2018 (8) TMI 1881 - AT - Income Tax

Deemed dividend u/s 2 (22) (e) - loan given for expansion of business - HELD THAT - In the instant case the loan was given to the assessee for further expansion of business as the said company intended to take over the business of the assessee hence would be an indirect beneficiary from such transaction. Further the assessee had paid interest on the said amount which has benefited the said company. Thus it was a commercial transaction between the parties. Similar transaction was accepted as commercial transaction between the parties in earlier as well as subsequent years in which interest has also been paid and no adverse inference have been drawn against the assessee therefore rule of consistency do apply with the income proceedings and the AO without bringing any further evidence against the assessee should not have taken a different view against the assessee. The decisions relied upon by assessee squarely apply to the facts and the circumstances of the case. The assessee produce sufficient evidence on the record to justify that it was a commercial transaction between the parties not only in assessment year under appeal but in preceding and subsequent years therefore the authorities below were not justified in invoking provision of section 2 (22) (e) of the IT Act against the assessee for making the addition. We set aside the orders of the authorities below and delete the addition. This ground of appeal of the assessee is allowed. Disallowance on account of labour charges - HELD THAT - We are of the opinion that addition is ad-hoc in nature and cannot be sustained. The Tribunal in A. Y. 2010-11 2018 (8) TMI 1880 - ITAT DELHI deleted similar addition vide order of even date. The assessee explained the reasons for variations we therefore delete the addition of 3, 00, 000/-. This ground of appeal of assessee is allowed. Addition on account of commission u/s 37 (1) - HELD THAT - The assessee has incurred above expenses wholly and exclusively for the purpose of business same is allowable deduction. The financial results of the assessee are better as compared to earlier years and subsequent years therefore there were no reason for assessee to inflate the expenses. Considering the totality of the facts and circumstances of the case we do not find any justification to sustain the addition. We accordingly set aside the orders of the authorities below and delete the addition. This ground of the assessee is allowed.

Issues Involved:
1. Addition of ?8,23,964/- on account of deemed dividend u/s 2(22)(e) of the IT Act.
2. Disallowance of ?3,00,000/- on account of labor charges.
3. Disallowance of ?29,34,000/- on account of commission u/s 37(1) of the IT Act.

Issue-wise Detailed Analysis:

1. Addition of ?8,23,964/- on account of deemed dividend u/s 2(22)(e) of the IT Act:
The assessee challenged the addition of ?8,23,964/- made by the Assessing Officer (AO) under the provisions of section 2(22)(e) of the Income Tax Act, which deals with deemed dividends. During the assessment proceedings, the AO noted that the assessee had an unsecured loan from M/s. Ramsan Communication Limited, a company in which the assessee had substantial interest. The loan outstanding as on 31.03.2011 was ?1,12,95,724/- and the accumulated profit was ?8,23,964/-. The AO treated this amount as deemed dividend, as the assessee could not provide sufficient evidence to prove that the transaction was not a loan but an advance for the purchase of an industrial plot. The CIT(A) confirmed the addition for the same reasons.

The assessee argued that the transaction was a commercial one and not a loan, supported by ledger accounts showing interest payments and TDS deductions. The ITAT referred to similar cases, such as Shri Deven Chachra Vs. DCIT and Pradip Kumar Malhotra Vs. CIT, where it was held that commercial transactions do not fall under the purview of deemed dividends. The ITAT concluded that the transaction was commercial and consistent with previous and subsequent years, thus not attracting section 2(22)(e). The addition of ?8,23,964/- was deleted.

2. Disallowance of ?3,00,000/- on account of labor charges:
The assessee challenged the disallowance of ?3,00,000/- on labor charges, which the AO had disallowed due to a sudden increase in March 2011 and lack of documentary evidence like invoices or bills. The CIT(A) confirmed the disallowance citing discrepancies such as payments in cash and lack of proper documentation.

The assessee argued that the business involved variations in labor expenses due to the nature of government contracts and that payments were made in advance with TDS deductions. The ITAT found the disallowance to be ad-hoc and noted that no similar disallowances were made in earlier or subsequent years. The ITAT deleted the addition, stating that the reasons for variations were adequately explained.

3. Disallowance of ?29,34,000/- on account of commission u/s 37(1) of the IT Act:
The assessee challenged the disallowance of ?29,34,000/- paid as commission, which the AO disallowed on the grounds that the payments were illegal as no middlemen are allowed in government tendering processes. The AO also noted the lack of agreements and evidence of services rendered by the commission agents. The CIT(A) confirmed the disallowance.

The assessee argued that the commission was paid for representing him before certain parties to get tenders, with TDS deducted and confirmations from agents provided. The ITAT referred to similar cases, such as Mobile Communication (India) P. Ltd. Vs. DCIT, where it was held that agents could assist in pre-tender and post-tender activities. The ITAT found that the AO did not make any inquiries to verify the services rendered and that the payments were consistent with earlier and subsequent years. The ITAT concluded that the expenses were incurred wholly and exclusively for business purposes and deleted the addition.

Conclusion:
The appeal of the assessee was allowed, with the ITAT deleting the additions on account of deemed dividend, labor charges, and commission. The ITAT emphasized the importance of consistency and the necessity for the AO to substantiate disallowances with proper evidence. The judgment was pronounced in the open court on 01.08.2018.

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