2017 (4) TMI 1458 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - addition of deemed dividend under the provisions of section 2(22)(e) - HELD THAT - Section 2(22)(e) of the Act creates legal fiction whereby loans/advances received by an assessee are deemed as taxable income in the hands of the recipient assessee in certain circumstances as specified therein. In view of section 2(22)(e) of the Act, loans/advances amount under consideration artificially partake the character of dividend and brought to tax as deemed dividend. The aforesaid provision of section 2(22)(e) has brought a deeming and unnatural concept of treating the returnable loans/advances as taxable income in the hands of borrower in departure with the operation of the normal provisions. Admittedly, the relevant facts concerning the issue were available to the AO. Thus, there is no concealment of any particulars of any fact per se. Assessee has simultaneously claimed that the aforesaid advances have been received the course of ordinary business and owing to ongoing business transactions and thus not susceptible to provisions of section 2(22)(e) of the Act. Thus, while the provisions of s.2(22)(e) have been applied, the issue is not entirely free of any debate. As noted, section 2(22)(e) of the Act is only deeming provision of law and is not a substantive provision. Thus, in the absence of any perceptible malafides, we find no infirmity in the order of the CIT(A) deleting the penalty imposed by the AO. Thus, we do not see any merits in the appeals of the Revenue.

Summary

Issues:
Challenge to deletion of penalty under section 271(1)(c) of the Income Tax Act, 1961 for furnishing inaccurate particulars of income based on loans treated as deemed dividend under section 2(22)(e) of the Act.

Analysis:

1. Deletion of Penalty by CIT(A):
The appeals by the Revenue were directed against the order of the Commissioner of Income Tax(Appeals)-II, Ahmedabad for the Assessment Years 2008-09 & 2009-10. The Assessing Officer challenged the deletion of penalties amounting to ?2,86,660/- and ?20,66,590/- imposed under section 271(1)(c) of the Income Tax Act, 1961. The penalties were imposed for furnishing inaccurate particulars of income related to loans treated as deemed dividend under section 2(22)(e) of the Act. The CIT(A) held that the penalty was not justified as all relevant facts regarding the loans were disclosed, and the loans were treated as income chargeable only by legal fiction under section 2(22)(e) of the Act.

2. Legal Fiction of Deemed Dividend:
Section 2(22)(e) of the Act creates a legal fiction where loans/advances received by an assessee are deemed as taxable income in certain circumstances. The loans/advances, in this case, were treated as deemed dividend and brought to tax as such. This provision introduces a deeming concept, departing from normal provisions. The AO had access to all relevant facts regarding the issue, and the Assessee argued that the advances were part of ordinary business transactions and not covered under section 2(22)(e). As section 2(22)(e) is a deeming provision and not substantive, and in the absence of malafides, the CIT(A)'s decision to delete the penalty was upheld.

3. Conclusion:
The Tribunal dismissed the appeals of the Revenue, upholding the CIT(A)'s order deleting the penalties. The judgment emphasized that the loans treated as deemed dividend under section 2(22)(e) were subject to legal fiction and not a substantive provision. As all relevant facts were disclosed, and the issue was not free of debate, the imposition of penalty under section 271(1)(c) was deemed unjustified. Therefore, the penalties were deleted, and the appeals were dismissed.

This judgment highlights the application of legal fiction under section 2(22)(e) of the Income Tax Act, 1961, and the implications on penalties for furnishing inaccurate particulars of income. The analysis delves into the concept of deemed dividend, the role of deeming provisions in taxation, and the significance of disclosing all relevant facts in penalty proceedings.