2016 (5) TMI 542 - AT - Income Tax

Deemed dividend addition u/s 2(22((e) - Held that - The Assessing officer has invoked section 2(22)(e) only because the account contain transactions of payment and repayment between the said Company OIL and firms OC and OBA. Further, he has nowhere ascertained that the payment received and the payments made are towards payment by way of loans or advances. Therefore, simply because there were transactions of cheques received and cheques paid in the mutual, open, current, running account with the sister concerns, the same cannot be considered as payment by way of loans or advances so as to attract provisions of section 2(22)(e) as held in the case of Schutz Dishman Bio-tech Pvt Ltd (2016 (1) TMI 84 - GUJARAT HIGH COURT ). Similar transactions have been made in earlier year also but never in past the same has been considered to be transaction attracting section 2(22)(e). Therefore, in view of the binding decision in the case of Schutiz Dishman Bio-tech Pvt Ltd (supra), the transactions is required to be held in the nature of mutual current accommodation entries and therefore outside the purview of provisions of Section 2(22)(e) of the Act. - Decided against revenue

Issues Involved:
1. Reopening of assessment under section 147 of the Income Tax Act.
2. Applicability of Section 2(22)(e) regarding deemed dividend.
3. Nature of transactions as current accommodation adjustments versus loans or advances.
4. Enhancement of income by the CIT(A) without mandatory notice.
5. Payment by the company to the partnership firm for the individual benefit of the shareholder.
6. Nexus between the amount paid by the company and the amount lent by the firm to the individual shareholder.
7. Consideration of submissions and explanations by the lower authorities.
8. Levy of interest under section 234B/C.
9. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Reopening of Assessment (Ground No. 1)
The assessee did not press the issue regarding the reopening of assessment under section 147 of the Income Tax Act. Consequently, this ground was dismissed as not pressed.

2. Applicability of Section 2(22)(e) (Ground Nos. 2 & 3)
The core issue was whether the transactions between M/s. Ornet Intermediates Ltd. (OIL), M/s. OBA Specialty Chemicals (OBA), and M/s. Ornet Corporation (OC) were in the nature of loans or advances, thereby attracting the provisions of Section 2(22)(e) regarding deemed dividend.

The Assessing Officer (AO) found that the assessees held substantial shares in OIL and had significant interests in OBA and OC. The AO treated the advances by OIL to OC and OBA as deemed dividends under Section 2(22)(e) and made additions based on the peak balances.

The CIT(A) initially deleted these additions but later quantified deemed dividends based on the withdrawals by the assessees from OC and OBA, invoking the third limb of Section 2(22)(e).

3. Nature of Transactions (Ground Nos. 2 & 3)
The assessee argued that the transactions were current accommodation adjustments, not loans or advances. They cited frequent, mutual transactions without interest charges as evidence of this. The CIT(A) rejected this, stating that OIL was not in the business of money lending, but the Tribunal disagreed, referencing the Gujarat High Court's decision in CIT vs. Schutz Dishman Bio-tech Pvt Ltd., which supported the assessee's view that such transactions are not loans or advances.

4. Enhancement of Income by CIT(A) (Ground No. 5)
The CIT(A) enhanced the income of the assessee without issuing the mandatory notice, changing the computation basis of deemed dividends. This was contested by the assessee, arguing procedural violations.

5. Payment for Individual Benefit (Ground No. 6)
The CIT(A) invoked the third limb of Section 2(22)(e), considering payments by OIL to OC and OBA as for the individual benefit of the shareholders. However, no material evidence was provided to substantiate this claim.

6. Nexus Between Payments (Ground No. 7)
The lower authorities failed to establish a direct nexus between the amounts paid by the company to the firm and the amounts lent by the firm to the individual shareholder, leading to the confirmation of deemed dividend addition.

7. Consideration of Submissions (Ground No. 8)
The assessee argued that the lower authorities ignored various submissions and explanations, violating the principles of natural justice. This ground was upheld, emphasizing the need for proper consideration of all provided information.

8. Levy of Interest (Ground No. 9)
The CIT(A) confirmed the AO’s action of levying interest under section 234B/C, which was contested by the assessee.

9. Penalty Proceedings (Ground No. 10)
The initiation of penalty proceedings under section 271(1)(c) was also confirmed by the CIT(A), which the assessee contested.

Conclusion:
The Tribunal concluded that the transactions between OIL, OC, and OBA were indeed current accommodation adjustments and not loans or advances, thereby not attracting the provisions of Section 2(22)(e). Consequently, all appeals filed by the assessee were allowed, and those filed by the Revenue were dismissed. The Tribunal held that when the provisions of Section 2(22)(e) do not apply, the question of quantifying deemed dividends does not arise. The order was pronounced on April 5, 2016, in Ahmedabad.

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