2018 (2) TMI 2113 - HC - Income Tax

Addition u/s 68 - unexplained credit-brought to tax - AO relied upon the statements made by the Directors of the companies, whose credits were sought to be questioned and also upon the account statements of the said companies - CIT(A) and ITAT deleted addition - HELD THAT - Both the appellate authorities held that the AO did not make proper enquiries. Assessee had provided the primary details such as the identify of the creditors, their bank accounts (financial soundness) and all material particulars. Thus, the initial onus cast upon the assessee in terms of the judgment of Lovely Exports 2008 (1) TMI 575 - SC ORDER was discharged. Burden which then shifted to the ITAT of probing deeper was not discharged in the present case. The AO did not make a closer scrutiny of the bank accounts or the statements provided; nor did he probe into the income tax returns of the creditor companies. The AO should not have rested content only on the statement of the Directors, but, also analysed the other details provided. In these circumstances, the concurrent findings of facts, cannot be faulted. Addition u/s 2(2)(e) - amounts secured as loan were treated as deemed dividend - assessee was shareholder to the tune of 20% of its share capital, in these circumstances, the transactions squarely amounted to a deemed dividend - ITAT deleted addition - HELD THAT - This kind of transaction though facially suspect, stands sufficiently explained. The Court also notices that the recent Board s circular in this regard (which is dated 12.06.2017 circular 19/2017) is based upon judicial decisions of various High Courts and has guided the Income Tax Authorities that trade advances which are in the nature of commercial transactions would not fall within the ambit of the word advance in Section 2(22)(e) of the Act. Furthermore, similar decisions have been rendered by various High Courts including this Court in Commissioner of Income Tax vs. Raj Kumar 2009 (5) TMI 17 - DELHI HIGH COURT and Commissioner of Income Tax vs. F. Praveen, 2008 (8) TMI 908 - MADRAS HIGH COURT The lone question urged with respect to disallowance of commission, claimed by the assessee for one year, was examined and concurrent findings returned by the Appellate Commissioner and the ITAT. In the circumstances, no question of law arises on that score. No substantial question of law arises. Revenue appeal dismissed.

Summary

Issues:
1. Deletion of amounts brought to tax under Section 2(22)(e) and Section 68 of the Income Tax Act, 1961.
2. Proper appreciation of circumstances in setting aside additions made on account of income from undisclosed sources.
3. Deemed dividend treatment under Section 2(22)(e) for substantial amounts.
4. Disallowance of commission claimed by the assessee.

Analysis:

1. The Revenue challenged the decision of the Income Tax Appellate Tribunal (ITAT) regarding the deletion of amounts brought to tax under Section 2(22)(e) and Section 68 of the Income Tax Act, 1961. The assessee, after being subjected to a search under Section 132 and issued notice under Section 153A, contested the notice but faced adverse final assessment orders resulting in substantial additions. The Commissioner (CIT(A)) deleted the amounts brought to tax, and the ITAT upheld this decision. The Revenue contended that the additions made on account of income from undisclosed sources were set aside without proper appreciation of the circumstances, emphasizing the alleged unexplained credits under Section 68 and treating loan amounts as "deemed dividend" under Section 2(22)(e).

2. The Court observed that both appellate authorities found that the Assessing Officer (AO) did not conduct proper inquiries. The assessee provided essential details such as creditor identities, financial soundness, and other particulars, meeting the initial onus as per legal precedents. However, the burden shifted to the ITAT was not discharged as the AO failed to scrutinize bank accounts, statements, or creditor companies' tax returns adequately. The Court upheld the concurrent findings as the AO solely relied on directors' statements without analyzing other details, in line with the judgment in Commissioner of Income Tax vs. Lovely Exports, (2008) 216 CTR 195.

3. Regarding the deemed dividend treatment under Section 2(22)(e), it was noted that the assessee provided security by mortgaging personal property for M/s Pilot Industries to secure bank loans, receiving loans in return. Despite the transaction's suspicion, it was adequately explained. The Court referenced a recent circular and judicial decisions, including Commissioner of Income Tax vs. Raj Kumar, (2009) 318 CTR 462, supporting that trade advances as commercial transactions do not fall under Section 2(22)(e).

4. The Court also addressed the disallowance of commission claimed by the assessee for one year, finding no legal question as both the Appellate Commissioner and the ITAT had returned concurrent findings. Consequently, the appeals were dismissed, and no substantial question of law was identified, leading to the disposal of all pending applications.