2016 (2) TMI 379 - AT - Income Tax

Deemed dividend under sec. 2(22)(e) - the company maintained separate accounts for land advance and other loans and that the amount was not reflected in the accounts of the land advance - Held that - A.O. did not pointed out any mistakes, other than the deemed addition under sec. 2(22)(e), the additional income offered should be telescoped against the deemed addition made under sec. 2(22)(e). We do not find any merits in the arguments of the assessee, as the addition made under deeming provision is nothing to do with the income offered to cover up the deficiencies in the books of accounts. Insofar addition under sec. 2(22)(e) is concerned, the said addition is made under deeming provision, therefore, it cannot be said that the disclosure made by the assessee before the A.O. is on account of deemed dividend. Hence, the contention of the assessee is rejected. Taxability in the hands of all the directors according to their share holding - Held that - Coming to the additional ground raised by the assessee that without prejudice to the claim that the addition towards deemed dividend under sec. 2(22)(e) of the Act is not sustainable in the hands of assessee, if at all the dividend is taxable, it is reasonable to consider the addition to the extent of 20% of the accumulated profits in the hands of assessee and the remaining may be ordered to be assessed in the hands of other four shareholders, as all the shareholders have taken advance from the company, therefore, the amount is liable to be taxed in the hands of all the directors according to their share holding. We have considered the arguments of the assessee and we find that there is no merit in the arguments of the assessee. The assessee keeps on changing his arguments at each stage of proceedings and from this inconsistent explanation of the assessee, we find that there is no bonafiedness in the claim of the assessee. Initially, he has chosen to declare the deemed dividend in his hand, later come with different explanation at different levels. - Decided against assessee

Summary

Issues Involved:
1. Whether the loan taken by the assessee from the company constitutes deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
2. Whether the assessee's claim that the loan was for the purchase of land for the company is valid.
3. Whether the assessee's voluntary disclosure of additional income should be telescoped against the deemed dividend addition.
4. Whether the additional ground raised by the assessee regarding the apportionment of deemed dividend among shareholders is valid.

Issue-wise Detailed Analysis:

1. Deemed Dividend under Section 2(22)(e):
The primary issue revolves around whether the loan taken by the assessee from M/s Chalapathi Estates Pvt Ltd, a closely held company, should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The assessee, holding 12% shares in the company, received a loan amounting to Rs. 57,50,000, which was used for investment in another company. The Assessing Officer (A.O.) observed that the company had accumulated profits and treated the loan as deemed dividend, making an addition of Rs. 3,53,661. The assessee initially admitted to this during the search operation but later retracted, claiming the loan was for the purchase of land for the company. However, the A.O. did not accept this explanation, as there was no evidence provided to support the claim.

2. Loan for Purchase of Land Claim:
The assessee contended that the loan was an advance for purchasing land for the company and not a loan falling under Section 2(22)(e). This claim was rejected by the A.O. and the Commissioner of Income Tax (Appeals) [CIT(A)] due to lack of supporting evidence such as agreements or details of the amount spent on land purchase. The Tribunal noted that the assessee had changed his explanation multiple times during the proceedings, undermining the credibility of his claim. The Tribunal upheld the A.O.'s finding that the loan was for personal benefit and thus attracted the provisions of Section 2(22)(e).

3. Telescoping of Voluntary Disclosure:
The assessee argued that his voluntary disclosure of Rs. 16,65,000 to cover deficiencies in the books of accounts should be telescoped against the deemed dividend addition. The Tribunal rejected this argument, stating that the addition under Section 2(22)(e) is a deemed provision and unrelated to the voluntary disclosure meant to cover other deficiencies. The Tribunal emphasized that the deemed dividend addition is independent and cannot be adjusted against the disclosed income.

4. Apportionment of Deemed Dividend:
The assessee raised an additional ground, suggesting that if the deemed dividend is taxable, it should be proportionately distributed among all shareholders based on their shareholding. The Tribunal found no merit in this argument, noting the assessee's inconsistent explanations throughout the proceedings. The Tribunal upheld the A.O.'s decision to treat the entire amount as deemed dividend in the hands of the assessee, rejecting the additional ground for apportionment.

Conclusion:
The Tribunal dismissed all the appeals filed by the assessee, affirming the A.O.'s and CIT(A)'s decisions. The Tribunal concluded that the loan taken by the assessee was rightly treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961, and there was no basis for telescoping the voluntary disclosure or apportioning the deemed dividend among other shareholders. The order was pronounced in the open court on 8th January 2016.