2022 (1) TMI 885 - AT - Income Tax

Addition of deemed dividend u/s 2(22)(e) - proof of incriminating material found in the course of search - loan or advance received by the assessee from the partnership firm instead of closely held company - HELD THAT - It is noted that in order to attract the fiction of section 2(22(e), it is essential that the elements of that section must be found applicable. Since section 2(22)(e) treats the loan or advance as dividend, hence it is essential to give a strict interpretation to such fiction.We have gone through section 2(22)(e) and the facts of the present case. There is no loan or advance received by the assessee from M/s Orient Crafts Ltd. It is seen that even as per the case of the A.O. made in the assessment order, the loan or advance has been received by the assessee from M/s SKA Enterprises which was a partnership firm. Therefore, as per the admitted case of the A.O., such loan or advance having notbeen received by the assessee from a closely held company i.e. from Orient Craft Ltd. or Olympus Realters P Ltd. cannot be treated as dividend u/s 2(22)(e), since the first ingredient of section 2(22)(e) itself is not met in this case. There is no question of treating the amount withdrawn by the assessee as partner from the partnership firm namely M/s SKA Enterprises in the nature of loan and advance and treat it as deemed dividend under section 2(22)(e) of the Income Tax Act. None of the ingredients of section 2(22)(e) stand satisfied in the instant case. We have also gone through part of written submissions as reproduced above where rebuttal of each and every adverse observation made by the assessing officer has been made by the assessee and we are in agreement with the assessee on all those rebuttals. CIT (A) despite recording a clear cut finding as to the nature of payments made by one entity to another in para 7.3.2 of the appeal order has committed grave error in concluding without any basis, material or evidence that M/s Super Connections India P. Ltd., M/s Olympus Realtors P. Ltd. andM/s SKA Enterprises were used as conduits. Therefore, we are unable to subscribe to this bald conclusion of CIT(A). We thus hold that the additions sustained on account of deemed dividend u/s 2(22)(e) were sustained by CIT(A) contrary to the factual position and contrary to the law contained in this regard. Hence, we reverse the Order of CIT(A) and delete the addition. - Decided in favour of assessee.

Issues Involved:
1. Addition of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
2. Scope of proceedings under Section 153A for abated and completed assessments.
3. Requirement of incriminating material for additions under Section 153A.
4. Interpretation of Section 153A and its non-obstante clause.
5. Applicability of judicial precedents, particularly the Delhi High Court's decision in CIT vs. Kabul Chawla.
6. Validity of assessment orders without requisite approval under Section 153D.

Detailed Analysis:

1. Addition of Deemed Dividend under Section 2(22)(e):
The core issue was whether the amounts received by the assessees from various entities could be treated as deemed dividends under Section 2(22)(e). The Assessing Officer (AO) argued that funds were routed through multiple entities, ultimately benefiting the shareholders of Orient Craft Ltd., thus constituting deemed dividends.

Findings:
- The Tribunal found that the amounts were not directly received from Orient Craft Ltd. but through a series of transactions involving other entities like Super Connection India P. Ltd., Olympus Realtors P. Ltd., and SKA Enterprises.
- The Tribunal noted that these entities were independent and assessed to tax, and the transactions were part of their regular business activities.
- The Tribunal held that the amounts received by the assessees as partners in SKA Enterprises could not be treated as loans or advances from a closely held company, thus not attracting Section 2(22)(e).

2. Scope of Proceedings under Section 153A:
The Revenue contended that additions could be made under Section 153A even for completed assessments if any escaped income was found during the search.

Findings:
- The Tribunal upheld the CIT(A)'s view that additions under Section 153A could only be made based on incriminating material found during the search.
- It was noted that the assessments for the relevant years were completed before the search, and no incriminating material was found during the search to justify the additions.

3. Requirement of Incriminating Material:
The Revenue argued that the documents found during the search, including balance sheets and trial balances, constituted incriminating material.

Findings:
- The Tribunal found that the documents seized were already part of the regular books of accounts and returns filed with the tax department, thus not constituting incriminating material.
- The Tribunal emphasized that mere seizure of documents during a search does not automatically make them incriminating.

4. Interpretation of Section 153A and its Non-Obstante Clause:
The Revenue argued that Section 153A, starting with a non-obstante clause, allowed the AO to assess or reassess the total income, irrespective of whether incriminating material was found.

Findings:
- The Tribunal reiterated that the scope of Section 153A is limited to assessing or reassessing income based on incriminating material found during the search, especially for completed assessments.
- The Tribunal followed the judicial precedents, including the Delhi High Court's decision in CIT vs. Kabul Chawla, which supports this interpretation.

5. Applicability of Judicial Precedents:
The Revenue cited the Supreme Court's decision in CIT vs. Mukundray K. Shah to support the additions.

Findings:
- The Tribunal distinguished the facts of the present case from those in Mukundray K. Shah, noting that the latter involved different circumstances.
- The Tribunal relied on the Delhi High Court's decision in CIT vs. Kabul Chawla and other relevant precedents, emphasizing the need for incriminating material to justify additions under Section 153A.

6. Validity of Assessment Orders without Requisite Approval:
The assessees contended that the assessment orders were invalid as they lacked proper approval under Section 153D.

Findings:
- The Tribunal did not specifically address this issue in detail, focusing instead on the lack of incriminating material and the improper application of Section 2(22)(e).

Conclusion:
The Tribunal dismissed the Revenue's appeals and allowed the assessees' appeals, holding that the additions made under Section 2(22)(e) were not justified due to the lack of incriminating material and the improper application of the deemed dividend provisions. The Tribunal emphasized the need for strict interpretation of deeming provisions and the requirement of incriminating material for additions under Section 153A.

← Previous Next →