2013 (9) TMI 445 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Disallowance u/s 56 rws 2(22)(e) - Commercial transaction versus loan or advances - Held that - sub-clause (e) of Section 2(22) lays down that dividend includes any payment by a closely held company of any sum by way of advance or loan to a shareholder who comes in the category described in that sub-clause or to a concern in which such shareholder has a substantial interest. Dividend under the sub-clause also includes any payment by such company on behalf or for the individual benefit of any such shareholder. Deemed dividend under this sub-clause would be to the extent to the company in either case possesses accumulated profits. The shareholder referred to here should be beneficial owner of shares holding not less than 10% of the voting power but those shares should not be shares entitled to a fixed rate of dividend with or without a right to participate in profits - For the purpose of Income-tax one is to examine the nature of transaction in accordance with law. In the light of the facts the same is to be decided in accordance with law. In the case under consideration as stated above the assessee has demonstrated that the amount was received for the purpose of commercial transaction. As regards the second objection which is agreement and MOU as after thought in this regard we are of the view that these documents are already on record and the Revenue did not point out any contrary material to these documents. Therefore merely by stating that this is after thought such argument of the revenue without supporting material/evidence is not sustainable therefore the same is rejected - amount of Rs.1, 00, 00, 000/- received to the assessee is on account of commercial transaction therefore the Section 2(22)(e) is not applicable - Decided in favour of assessee.

Issues Involved:
1. Addition of Rs.1,01,20,910/- under Section 56 read with Section 2(22)(e) of the Income Tax Act, 1961.
2. Disallowance of interest amounting to Rs.1,34,794/- under Section 36(1)(iii) of the Income Tax Act, 1961.
3. Addition of Rs.10,00,000/- under Section 28(iv) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition of Rs.1,01,20,910/- under Section 56 read with Section 2(22)(e) of the Income Tax Act, 1961:

The Assessing Officer (AO) noticed that the assessee had transactions with M/s Bhole Baba Buildcon Pvt. Ltd. and concluded that the amount of Rs.1,01,20,910/- was hit by Section 2(22)(e) of the Act, which pertains to deemed dividends. The CIT(A) confirmed the AO's order, stating that the assessee failed to prove that the money was advanced for business consideration and that the provisions of Section 2(22)(e) were applicable.

The assessee argued that the transaction was a commercial one, supported by an agreement (Ikrarnama) for the sale of a cold storage building, which was later canceled due to disputes. The assessee provided documentation to support this claim, including a settlement deed and board resolutions.

The Tribunal observed that Section 2(22)(e) aims to tax loans or advances given to shareholders as deemed dividends to prevent tax evasion through non-declaration of dividends. However, it noted that not all advances or loans fall under this section, especially if they are part of commercial transactions. Citing various High Court judgments, the Tribunal concluded that the assessee had established the transaction as a commercial one, and therefore, Section 2(22)(e) was not applicable. The addition of Rs.1,01,20,910/- was deleted.

2. Disallowance of interest amounting to Rs.1,34,794/- under Section 36(1)(iii) of the Income Tax Act, 1961:

The AO disallowed the interest claim of Rs.1,34,794/- under Section 36(1)(iii), noting that the assessee had taken interest-bearing loans but had given interest-free advances to family members. The CIT(A) upheld this disallowance.

The assessee contended that he had sufficient own capital to cover the interest-free advances, citing previous ITAT orders where it was held that no disallowance should be made if the interest-free advances are covered by the assessee's own capital.

The Tribunal agreed with the assessee, noting that he had sufficient own capital (Rs.1,78,85,290/-) compared to the interest-free advances (Rs.1,73,38,986/-). Following the principle of consistency and previous ITAT decisions, the Tribunal deleted the disallowance of Rs.1,34,794/-.

3. Addition of Rs.10,00,000/- under Section 28(iv) of the Income Tax Act, 1961:

The AO added Rs.10,00,000/- to the assessee's income under Section 28(iv), noting that the amount was shown as a liability forgone and credited to the capital account. The CIT(A) confirmed this addition.

The assessee argued that the amount did not arise from business or profession. However, the Tribunal noted that the amount was credited to the capital account on account of a liability forgone, indicating it was related to business transactions. Citing various judgments, the Tribunal held that the amount was liable to tax under Section 28(iv) and confirmed the addition of Rs.10,00,000/-.

Conclusion:

The appeal was partly allowed. The Tribunal deleted the addition of Rs.1,01,20,910/- under Section 56 read with Section 2(22)(e) and the disallowance of Rs.1,34,794/- under Section 36(1)(iii), but confirmed the addition of Rs.10,00,000/- under Section 28(iv).

← Previous Next →