd. in the FY 2000-01 on deposit of Rs.95,68,938/- and monthly rent of Rs.1.5 lacs & vide letter dated 15.3.2001 had requested ITL Industries to increase deposit to Rs.2.00 crores and not to pay any rent during financial year 2001-02. It is clear from records that the assessee was in need of substantial funds for setting up of new project for which assessee was looking for funds from other parties as per its own submission. Money received from ITL Industries Ltd. is obviously of the nature of loans/advances and not deposit and, therefore, amount can not be considered as deposit merely on the ground that the same has been described as deposit in the balance sheet or in correspondence with ITL Industries Ltd. which is a group concern of the assessee. The argument of assessee rejected that he had received deposit and not loan/advances and hold that the assessee had received loan/advances during the year which are covered by the provisions of section 2(22)(e). The exception from the provisions of section 2(22)(e) is available if the money is advanced in the normal course of business of the company advancing the money. There is no provision for exemption on the ground that the money received has been used by the shareholder in its business. In the present case, there is no material to show that ITL Industries Ltd. advanced the money in the normal course of its business. As decided in CIT vs. V. Damodaran 1979 (10) TMI 5 - SUPREME COURT & M.B. Stock Holding Pvt. Ltd. vs. ACIT 2001 (12) TMI 190 - ITAT AHMEDABAD-B that business profit of the company accrued only at the end of the year and, therefore, current year business profit are not to be included in the accumulated profit relying on cases as submiited by assessee as no contrary decision of any High Court or Apex Court has been brought to notice by the DR section 2(22)(e) has to be applied only to loan/advances received during the year which was Rs.1,04,31,062/-. The opening balance of Rs.95,68,938/- was in fact not loan/advance but deposit given in connection with letting out of the properties in financial year 2000-01 and therefore, in the earlier year, no addition was required to be made under section 2(22)(e). Therefore, the accumulated profit of Rs.97,91,884/- till 31.3.2001 could not be adjusted against the said deposit in assessment year 2001-02 & will be available for addition u/s 2(22)(e) in respect of loan/advances of Rs.1,04,31,062/- received during the assessment year 2002-03. The argument of the assessee that out of the accumulated profit of Rs.97,91,884/-, sum of Rs.95,68,938/- has to be adjusted against deemed dividend in assessment year 2001-02 cannot be accepted as the said amount was deposit and provisions of section 2(22)(e) could not be applied in assessment year 2001-02. Therefore, in assessment year 2002-03 addition has to be made up to accumulated profit till 31.3.2001 which was Rs.97,91,884/- appeal of the assessee partly allowed.

Summary

Issues Involved:
1. Legal validity of reopening the assessment under section 147 of the Income Tax Act, 1961.
2. Addition made by the Assessing Officer (AO) as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.

Detailed Analysis:

1. Legal Validity of Reopening the Assessment:
The appeal concerns the reopening of the assessment for the assessment year 2002-03. Initially, the assessee declared a loss of Rs. 7,71,770 in the original return filed on 31.10.2002. The regular assessment under section 143(3) was completed on 18.10.2005 with a total income determined at Rs. 2,95,770. The AO later noted that the assessee had received unsecured loans of Rs. 2.00 crores from ITL Industries Ltd., where a common shareholder held substantial interest in both companies, making the provisions of section 2(22)(e) applicable. The AO believed that the income chargeable to tax had escaped assessment due to the assessee's failure to disclose all material facts fully and truly. Consequently, the AO reopened the assessment by issuing a notice under section 148 on 17.10.2008.

Upon challenge, the AO and CIT(A) both upheld the reopening, citing that mere production of evidence was insufficient without full and true disclosure. The Tribunal also agreed, noting that the assessee had not provided necessary details such as the shareholding pattern, which was critical for applying section 2(22)(e). The Tribunal emphasized that the mere fact that both companies were assessed by the same AO did not exempt the assessee from disclosing all material facts. Thus, the reopening of the assessment was deemed legally valid.

2. Addition as Deemed Dividend under Section 2(22)(e):
The AO assessed the advance received from ITL Industries Ltd. as deemed dividend under section 2(22)(e), noting that the assessee had received Rs. 2.00 crores during the year. The assessee contended that the amount was a deposit related to letting out premises and not a loan or advance. The AO rejected this claim, determining that the amount was indeed an advance, as the assessee had already taken a deposit in the previous year and no additional space was let out during the current year. The AO also noted that the lending of money was not a substantial part of ITL Industries' business, making the provisions of section 2(22)(e) applicable.

On appeal, the CIT(A) upheld the AO's decision, stating that irrespective of the nomenclature, the true substance of the transaction was an advance, thus falling under section 2(22)(e). The CIT(A) also included the current year's profits in the accumulated profits for calculating the deemed dividend.

The Tribunal reviewed the case and agreed with the lower authorities that the amount received was an advance and not a deposit. The Tribunal also noted that the exception under clause (ii) to section 2(22)(e) did not apply as the lending of money was not a substantial part of ITL Industries' business. However, the Tribunal held that only the accumulated profits up to 31.3.2001 should be considered for calculating the deemed dividend, amounting to Rs. 97,91,884. The Tribunal thus confirmed the addition of Rs. 97,91,884 as deemed dividend and deleted the balance addition made by the AO.

Conclusion:
The Tribunal upheld the legal validity of reopening the assessment under section 147 due to the assessee's failure to disclose all material facts fully and truly. On the merits of the addition under section 2(22)(e), the Tribunal confirmed the addition of Rs. 97,91,884 as deemed dividend, considering only the accumulated profits up to 31.3.2001, and deleted the balance addition. The appeal of the assessee was partly allowed.