2016 (7) TMI 1494 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - assessee had shown amount as unsecured loan from Oxford Securities Private Ltd.(OSPL), that one of the partners of the assessee firm was holding 10% of the shares in the company - Held that - AO was not justified in invoking the provisions of section 2(22)(e) of the Act without establishing the basic fact as to whether the assessee was a shareholder of OSPL or not. As decided in UNIVERSAL MEDICARE PRIVATE LIMITED 2010 (3) TMI 323 - BOMBAY HIGH COURT The advance or loan has to be made as the case may be either to a shareholder being a beneficial owner holding not less than ten per cent. of the voting power or to any concern in which such a shareholder is a member or a partner and in which he has a substantial interest. Section 2(22)(e) defines the ambit of the expression dividend . All payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely the shareholder. The definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. - decided against revenue Addition under the head unaccounted profits on sale - mismatch in consumption of electricity and production of goods - Held that - The assessee had filed a letter addressed to the State Electricity authorities informing them of malfunctioning of meter for two-three months. It is quite common feature that electricity meters in some cases do not function properly and electricity boards takes time to rectify the defects. Thus a plausible and reasonable explanation was filed by the assessee about the discrepancy in electricity bill. But the AO without making any inquiry in that regard jumped on a final conclusion. Besides even if there was no malfunctioning of the meters there can be many a reasons for mismatch in consumption of electricity and production of goods. The assessee is not manufacturing only one type of wires or not using one kind of raw material. The variation in the final product and the raw material will affect the consumption of electricity. Other factors mentioned by the assessee for variation in power consumption before the FAA were also not considered by the AO.It is pertinent to note that the AO has not commented upon the documents maintained by the assessee for the purposes of excise duty or sales tax department. No evidence has been brought on record about unrecorded purchases of raw material. - decided against revenue

Summary

Issues Involved:
1. Adjudication of additional ground regarding Central Sales Tax.
2. Deduction claimed under Section 80IB of the Income Tax Act.
3. Addition under Section 2(22)(e) as deemed dividend.
4. Addition of unaccounted profits on sale.
5. Taxation of interest income from fixed deposits.

Issue-wise Detailed Analysis:

1. Adjudication of Additional Ground Regarding Central Sales Tax:
The assessee raised an additional ground concerning the Central Sales Tax of ?2.75 crores embedded in interstate sales, claiming it as a capital receipt. The First Appellate Authority (FAA) dismissed this ground, stating that the claim was not raised earlier in the return or before the Assessing Officer (AO). The FAA emphasized that the assessee had disclosed the Central Sales Tax as revenue receipt in its return and had not provided any Supreme Court decisions to support its claim. The Tribunal, however, referred to the jurisdictional High Court's decision in Prithvi Share Brokers (349 ITR 336), which allows raising additional claims before appellate authorities. Consequently, the Tribunal directed the FAA to adjudicate the issue after providing a reasonable opportunity of hearing to the assessee.

2. Deduction Claimed Under Section 80IB of the Income Tax Act:
The Revenue contested the deduction of ?8,50,23,349 under Section 80IB, arguing that the activities of the assessee's units did not constitute manufacturing. The Tribunal noted that this issue had been consistently decided in favor of the assessee in previous years, including by the High Court of Bombay. The Tribunal upheld the FAA's order allowing the deduction, emphasizing the principle of consistency, as no new contrary material was presented by the Revenue.

3. Addition Under Section 2(22)(e) as Deemed Dividend:
The AO treated ?97.16 lakhs as deemed dividend under Section 2(22)(e) because one of the partners of the assessee firm held a substantial share in Oxford Securities Private Ltd. (OSPL). The FAA granted relief to the assessee, referencing the case of Bhaumik Colour P. Ltd. (313 ITR (AT) 146) and National Travel Services (347 ITR 305), stating that the assessee was not a shareholder of OSPL. The Tribunal upheld this view, citing the Bombay High Court's decision in Universal Medicare (324 ITR 263), which clarified that dividend must be taxed in the hands of the shareholder, not the recipient of the loan or advance.

4. Addition of Unaccounted Profits on Sale:
The AO added ?2.81 crores as unaccounted profits based on discrepancies in power consumption in Unit-III. The assessee argued that the addition was based on notional computations without evidence of unreported production or sales. The FAA accepted the assessee's explanation regarding the malfunctioning of electricity meters and the variation in power consumption due to different product mixes. The Tribunal agreed, noting that the AO did not reject the books of accounts or provide evidence of unrecorded purchases. The addition was deemed speculative and based on conjectures, thus the Tribunal upheld the FAA's decision to delete the addition.

5. Taxation of Interest Income from Fixed Deposits:
The only ground in the Cross Objection (CO) was about taxing interest income of ?7.35 lakhs from fixed deposits as "income from other sources" instead of "business income." Both parties conceded that this issue had been remanded to the AO in a previous Tribunal decision. The Tribunal, following the precedent, restored the matter to the AO for fresh adjudication, directing the AO to consider the Supreme Court's decision in ACG Associated Capsules P. Ltd vs. CIT (343 ITR 89) and provide a reasonable opportunity of hearing to the assessee.

Conclusion:
The appeal and the CO filed by the assessee were partly allowed, and the appeal of the AO was dismissed. The Tribunal directed the FAA to adjudicate specific issues and remanded others to the AO for fresh consideration, ensuring adherence to legal principles and providing opportunities for the assessee to present their case.