2015 (8) TMI 42 - AT - Income Tax

Addition u/s 2(22)(e) as deemed dividend - CIT(A) deleted the addition - Held that - As per provisions of section 2(22)(e) of the Act the liability of tax can be fastened only on the shareholder of the payer company. In the present case the AO could not bring out any fact to support that the loan taken by the assessee company from M/s R.D. Finlease Pvt. Ltd. satisfies the requirement of section 2(22)(e) of the Act as the assessee company is not a shareholder of M/s R.D. Finlease Pvt. Ltd. In the light of above legal proposition and dicta laid down by the Jurisdictional High Court of Delhi in the case of CIT vs Ankitech Pvt. Ltd. 2011 (5) TMI 325 - DELHI HIGH COURT we are of the opinion that the action taken by the AO was not in accordance with law and letter and spirit of section 2(22)(e) of the Act which was rightly directed to be deleted by the CIT(A) by passing the impugned order. - Decided in favour of assessee. Disallowance under section 40(a)(ia) - on perusal of Form 3CD it was seen that the auditors had reported that there was tax deductible at source which was not deducted at all - Held that - As decided Shri Rajeev Kumar Agrawal vs JCIT dated 2014 (10) TMI 492 - ITAT AGRA the insertion of second proviso to section 40(1)(ia) is declaratory and curative in nature and hence it has retrospective effect from 1.4.2005 being the date from which sub-clause (ia) of section 40A was inserted by Finance No.(2) Act 2004. We uphold the grievance of the assessee principally and direct that the AO shall give due and fair opportunity of hearing to the assessee and decide the matter afresh in accordance with law by way of a speaking order after carrying out necessary verification regarding impugned payments having been taken into account by the recipients in the computation of their respective income regarding payment of taxes in respect of such income and regarding filing of related income tax return by the recipients. Accordingly sole cross objection of the assessee is allowed in principle and deemed to be allowed for verification by the AO in the manner as indicated above. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Deletion of addition made under section 2(22)(e) as deemed dividend.
2. Partial disallowance under section 40(a)(ia) regarding tax deductible at source.

Detailed Analysis:

Issue 1: Deletion of Addition under Section 2(22)(e) as Deemed Dividend

The revenue's appeal raised the issue of whether the CIT(A) erred in law and on facts by deleting the addition of Rs. 42,97,686 made under section 2(22)(e) as deemed dividend. The revenue argued that the company was not engaged in the ordinary course of money lending and finance.

The Tribunal examined the arguments and noted that the issue was covered in favor of the assessee by the Delhi High Court's decision in CIT vs Ankitech Pvt. Ltd. (2012) 340 ITR 14 (Del). It was established that for the purpose of section 2(22)(e), the amount received as advances and loans would be treated as dividend only if the recipient company is a shareholder of the lending company. Since the assessee company was not a shareholder of M/s R.D. Finlease Pvt. Ltd., the provisions of section 2(22)(e) could not be invoked.

The CIT(A) had relied on the Rajasthan High Court's decision in CIT v. Hotel Hill Top (2009) 313 ITR 116, which held that deemed dividend cannot be taxed in the hands of a non-shareholder. The Supreme Court in C.P. Sarathy Mudaliar and Rameshwarlal Sanwarmal also confirmed that deemed dividend liability is attracted only in the hands of registered shareholders.

The Tribunal concluded that the CIT(A) was correct in deleting the addition as the loan amount could only be taxed in the hands of the shareholder of the lender company, not the assessee company. Therefore, the revenue's sole ground of appeal was dismissed.

Issue 2: Partial Disallowance under Section 40(a)(ia)

The assessee's cross-objection involved the partial disallowance of Rs. 54,51,000 under section 40(a)(ia), which was sustained to the extent of Rs. 16,32,925 by the CIT(A). The assessee argued that the insertion of the second proviso to section 40(a)(ia) is declaratory and curative in nature and should have retrospective effect from 1.4.2005.

The Tribunal considered the ITAT Agra Bench's decision in Shri Rajeev Kumar Agrawal vs JCIT, which held that the second proviso to section 40(a)(ia) is curative and has retrospective effect from 1.4.2005. The Tribunal observed that the CIT(A) had agreed on the correct rate of TDS but did not accept that no addition was required since the interest income was accounted for by JCB (India) Ltd. in its tax return.

The Tribunal concurred with the ITAT Agra's view that the provisions of section 40(a)(ia) should not create undue hardship if the tax withholding lapses did not result in any loss to the exchequer. The Tribunal directed the AO to verify whether the impugned payments were taken into account by the recipients in their income computation, taxes were paid, and returns were filed. The AO was instructed to provide a fair hearing and decide the matter afresh in accordance with the law.

Conclusion:

- The revenue's appeal regarding the deletion of addition under section 2(22)(e) was dismissed.
- The assessee's cross-objection regarding disallowance under section 40(a)(ia) was allowed for statistical purposes, with directions for the AO to verify and decide the matter afresh.

Order:
The appeal of the revenue is dismissed, and the sole cross-objection of the assessee is allowed for statistical purposes. Order pronounced in the open court on 29.07.2015.