2013 (7) TMI 109 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - assessee is a beneficial shareholder in M/s Koradia Construction Pvt Ltd, and having 50% of shares holding with the advance of ₹ 58 lacs stated to have been given to the assessee by the company for purchase of flat - CIT(A) confirmed the partial addition - Held that - From the books of accounts and audit report of M/s Koradia Construction P Ltd, it is evident that the company has shown this amount of ₹ 58 lacs as advance for the purchase of property aslo as per the Schedule E to the balance Sheet the amount of ₹ 58 lacs has been clearly shown as towards purchase of premises. Thus as company is engaged in the business of construction and dealing in properties and the purpose of advancing money to the assessee, therefore, falls under the business/commercial transaction between the company and the assessee & said amount cannot falls under the ambit of loan and advances in the provisions of sec. 2(22)(e) of the Act. Once the assessee has established that the said amount was given to the assessee for the purchase of flat which is in the nature of commercial transaction between the parties, then in the absence of proving contrary by the department, the addition to the extent of ₹ 58 lacs is not justified. Hence, the addition to the extent of ₹ 58 lacs u/s 2(22)(e) is deleted and consequently, the addition of balance amount of ₹ 7,99,604/- is confirmed. Partly in favour of assessee. Disallowance u/s 57(ii) - interest paid on overdrawn capital with partnership firm - Held that - The assessee has introduced ₹ 50 lacs as capital in Aditya Developers and withdrawal of ₹ 56 lacs with Sagar Construction. Thus, the assessee has earned interest income from partnership firms M/s Aditya Developers, at the same time, the assessee had interest expenditure of ₹ 65,429/- on debit balance with the other partnership firm. There is no dispute about the fact that the assessee has overdrawn from the partnership firm M/s Sagar Construction; therefore, the interest paid to the Sagar Construction for debit balance in the capital account is an allowable expenditure against the business income of the assessee and particularly against the interest/remuneration received from the partnership firm. In favour of assessee.

Summary

Issues:
1. Deemed dividend u/s 2(22)(e)
2. Disallowance of interest u/s 57(ii)

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Deemed dividend u/s 2(22)(e):
The appellant, a beneficial shareholder in a company, received a loan from the company. The Assessing Officer treated the loan as deemed dividend u/s 2(22)(e) of the IT Act and added it to the appellant's income. The appellant contended before the CIT(A) that certain amounts should be excluded from the addition, including a sum received for the purchase of a flat that was later refunded. The CIT(A) accepted part of the appellant's explanation but confirmed an addition after giving partial relief. The appellant argued that the advance for the flat purchase was a business transaction and not covered under deemed dividend. The appellant cited legal precedents to support this argument. The ITAT considered the evidence provided, including company records, and concluded that the amount given for the flat purchase was a commercial transaction and not a loan covered under sec. 2(22)(e). The ITAT deleted the addition of the amount related to the flat purchase but confirmed the balance addition.

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Disallowance of interest u/s 57(ii):
The appellant, a partner in two firms, earned interest income from one firm and paid interest to another. The Assessing Officer disallowed the interest payment deduction, treating the interest income as from other sources. The CIT(A) upheld part of the Assessing Officer's decision. The ITAT noted that the interest income should have been assessed as business income under sec. 28(v) and that the interest paid was an allowable expenditure against the business income. Therefore, the ITAT allowed the appellant's claim and deleted the addition made by the Assessing Officer.

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In conclusion, the ITAT partly allowed the appeal, deleting the addition related to deemed dividend and disallowance of interest, based on the arguments presented and legal provisions applicable to the respective issues.