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2018 (12) TMI 1835 - AT - Income TaxEstimation of income of capital work in progress - HELD THAT - Assessee was having difficulty in realizing the dues from the aforesaid contractee which is evident from consent terms dated 21/02/2009 as approved by Hon ble Bombay High Court and contempt petition filed by the assessee against the aforesaid entity for not honouring the terms of the consent terms by the contractee. These facts give credence to the arguments of Ld. AR that there was significant uncertainty as to the recovery of the final amount and the income, under the circumstances, could not be recognized with reasonable certainty. No defects have been found in the books and therefore, the action of the assessee in estimating the income @10% of capital work in progress could not be said to be without strong foundation. No infirmity in the order of Ld. first appellate authority in deleting the estimated additions as made by Ld. AO. - Decided in favour of assessee. Deemed dividend u/s 2(22)(e) - CIT(A) deleted the addition holding that deemed dividend would be attracted in the hands of the Directors being the shareholders and not in the hands of the assessee company, who is not a shareholder - HELD THAT - Both the entities i.e. lender and the assessee company has certain individuals shareholders who hold threshold shareholding in the two entities within the meaning of Section 2(22)(e).- assessee itself does not hold any shareholding in the lender company either as registered shareholder or as a beneficial shareholder. This being the case, the ratio of decision of Special Bench of Mumbai Tribunal rendered in ACIT Vs Bhaumik Color (P) Ltd.. 2008 (11) TMI 273 - ITAT BOMBAY-E as relied upon by first appellate authority becomes squarely applicable. Section 2(22)(e) does not extend the meaning of the term shareholders and that the loan so granted could not be taxed as dividend income in the hands of the recipient company who was not the shareholder of the lender company.- Decided in favour of assessee.
Issues Involved:
1. Deletion of addition to net profit based on unexplained "work in progress." 2. Deletion of addition of deemed dividend under Section 2(22)(e) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Deletion of Addition to Net Profit Based on Unexplained "Work in Progress": The revenue contested the deletion of ?55,58,394 added by the Assessing Officer (AO) to the net profit, arguing that the assessee failed to satisfactorily explain the figures adopted for "work in progress" during the assessment proceedings. Facts: - The assessee, a civil contractor, was assessed under scrutiny assessment for AY 2009-10. - The AO noted discrepancies in the financial statements concerning the capital work in progress and turnover. - The AO treated the differential amount as income and made an addition of ?74.37 Lacs after allowing certain expenditures. Assessee's Argument: - The assessee argued that there was significant uncertainty in realizing dues from the contractee, even after consent terms were approved by the court. - The contractee did not honor the consent terms, leading to further litigation. - The income did not accrue to the assessee and was not recognized during the impugned AY. - In the alternative, the assessee requested the non-recovered amount to be allowed as a business loss. CIT(A) Observations: - The CIT(A) agreed with the assessee's arguments, noting the uncertainty in realizing the bills. - The CIT(A) emphasized that only the income which accrues or is deemed to accrue during the year can be included in the total income. - The CIT(A) cited various judicial precedents supporting the assessee's position that disputed bills cannot be recognized as income until paid by the contractee. - The addition of ?55,58,394 was deleted, and the alternative plea was not adjudicated due to the decision. Tribunal's Decision: - The Tribunal found no infirmity in the CIT(A)'s order, noting the significant uncertainty in realizing the final amount and the absence of defects in the books. - The action of the assessee in estimating the income at 10% of capital work in progress was deemed reasonable. - The Tribunal upheld the deletion of the estimated additions made by the AO. 2. Deletion of Addition of Deemed Dividend Under Section 2(22)(e): The revenue contested the deletion of ?17,25,000 added as deemed dividend under Section 2(22)(e), arguing that the deemed dividend should be attracted in the hands of the directors being the shareholders, not the assessee company, which is not a shareholder. Facts: - The assessee received an unsecured loan of ?17.25 Lacs from Best Roadways Limited. - Two individuals with substantial interest in the assessee company also had significant shareholding in the lender company. - The AO invoked Section 2(22)(e) and added the amount as deemed dividend in the hands of the assessee company. Assessee's Argument: - The assessee argued that it was neither a shareholder nor a beneficial owner of shares in the lender company. - The addition could not be sustained as the provisions of Section 2(22)(e) did not apply to the assessee company. CIT(A) Observations: - The CIT(A) agreed with the assessee, noting that the assessee was neither a shareholder nor a beneficial owner of shares in the lender company. - The CIT(A) relied on the ITAT Mumbai's decision in Bhaumik Colours (P) Ltd., which held that deemed dividend could not be taxed in the hands of the recipient company if it was not a shareholder of the lender company. - The addition of ?17,25,000 was deleted. Tribunal's Decision: - The Tribunal found that the assessee company was neither a registered shareholder nor a beneficial shareholder of the lender company. - The Tribunal upheld the CIT(A)'s decision, noting that the ratio of the Special Bench decision in Bhaumik Colour (P) Ltd. and the Hon'ble Apex Court's decision in CIT Vs. Madhur Housing & Development Co. were applicable. - The Tribunal distinguished the case from the Supreme Court's decision in Gopal Sons & HUF Vs CIT, noting that the facts were different. - The Tribunal concluded that the CIT(A)'s decision was in line with settled judicial propositions and required no interference. Conclusion: The appeal was dismissed, and the CIT(A)'s order deleting the additions to net profit and deemed dividend was upheld. The Tribunal found no infirmity in the CIT(A)'s decision, which was consistent with judicial precedents and the facts of the case.
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