2024 (10) TMI 1565 - AT - Income Tax

Deemed dividend u/s. 2(22)(e) - assessee was a director and substantial shareholder in M/s. Mahavir Submersible Pvt. Ltd., holding 49.71% of the total shares and the assessee had received a loan from the aforesaid company - AO held that any payment made by a company, particularly one not substantially held by the public, to a substantial shareholder or a concern in which that shareholder has a significant interest, should be treated as deemed dividend to the extent of the company's accumulated profits - assessee contended that the provisions of Section 2(22)(e) of the Act only apply to actual cash payments, not journal entries, HELD THAT - The subsequent hearings revealed that the addition of deemed dividend was based on the advances from MSPL, which were presented as mere journal entries, suggesting that no actual loan had been received. During these proceedings before us, it emerged that the explanation concerning the journal entry had already been presented to PCIT in earlier proceedings u/s 263 as noted that the AO had not adequately examined the issue in the original assessment, rendering the order erroneous and prejudicial to revenue interests. Consequently, the AO was directed to revisit the matter. We observe that the assessee had also reiterated this explanation before the CIT(A), emphasizing that the advance was recorded as a journal entry. This Bench acknowledged that this information had been consistently available with the Revenue Authorities throughout the proceedings. Given this context, this Bench decided that there was no need for further hearings regarding the admission of evidence, as these were not indeed new submissions. Therefore, it is clear that the AO and CIT(A) had not verified or considered the appellant's explanation adequately during their assessments, especially when the assessee has all throughout contended that the advance was recorded as a journal entry. However, this aspect / submission was omitted to be considered by the AO / CIT(A). Accordingly since the contention of the assessee has all throughout been that no sum was received by the assessee, but a mere journal entry was passed and therefore there is no occasion to invoke the provisions of section 2(22)(e) of the Act has not been examined or verified by the Revenue Authorities, we are of the considered view that the order passed by Ld. CIT(Appeals) is liable to be set aside in absence of any finding on the above contention of the assessee. Assessee appeal allowed.

Summary

Issues:
1. Addition of deemed dividend under Section 2(22)(e) of the Income Tax Act.
2. Interpretation of journal entries in loan transactions.
3. Adequacy of consideration of appellant's explanation by Revenue Authorities.

Analysis:

Issue 1: Addition of deemed dividend under Section 2(22)(e) of the Income Tax Act
The Assessing Officer (AO) noted that the appellant, a substantial shareholder in Mahavir Submersible Pvt. Ltd. (MSPL), had received a loan from the company, leading to the addition of Rs. 25,93,812/- as deemed dividend under Section 2(22)(e). The AO applied the provision, considering the appellant's shareholding and the company's accumulated profits. The Ld. CIT(A) upheld the AO's decision, dismissing the appeal. However, the appellant contended that the loan transaction was part of a running account, including journal entries related to property acquisition, not falling under Section 2(22)(e). Despite the appellant's arguments, the Ld. CIT(A) affirmed the addition, emphasizing the applicability of Section 2(22)(e) due to the shareholding and profits, leading to the dismissal of the appeal.

Issue 2: Interpretation of journal entries in loan transactions
During the appeal, the appellant argued that the funds advanced by MSPL were not from the company itself but from bank loans taken by directors and shareholders for property purchase. The appellant presented ledger accounts and bank loan documents showing the transactions as journal entries in MSPL's books. The appellant's counsel requested an inquiry into this explanation. The subsequent hearings revealed that the addition of deemed dividend was based on journal entries, indicating no actual loan receipt. The appellant consistently maintained this position, which was not adequately considered by the AO or Ld. CIT(A), despite being presented in earlier proceedings under Section 263 and before the PCIT.

Issue 3: Adequacy of consideration of appellant's explanation by Revenue Authorities
The appellant's explanation that no sum was received, but only a journal entry was passed, was not adequately examined or verified by the Revenue Authorities. The Tribunal found that the AO and Ld. CIT(A) had not properly considered this explanation, which was crucial in determining the applicability of Section 2(22)(e). As the Revenue Authorities failed to address this contention, the Tribunal concluded that the Ld. CIT(A)'s order should be set aside. Consequently, the Tribunal allowed the appeal of the assessee, emphasizing the importance of verifying and considering all explanations presented during assessments.

This detailed analysis highlights the key arguments, decisions, and considerations made in the judgment, focusing on the issues raised by the appellant and the Tribunal's ultimate decision in setting aside the Ld. CIT(A)'s order.