2016 (4) TMI 71 - AT - Income Tax

Penalty under section 271(1)(c) - deemed dividend addition u/s 2(22) - assessment u/s 153A - Held that - The assessee filed the return under section 139 for all the years and disclosed the particulars of shareholding pattern, advances taken and given by the assessee company/individual in return itself. The accumulated profit also has been disclosed. Thereafter assessee filed return under section 153A of the IT Act wherein also all the detailed facts and figures were disclosed in the return. The assessee s case is auditable. The assessee at the time of quantum addition as well as at the time of penalty proceedings has reiterated that these advances are in the course of regular business. It is a running account, said advances later on repaid. This issue is debatable and various courts particularly in the case of Creative Dyeing & Printing (P) Ltd. (2009 (9) TMI 43 - DELHI HIGH COURT ) wherein it has been held that business transaction is not covered under section 2(22)(e) of the Act. Various other case laws cited by the assessee has also made this issue debatable. The case relied on by the AO i.e. Mak Data P. Ltd. is not applicable as assessee at every stage had filed the explanation before the AO as well as CIT (A) i.e. these transactions were made for the purpose of business and commercial expediency, is bonafide. Penalty imposed by the AO and confirmed by ld. CIT (A) are not justified. Accordingly we delete the penalty in all the cases. - Decided in favour of assessee

Issues Involved:
1. Confirmation of penalty under section 271(1)(c) of the Income Tax Act.
2. Determination of deemed dividend under section 2(22)(e) of the Income Tax Act.
3. Voluntariness and disclosure of income.
4. Applicability of mens rea in the imposition of penalty.
5. Interpretation of business advances in relation to deemed dividend.
6. Applicability of judicial precedents and legal principles.

Detailed Analysis:

1. Confirmation of Penalty under Section 271(1)(c):
The sole ground in all the appeals was against confirming the penalty under section 271(1)(c) of the Income Tax Act. The Assessing Officer (AO) imposed penalties on various assessees, citing that intra-group fund transfers fell within the ambit of section 2(22)(e) of the IT Act, leading to additions as deemed dividends. The AO observed that the assessee had not disclosed deemed income in the returns filed under sections 139 and 153A, thus leading to the imposition of penalties.

2. Determination of Deemed Dividend under Section 2(22)(e):
The AO made additions on account of deemed dividend, arguing that the section does not distinguish between business advances and other types of advances. The AO relied on various judicial precedents to justify the additions, asserting that the intra-group transfers were substantial and that the shareholding pattern indicated substantial shareholders within the companies involved.

3. Voluntariness and Disclosure of Income:
The assessee contended that the amounts were offered for tax voluntarily and that the loans received were for business purposes. They argued that the disclosure was made to avoid prolonged litigation and that surrendering income does not equate to concealment. The AO, however, argued that the disclosure was not voluntary but was a result of the investigation, and thus imposed penalties.

4. Applicability of Mens Rea in the Imposition of Penalty:
The AO and CIT (A) held that even if the advances were made during the course of business, they still fell under section 2(22)(e). The assessee argued that mens rea, an active element in the imposition of penalty, was lacking in this case. The AO, however, relied on judicial precedents that equated civil liability with strict liability, thereby justifying the penalties.

5. Interpretation of Business Advances in Relation to Deemed Dividend:
The assessee argued that the funds received were used for acquiring development rights and were repaid, thus falling outside the purview of section 2(22)(e). They cited various judicial precedents supporting the view that business advances do not attract deemed dividend provisions. The CIT (A) and AO, however, did not accept this argument, holding that section 2(22)(e) does not differentiate between types of advances.

6. Applicability of Judicial Precedents and Legal Principles:
The assessee relied on multiple judicial precedents to argue that business advances are not covered under section 2(22)(e). They cited cases such as Creative Dyeing & Printing (P) Ltd., CIT vs. Ambassador Travels Pvt. Ltd., and CIT vs. Raj Kumar, among others. The AO and CIT (A) relied on different precedents, including Mak Data Pvt. Ltd. vs. CIT and CIT vs. Alkesh K. Patel, to support the imposition of penalties.

Conclusion:
The Tribunal, after considering the arguments and precedents, held that the issue of business advances being considered as deemed dividends is debatable. The Tribunal noted that the assessee had disclosed all relevant details in the returns and had a bona fide belief that the advances were for business purposes. The Tribunal found that the penalties imposed by the AO and confirmed by the CIT (A) were not justified and thus deleted the penalties in all cases. The appeals of the assessee were allowed, and the order was pronounced in the open court on 12/02/2016.

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