2019 (2) TMI 286 - AT - Income Tax

Revision u/s 263 - Deemed dividend addition u/s 2(22)(e) - Held that - The instant case, there is no dispute that the assessee company has not made any actual payment to the assessee as the assessee has taken over the actual liability of the company on his shoulder. No asset was distributed to the assessee relating to the company and accumulated profits were not distributed in the form of loans or advances to the assessee. Actual liability of the company has been transferred to the assessee which increases his liability and there is no revenue loss to the department. Though the AO did not examine this issue, the assessment cannot be held to be prejudicial to the interest of the revenue. Accordingly, we are unable to sustain the order of the Pr.CIT passed u/s 263 and the order of the Pr.CIT passed u/s 263 is set aside and the order of the AO is restored.- Decided in favour of assessee.

Summary

Issues:
Assessment of deemed dividend u/s 2(22)(e) - Revision proceedings under section 263 - Transfer of funds between companies - Liability takeover by assessee - Prejudice to revenue interest.

Analysis:
The appeal was filed against the Pr.CIT's order for the A.Y. 2013-14, where the AO added a sum related to advances as income. The Pr.CIT observed funds transfer between companies and deemed it as dividend u/s 2(22)(e), directing a reassessment. The assessee argued no direct payment was received, only liabilities were transferred. The Pr.CIT found the transaction attracting deemed dividend, as per sec. 2(22)(e), due to fund flow circumventing provisions. The assessee contended no benefit was received, only obligations increased. The Tribunal examined the balance sheet, finding no asset transfer or profit reduction. The liability takeover by the assessee was to improve the balance sheet, not for personal benefit. The Tribunal cited a case to support the requirement of actual payment for deemed dividend treatment. It concluded that no direct payment was made to the assessee, and the liability transfer did not result in revenue loss, thus overturning the Pr.CIT's order.

The Tribunal noted the absence of direct payments to the assessee, with liabilities transferred solely to enhance the balance sheet. The assessee's obligation increased without any benefit received, indicating no revenue prejudice. The Tribunal referenced a legal precedent emphasizing actual payments for deemed dividend treatment, which was absent in this case. As the liability transfer did not result in revenue loss and no assets were distributed to the assessee, the assessment was deemed not prejudicial to revenue interests. Consequently, the Pr.CIT's order under section 263 was set aside, restoring the AO's original order.

In summary, the Tribunal analyzed the fund transfer between companies, the liability takeover by the assessee, and the deemed dividend assessment under section 2(22)(e). It concluded that no direct payments were made to the assessee, the liability transfer did not result in revenue loss, and the assessment was not prejudicial to revenue interests. The Pr.CIT's order under section 263 was overturned, and the appeal of the assessee was allowed.