2019 (8) TMI 651 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - HELD THAT - Assessee company M/s Corporate Ispat Alloys Ltd. (CIAL) has taken loan from M/s Abhijeet Infrastructure Ltd. (AIL). The AIL-lender company charges interest from CIAL, that is, it is not an interest free loan therefore provisions of section 2(22)(e) does not attract. Moreover, the CIAL is not a shareholder in AIL, therefore question of deemed dividend does not arise; as has been held by the Special Bench Mumbai ITAT, in the case of Bhaumik Colour(P) Ltd. 2008 (11) TMI 273 - ITAT BOMBAY-E . We note that Hon ble Calcutta High Court in the case of Pradip Kumar Malhotra 2011 (8) TMI 16 - CALCUTTA HIGH COURT held that where loan and advance is given in return to an advantage (interest) then provisions of section 2(22)(e) does not apply. Therefore, respectfully following the judgment of Hon ble Calcutta High Court (supra) Sale of unaccounted finished goods - Chairman of Abhijeet Group, in a disclosure petition u/s 132(4) accepted shortage of raw material on account of cash sale of the raw material itself and offer for tax - HELD THAT - The Hon ble Supreme court in the case of Uma Charan Shaw 1959 (5) TMI 11 - SUPREME COURT has clearly held that suspicion howsoever strong anything on record to prove the production of finished goods i.e. Ferro Alloys and sale thereof. We have also considered the ratio decided by the Hon ble Delhi High Court in the case of Bhagirath Agarwal 2013 (2) TMI 48 - DELHI HIGH COURT wherein it has been held that an addition in assessee s income relying on statements recorded during search operation cannot be deleted without proving statements to be incorrect. We find that here in this case the statement was wrong/ incorrect. Neither any evidence of the production of Ferro Alloys nor any evidence of its sales have been brought on record by the A.O. Therefore, respectfully following the decision of the Hon ble Supreme Court in the case of Uma Charan Shaw (supra), we note that the ld. CIT(A) has rightly deleted the addition made by Assessing Officer. That being so , we decline to interfere in the order passed by the ld. CIT(A), his order on this issue, is hereby upheld and the grounds of appeal raised by the revenue is dismissed.

Issues Involved:
1. Deletion of addition of ?6,42,07,965/- on account of deemed dividend u/s 2(22)(e) of the Income Tax Act.
2. Deletion of addition of ?11,96,88,790/- on account of sale of unaccounted raw material goods for AY 2011-12.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?6,42,07,965/- on Account of Deemed Dividend u/s 2(22)(e) of the Act:

Facts:
A search and seizure operation was conducted in the 'Abhijeet Group of cases' on 18.01.2011, leading to the issuance of a search warrant upon the assessee, M/s Corporate Ispat Alloys Ltd. (CIAL). The assessee had received unsecured loans from Abhijeet Infrastructure Limited (AIL). The Assessing Officer (AO) noted that M/s Abhijeet Ventures Limited (holding company of both CIAL and AIL) held more than 10% of the paid-up equity share capital in both companies. The AO treated the loans as deemed dividends under section 2(22)(e) of the Act, adding ?24,33,20,477/- for AY 2011-12 and ?6,42,07,965/- for AY 2010-11.

Arguments:
The AO argued that since M/s Abhijeet Ventures Limited had substantial interest in both the lender (AIL) and the borrower (CIAL) companies, the provisions of section 2(22)(e) were applicable. The assessee contended that CIAL was not a shareholder in AIL and that the loans were not gratuitous but charged with interest.

Judgment:
The Tribunal noted that:
- The loan was taken by a company (CIAL) which was not a shareholder in the lending company (AIL).
- The loan was not gratuitous as it included interest charged by the lender.
- The provisions of section 2(22)(e) apply only if the recipient of the loan is a shareholder in the lending company.

The Tribunal relied on several judicial precedents, including CIT v. Sharman Woolen Mills Ltd., CIT v. MCC Marketing (P) Ltd., and CIT v. Navyug Promoters (P) Ltd., which held that deemed dividend provisions do not apply if the recipient is not a shareholder in the lending company.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the addition, concluding that the provisions of section 2(22)(e) were not applicable as CIAL was not a shareholder in AIL and the loan was not gratuitous.

2. Deletion of Addition of ?11,96,88,790/- on Account of Sale of Unaccounted Raw Material Goods for AY 2011-12:

Facts:
During the search and seizure operation, the Chairman of Abhijeet Group disclosed ?125 crores on behalf of himself, his family members, and some group companies. Out of this, ?71,03,79,670/- was identified as income of the assessee company for AY 2011-12. This included ?63,02,27,350/- for the sale of unaccounted manganese ore and ?8,01,52,320/- for the sale of coal. The AO added ?11,96,88,790/- as undisclosed income, arguing that the company would have produced and sold finished goods from the purported shortage of raw materials.

Arguments:
The assessee argued that the shortage of raw materials was due to their sale in cash before the date of search and that the sales were recorded in March 2011. The AO contended that the company would have produced finished goods from the raw materials and added the difference as undisclosed income.

Judgment:
The Tribunal noted that:
- The assessee had conducted an audit of its raw materials before the search.
- The Chairman's statement under section 132(4) accepted the shortage of raw materials due to cash sales.
- The AO did not provide evidence of the production and sale of finished goods.

The Tribunal cited the Supreme Court's decision in Uma Charan Shaw and the Delhi High Court's decision in Bhagirath Agarwal, which held that additions based on suspicion or unsubstantiated statements are not justified.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the addition, concluding that there was no evidence of the production and sale of finished goods, and the AO's addition was based on mere suspicion.

Final Order:
Both appeals filed by the Revenue were dismissed. The Tribunal upheld the CIT(A)'s orders, deleting the additions made by the AO on account of deemed dividend and unaccounted sale of raw materials.

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