2013 (1) TMI 426 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - advances taken by assessees from a company in which they were having substantial stakes holding 18.69% of shares - reopening of assessment - Held that - It is the case of the assessee that since it has mortgaged its property with the bank to enable the company to avail finance facilities from the bank, the advance by the company is not a gratuitous loan or advance, but in return for an advantage which the company has already availed on account of mortgaging of properties done by the assessees. However, it is a fact on record that the assessees have not produced any documents to prove the fact that the personal properties of the assessees were actually mortgaged with the bank for the sake of availing loans by the company. The letter dated 31.5.2008 of the Andhra Bank, submitted does not establish the fact that the properties were mortgaged with the bank. The assessees have also not produced any correspondence made either with the bank or with the company towards release of the properties mortgaged, as was the fact in the case of Pradip Kumar Malhotra (2011 (8) TMI 16 - CALCUTTA HIGH COURT) before the Hon ble Calcutta High Court. In the absence of conclusive evidence to prove the fact of mortgage and also the fact that the assessee has not requested the bank for release of the mortgage, the ratio of the decision in the case of Pradip Kumar Malhotra (supra) will not apply to the facts of the present case. As the payments made by the company towards advances to the assessee fulfils all the characteristics of dividend as envisaged in S. 2(22)(e),there cannot be any other conclusion excepting to consider the advances given by the company to the assessees as deemed dividend at the hands of the assessee - against assessee.

Summary

Issues Involved:
1. Additions under Section 2(22)(e) of the Income Tax Act as deemed dividend.
2. Validity of notice issued under Section 148 of the Income Tax Act.

Detailed Analysis:

1. Additions under Section 2(22)(e) of the Income Tax Act as deemed dividend

Facts and Background:
The Revenue appealed against the deletion of additions made by the assessing officer under Section 2(22)(e) of the Income Tax Act, treating advances taken by the assessees from a company in which they held substantial shares as deemed dividends. The assessees filed cross-objections supporting the CIT(A)'s order.

Arguments by the Revenue:
The Revenue argued that the CIT(A) erred in relying on the Calcutta High Court's decision in Pradip Kumar Malhotra v. CIT, which was not applicable to the present case. The Revenue emphasized that the Supreme Court's decision in Smt. Tarulata Shyam v. CIT should prevail, where it was held that loans or advances to shareholders can be deemed dividends if the company has accumulated profits, regardless of whether the loan is outstanding at the end of the year.

Arguments by the Assessees:
The assessees contended that the advances were not gratuitous but were given because their properties were mortgaged to enable the company to obtain loans. They argued that there was no personal benefit derived from these advances, thus they should not be treated as deemed dividends under Section 2(22)(e).

Tribunal's Findings:
The Tribunal noted that the assessees failed to provide conclusive evidence that their properties were mortgaged for the company's loans. The letter from Andhra Bank did not establish the mortgage. The Tribunal emphasized that the language of Section 2(22)(e) is clear and unambiguous, requiring strict interpretation. Since the conditions for deemed dividend under Section 2(22)(e) were met, the advances should be treated as deemed dividends. Consequently, the Tribunal set aside the CIT(A)'s orders and restored the additions made by the assessing officer.

2. Validity of notice issued under Section 148 of the Income Tax Act

Facts and Background:
The assessees contested the validity of the notice issued under Section 148 for reopening the assessment, arguing that the notice was not justified.

Tribunal's Findings:
The Tribunal upheld the legality and validity of the reopening of the assessment under Section 147, as the CIT(A) had already addressed this issue and found it to be in order.

Conclusion:
The Tribunal allowed the Revenue's appeals, reinstating the additions made by the assessing officer under Section 2(22)(e) as deemed dividends. The cross-objections by the assessees were dismissed as infructuous since they merely supported the CIT(A)'s orders. The Tribunal emphasized the strict interpretation of Section 2(22)(e) and the necessity of conclusive evidence to substantiate claims of property mortgages for company loans.