2019 (7) TMI 372 - HC - Income Tax

Deemed dividend u/s 2(22)(e) - assessee was the substantial stakeholder in both the companies namely M/s.AVPL and M/s.TPCL - allegation that loan received from M/s.AVPL to M/s.TPCL - allegation was made without evidence - balance sheet reveal that it was the assessee, who extended the loan to M/s.AVPL and not vice versa - perversity of order - HELD THAT - Allegation against M/s.AVPL is quasi criminal in the sense that M/s.AVPL was used as a conduit to transfer funds to the assessee. If such is the allegation, then it is the duty of the AO to render a finding based on the material, which was placed on record by the assessee and explain the nexus in the transaction before holding that the assessee was benefited on account of the transaction and that M/s.AVPL was used as a conduit. We find that this factual finding is missing in the assessment order, the correctness of which was not tested by the CIT(A) nor did the Tribunal undertake such an exercise though the assessee raised such a ground. We will be well justified in terming the orders passed by both the CIT(A) as well as the Tribunal to be perverse and unsustainable. That apart, the assessee specifically raised a contention before the CIT(A) that he did not have adequate opportunity to explain his case before the AO. This ground has not been dealt with by the CIT(A). Thus, considering these facts, we are of the opinion that the matter should be remanded to the CIT(A) for a fresh consideration

Summary

Issues involved:
Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 in the absence of accumulated profits, applicability of deemed dividend provisions, and determination of whether advances between companies constitute deemed dividend.

Analysis:
1. The Revenue filed an appeal under Section 260A of the Income Tax Act, challenging the Tribunal's order for the assessment year 2013-14. The key issues raised were the applicability of Section 2(22)(e) without accumulated profits, the interpretation of provisions disregarding dividend distribution conditions, and taxation of advances between companies based on substantial shareholding.

2. The Assessing Officer concluded that a deemed dividend under Section 2(22)(e) was routed through the appellant from M/s.Aban Ventures Private Limited (M/s.AVPL) and M/s.Tuticorin Power Company Limited (M/s.TPCL), alleging misuse of M/s.AVPL to transfer funds to the appellant. This led to assessing a sum as deemed dividend in the appellant's hands.

3. The appellant contended before the CIT(A) that M/s.AVPL was not a conduit for fund transfer, challenging the lack of business expediency in the transaction. The CIT(A) dismissed the appeal, which was further upheld by the Tribunal, prompting the High Court to review the case.

4. The High Court observed factual errors in determining the deemed dividend, noting discrepancies in the Assessing Officer's conclusions regarding fund transfers. The CIT(A) and Tribunal's decisions were deemed unsustainable due to lack of proper examination of factual positions and failure to address the appellant's contentions adequately.

5. The High Court referred to a Supreme Court decision and highlighted the quasi-criminal nature of allegations against M/s.AVPL, emphasizing the need for a thorough assessment based on evidence. The Court found the previous orders to be erroneous and remanded the case to the CIT(A) for a fresh consideration to allow the appellant to present all relevant records and refute the allegations.

6. Consequently, the High Court allowed the tax case appeal, setting aside the previous orders and instructing a fresh review by the CIT(A) solely on the issue of whether M/s.AVPL was used as a conduit for fund transfer. The substantial questions of law were left open, and no costs were awarded in this decision.