2019 (1) TMI 987 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - assessee company has received certain amounts from M/S Euro Safety Footwear (P) Ltd., Shri Kulbir Singh is a shareholder having substantial interest in both the companies - collaboration agreement to be obtained from the Bank - proof of commercial transactions - CIT-A deleted the addition - Held that - Assessee during the course of appellate proceedings placed on record the evidences in the form of collaboration agreement, sanction letter of bank etc. These evidences alongwith the submissions of the assessee were forwarded to the AO for comments. The AO made inquiries from the Bank and has confirmed the genuineness of the documentary evidences in the form of bank letter, collaboration agreement and bank sanction letter. Thus A.O. was given a reasonable opportunity to comment on the genuineness of the collaboration agreement and bank sanction letter. The CIT(A) specifically asked the A.O. vide letter and it was only after the receipt of remand report and after considering the same the appellate order has been passed. On the basis of the above, it is seen that the ld. CIT(A) was well justified in holding that deemed dividend can be taxed only in the hands of the recipient, either being individual shareholder, or the concern in which the individual has a substantial interest, or if any payment is made on behalf of, or for the individual benefit of the individual shareholder, which is not the case herein. - Decided against revenue

Summary

Issues Involved:
1. Assessment of certain amounts received by the assessee company as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
2. Admission of additional evidence in the form of a collaboration agreement.

Issue-wise Detailed Analysis:

1. Assessment of Certain Amounts as Deemed Dividend under Section 2(22)(e):

The primary issue was whether the amounts received by the assessee company from M/s Euro Safety Footwear (P) Ltd. should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) had added ?69,91,127/- to the income of the assessee company on the grounds that the amount received attracted the provisions of Section 2(22)(e). The CIT(A) deleted this addition, holding that the amounts were received on account of commercial transactions and business expediency, and the assessee company was not a registered shareholder of the payer company.

The Tribunal examined the facts and concluded that the assessee company received the amounts due to a tripartite collaboration agreement involving M/s Roger Industries Ltd., M/s Euro Safety Footwear (P) Ltd., and Shri Kulbir Singh. The agreement stipulated that M/s Euro Safety Footwear (P) Ltd. would provide interest-free advances to M/s Roger Industries Ltd. due to the latter's financial constraints arising from providing a bank guarantee. The Tribunal referenced the ITAT Chennai decision in the case of ‘ACIT vs G.Sreevidya’ and the Calcutta High Court decision in ‘Pradip Kumar Malhotra vs. CIT’, which held that advances made out of business expediency do not qualify as deemed dividends under Section 2(22)(e).

The Tribunal also noted that M/s Roger Industries Ltd. was neither a registered nor a beneficial shareholder in M/s Euro Safety Footwear (P) Ltd., and therefore, the provisions of Section 2(22)(e) were not applicable. The Tribunal cited the Special Bench decision in ‘ACIT vs. Bhaumik Colour P. Ltd.’, which clarified that deemed dividend under Section 2(22)(e) can only be assessed in the hands of the shareholder, not in the hands of a non-shareholder concern.

2. Admission of Additional Evidence:

The second issue pertained to the CIT(A)'s admission of additional evidence in the form of a collaboration agreement. During the assessment proceedings, the assessee company initially did not submit this evidence, believing that the explanation provided was sufficient. However, after the AO made the additions, the assessee submitted the collaboration agreement during the appellate proceedings. The CIT(A) forwarded these documents to the AO for comments, who confirmed their genuineness after inquiries from the bank.

The Tribunal upheld the CIT(A)'s decision to admit the additional evidence, noting that the AO was given a reasonable opportunity to comment on the genuineness of the collaboration agreement and bank sanction letter. The Tribunal referenced the jurisdictional High Court decision in ‘CIT vs. M/S Aakar Constructions (P) Ltd.’, which supported the CIT(A)'s actions as being within the framework of law.

Conclusion:

The Tribunal found no error in the CIT(A)'s order and confirmed that the amounts received by the assessee company from M/s Euro Safety Footwear (P) Ltd. were not deemed dividends under Section 2(22)(e) due to the commercial nature of the transactions and the lack of shareholder status. The Tribunal also upheld the admission of additional evidence by the CIT(A), ensuring procedural fairness. Consequently, the appeal was dismissed.