2006 (3) TMI 198 - AT - Income Tax

Deemed Dividend u/s 2(22)(e) - accumulated profits - unexplained cash credits - HELD THAT - Undisputedly, the shareholders of the lender-company Mr. Kirti Kapadia and Mrs. Tanuben Kapadia were holding more than 10 per cent of the equity shares in the lender-company i.e., SVMIPL and these shareholders also held more than 20 per cent of the equity shares in the assessee-company. Being a common shareholdings in both the companies, the assessee's case falls within the category No. 2 as discussed. The lower authorities are given a categorical finding in this regard and nothing is placed on behalf of the assessee to rebut this finding. We, therefore, have no hesitation in holding that provisions of section 2(22)(e) were rightly invoked by the revenue authorities on the advance given to the assessee. In this section, it has not been distinguished whether these advances are the trade advances or for different purposes. Only few exceptions are given in which these advances do not fall within the category of deemed dividend. In the instant case, assessee has taken a plea that the advances and loans were given in the ordinary course of its business, but, nothing is placed on record to establish that the substantial part of the business of the lender-company i.e., SVMIPL was lending of money. Whereas, CIT(A) has given a categorical finding in the light of profits earned by the lender-company i.e., SVMIPL and has held that the gross receipt of the lender-company were to the tune of Rs. 7,80,69,819 out of which only Rs. 4,38,835 was accounted for interest receipt. During the course of hearing, nothing had been placed before us on behalf of the assessee to establish that the substantial part of the business of the lender-company is of lending money. In these circumstances, we agree with the finding of the CIT(A) that the assessee does not fall within any exemption clause. Once the Legislature has defined the words 'accumulated profit', no other meaning of accumulated profits can be inferred or interpreted. In the instant case, though the Revenue is required to compute the accumulated profits up to the date of distribution or payment, but, they have computed up to the end of the last quarter of this previous year which is less than the accumulated profits computed on the date of the distribution or the payment. But, these facts are not clear from the record. We, therefore, restore the matter to the file of the Assessing Officer with a direction to re-compute the accumulated profits up to the date of distribution or payment and if it is found to be lesser than the accumulated profits adopted by the Assessing Officer, then, it should be taken into account for the purpose of deemed dividend income as per section 2(22)(e) of the Act. Otherwise, the Order of the Assessing Officer would be upheld. Unexplained cash credits - From careful perusal of the orders of the lower authorities, we find that the assessee was not given sufficient time to prove these cash credits as the enquiry with regard to the cash creditors was initiated in January or February when the assessment is going to be time-barred on 31st March. Since most of the creditors belong to Bhavnagar, assessee should have been given sufficient time to produce the confirmations or any other evidence in order to prove the genuineness of the credits and creditworthiness of the creditors. Since the issue was not properly investigated by the Assessing Officer in the light of explanations of the assessee, we are of the view that this issue requires a fresh adjudication. We, therefore, set aside the order of the Commissioner (Appeals) in this regard and restore the matter to the file of the Assessing Officer to re-adjudicate the issue afresh after affording a proper-opportunity of being heard to the assessee. In the result, Appeal No. 1088/Mum./2002 is partly allowed for statistical purposes - In the result, Appeal No. 1089/Mum./2002 is allowed for statistical purposes.

Issues Involved:
1. Assessment of trade advance as deemed dividend income under section 2(22)(e).
2. Addition of unexplained cash credits under section 68.
3. Disallowance of interest on unexplained cash credits.
4. Rectification of addition based on typographical error in tax audit report.

Issue-wise Detailed Analysis:

1. Assessment of Trade Advance as Deemed Dividend Income under Section 2(22)(e):

The assessee challenged the CIT(A)'s decision to treat a trade advance of Rs. 1,51,25,647 received from Standard Vishwas Marble Industries Pvt. Ltd. (SVMIPL) as deemed dividend income under section 2(22)(e). The Assessing Officer (AO) observed common shareholdings between the assessee and SVMIPL and invoked section 2(22)(e) based on the substantial interest held by certain shareholders in both companies. The assessee contended that the advances were trade advances received in the ordinary course of business, not loans, and that the assessee was not a shareholder in SVMIPL. However, the AO and CIT(A) rejected these arguments, citing that the advances were covered by section 2(22)(e) as there were common shareholders with substantial interest. The CIT(A) also computed accumulated profits to include current profits up to the date of distribution, supporting the AO's assessment. The Tribunal upheld the AO's application of section 2(22)(e) but directed the AO to re-compute accumulated profits up to the date of distribution or payment.

2. Addition of Unexplained Cash Credits under Section 68:

The AO added Rs. 1,76,40,000 as unexplained cash credits under section 68, as the assessee failed to provide sufficient evidence for loans from 470 parties. The AO issued commissions to verify the identity and creditworthiness of 151 parties, resulting in the addition of Rs. 1,32,05,000 from 50 untraceable parties and Rs. 25,94,000 from 17 non-appearing parties. The CIT(A) upheld the AO's decision. The Tribunal found that the assessee was not given sufficient time to provide confirmations and documents, as the enquiry was initiated close to the assessment deadline. The Tribunal set aside the CIT(A)'s order and remanded the issue to the AO for fresh adjudication, allowing the assessee to furnish necessary evidence.

3. Disallowance of Interest on Unexplained Cash Credits:

The disallowance of interest of Rs. 5,37,635 on unexplained cash credits was linked to the issue of unexplained cash credits. Since the Tribunal remanded the cash credits issue to the AO, the interest disallowance issue became infructuous. The AO was directed to adjudicate the interest disallowance along with the re-examination of unexplained cash credits.

4. Rectification of Addition Based on Typographical Error in Tax Audit Report:

The assessee appealed against the CIT(A)'s order under section 154, which rejected the claim to restrict the addition of Rs. 13,60,000 to Rs. 2,55,000 due to a typographical error in the tax audit report. Both parties agreed that if the cash credits issue was remanded, this issue should also be re-examined. The Tribunal restored the matter to the AO for re-adjudication along with the unexplained cash credits issue, providing the assessee an opportunity to present evidence.

Conclusion:

The Tribunal partly allowed Appeal No. 1088/Mum./2002 for statistical purposes, directing the AO to re-compute accumulated profits and re-adjudicate the unexplained cash credits issue. Appeal No. 1089/Mum./2002 was allowed for statistical purposes, remanding the rectification issue to the AO. The orders were pronounced in open court on March 31, 2006.

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