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2014 (3) TMI 19 - AT - Income TaxDeemed dividend u/s 2(22)(e) of the Act Held that - The assessee had debit balance as on 01.04.2008 which was continued up to 07.02.2009 - Thereafter, the company was advancing loan to the firm through cheques - CIT(A) has tabulated these advances in his order as annexure in totaling Rs.60,70,000/- which was received by the firm when the balances in the account of M/s Shree Vallabhlaxmi Cotton Pvt. Ltd. was showing credit balance - The payments have not been received against the sale and accordingly, the payments cannot be said to have been received in regular course of business and accordingly these are in the nature of loan and advances and the same are covered by the provisions of section 2 (22) (e) of the Act - The decision in CIT vs. Bharti Overseas Trading Co. 2012 (4) TMI 473 - DELHI HIGH COURT followed - shares in the name of the partners, but advances made by the company to the firm has to be treated as deemed dividend u/s 2(22)(e) of the Act - As per section 2 (22) (e), any payment even to any concern in which such shareholder is a member or a partner in which he has substantial interest or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits is deemed dividend - The Assessee firm is not shareholder of M/s Shree Vallabhlaxmi Cotton Pvt. Ltd. but partner of the assessee firm who has substantial share in firm, is shareholder in M/s Shree Vallabhlaxmi Cotton Pvt. Ltd. thus, the order of the CIT(A) upheld - Decided against Assessee. Deletion made on account of interest chargeable on loans given to sister concern Held that - The assessee has debit opening balance at Rs.1.04 crore which pertained to purchase made by the company from the assessee - the company also sold goods to assessee - All the transactions with company are mixed transactions thus, there is no reason to charge interest notionally on debit balance - The income is to be assessed on the basis of real income not notionally the order of the CIT(A) upheld. Deletion made on account of bogus purchase Held that - The AO worked out creditors erroneously by reducing the cheque payment for credit balance of entry as to be constructed which has been certified by the counsel of the assessee that there is no difference on account of creditor of M/s. Shree Vallabhalaxmi Cotton Pvt. Ltd thus, there is no reason to interfere in the order of the CIT(A) Decided against Revenue.
Issues Involved:
1. Validity of the assessment order under section 143(3) of the IT Act. 2. Addition of Rs.60,70,000/- towards deemed dividend under section 2(22)(e) of the IT Act. 3. Deletion of addition of Rs.6,11,930/- made under section 2(22)(e) of the IT Act. 4. Deletion of addition of Rs.8,72,071/- on account of interest chargeable on loans given to sister concern. 5. Deletion of addition of Rs.37,43,814/- on account of bogus purchases. Detailed Analysis: 1. Validity of the assessment order under section 143(3) of the IT Act: The assessee contended that the assessment order passed by the Assessing Officer (AO) under section 143(3) and partly confirmed by the first appellate authority was bad in law and deserved to be uncalled for. However, this issue was not elaborated further in the judgment, and the primary focus was on the addition towards deemed dividend. 2. Addition of Rs.60,70,000/- towards deemed dividend under section 2(22)(e) of the IT Act: The AO observed that the assessee had mixed accounts with M/s. Shree Vallabhalaxmi Cotton Pvt. Limited, showing total transactions of Rs.4,09,29,442/-. The AO gave the assessee a reasonable opportunity to explain why advances of Rs.66,81,930/- should not be assessed as deemed dividend under section 2(22)(e). The assessee claimed that these transactions were for business purposes. However, the AO noted that one of the partners of the firm held more than 10% of the shareholding in the company, fulfilling the conditions for deemed dividend. The AO made an addition of Rs.66,81,930/- under section 2(22)(e). The CIT(A) confirmed the addition of Rs.60,70,000/- by observing that the payments received by the appellant firm were not in the regular course of business and were in the nature of loans and advances. The CIT(A) held that the provisions of section 2(22)(e) were attracted as the conditions for deemed dividend were fulfilled. The CIT(A) reduced the addition to Rs.60,70,000/- from Rs.66,81,930/- based on the actual quantum of deemed dividend received by the appellant. The ITAT upheld the CIT(A)'s decision, noting that the assessee firm was not a shareholder of M/s. Shree Vallabhalaxmi Cotton Pvt. Ltd., but the partner who had substantial interest in the firm was a shareholder in the company. The ITAT relied on the decision of the Delhi High Court in CIT vs. Bharti Overseas Trading Co., where advances made by the company to the firm were held as deemed dividend under section 2(22)(e). 3. Deletion of addition of Rs.6,11,930/- made under section 2(22)(e) of the IT Act: The CIT(A) deleted the addition of Rs.6,11,930/- based on the correct calculation of the deemed dividend. The ITAT agreed with the CIT(A)'s findings and held that no separate adjudication was required on this issue as the same findings were applicable. 4. Deletion of addition of Rs.8,72,071/- on account of interest chargeable on loans given to sister concern: The AO calculated interest on a day-to-day basis on the debit balance, which was worked out at Rs.8,72,071/-, and added the same to the income of the assessee. The CIT(A) deleted the addition, observing that the opening debit balance pertained to business transactions and there was no rationale to charge interest on the opening debit balance. The CIT(A) also noted that notional interest cannot be charged as per the law. The ITAT upheld the CIT(A)'s decision, stating that the transactions with the company were mixed and there was no reason to charge interest notionally on the debit balance. The ITAT confirmed that income should be assessed based on real income, not notional income. 5. Deletion of addition of Rs.37,43,814/- on account of bogus purchases: The AO treated the difference of Rs.37,43,814/- between the transactions made and the credit shown as bogus purchases. The CIT(A) deleted the addition, noting that the working done by the AO was erroneous and against the settled principles of accountancy. The CIT(A) found no discrepancy in the declaration of the credit balance in the account of M/s. Shree Vallabhalaxmi Cotton Pvt. Ltd. The ITAT agreed with the CIT(A)'s findings and held that the AO erroneously worked out the creditors by reducing the cheque payment of Rs.1,65,000/-. The ITAT confirmed that there was no difference in the account of the creditor, and thus, there was no reason to intervene in the order of the CIT(A). Conclusion: The ITAT dismissed both the assessee's appeal and the Revenue's appeal, confirming the CIT(A)'s order on all issues. The additions towards deemed dividend, interest on loans to sister concern, and bogus purchases were addressed comprehensively, with the CIT(A) and ITAT providing detailed reasoning for their decisions.
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