2025 (3) TMI 1371 - AT - Income Tax

Additions on Dividend and Interest Income - CIT(A) and the AO have estimated the gross dividend and interest on debentures by making comparison with the group entities - HELD THAT - There is no denying of the fact that the dividend is received only by the registered shareholders. Assessee may have purchased shares and the shares must be lying for registration with the companies and therefore there is no question of receiving any dividend on any unregistered shares. It is an admitted fact that Harshad Mehta group was notified person and therefore the shares belong to a notified person and were in the custody of the Special Court. It is also a fact that some of the shares had not been received by the notified party. We are of the considered view that such dividend in the hands of the owner of shares which were not registered in the name of the assessee could not be assessed as income in the hands of the assessee. We direct the AO to delete the additions on account of dividend and interest. In fact most of the debentures were convertible debentures and have been converted into shares therefore there is no question of estimating any interest on the same. Accordingly Ground No. 2 is allowed. Purchase of shares as unexplained investment - As assessee reiterated that the shares received on bonus have not been considered in the increase in the holding of shares. The details have been furnished. Considering the bonus shares in the impugned shares we do not find any merit in the additions sustained by the ld. CIT(A) and the same is hereby directed to be deleted. Accordingly Ground No. 3 is allowed. Addition of interest income - HELD THAT - We are of the considered view that since all the documents including bank statements of the assessee were in possession of either of the Income-tax Department or the Custodian it would be a futile exercise to expect the assessee to furnish evidence and since no evidence has been brought on record by the revenue the addition is directed to be deleted. Ground No. 5 is allowed. Disallowance of various expenses recorded in the books of accounts - assessee has claimed various expenditure including interest on share debenture call money loss of shares and other expenses - HELD THAT - We find that on conversion of debentures the assessee received shares on which it received dividends. Therefore any difference in the claim of interest expenses qua the interest received on debentures is due to the conversion of debentures into shares. Therefore the basis on which the interest has been disallowed itself is faulty. Therefore the addition to the extent of Rs. 16, 16, 148/- cannot be sustained. Share trading loss - The assessee has furnished copies of the contract notes of purchase of shares which are placed on record. Considering the same the share trading loss cannot be disallowed and insofar as the other expenses are concerned which are mainly related to the accounting and auditing expenses were incurred for the purpose of business and the same deserve to be allowed. Considering the totality of facts we do not find any merit in the addition and the same is directed to be deleted. Disallowance of interest expenditure - HELD THAT - In assessee s own case for AY 1991-92 the Coordinate Bench has allowed the claim of interest. On finding parity of facts respectfully following the decision (supra) we direct the AO to allow the entire claim of interest.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the rejection of the books of accounts by the CIT(A) was justified.
• Whether the additions made by the CIT(A) regarding dividend and interest income were correct.
• Whether the addition for unexplained investment in shares was justified.
• Whether the disallowance of various expenses claimed by the assessee was appropriate.
• Whether the enhancement of income by the CIT(A) complied with the provisions of Section 251 of the Act.
• Whether the reopening of the assessment under Section 147 of the Act was valid.

ISSUE-WISE DETAILED ANALYSIS

1. Rejection of Books of Accounts and Additions on Dividend and Interest Income

• Legal Framework and Precedents: The Tribunal considered the principle that income tax is levied on actual income received or accrued, as established in CIT v. Shoorji Vallabhdas and Co. and CIT v. Aatur Holdings Pvt. Ltd.
• Court's Interpretation and Reasoning: The Tribunal noted that the CIT(A) and AO estimated dividend and interest based on comparisons with group entities, which was not justified as dividends are only received by registered shareholders.
• Key Evidence and Findings: The Tribunal found that shares were not registered in the assessee's name, and thus, the assessee could not have received dividends.
• Application of Law to Facts: The Tribunal applied the principle that only registered shareholders are entitled to dividends and directed the deletion of additions related to dividend and interest income.
• Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument supporting the AO's findings, emphasizing the lack of evidence for the additions.
• Conclusions: The Tribunal directed the AO to delete the additions on account of dividend and interest income.

2. Addition for Unexplained Investment in Shares

• Relevant Legal Framework: The principle of burden of proof on the Department to establish taxable income.
• Court's Interpretation and Reasoning: The Tribunal found inconsistencies in the AO's computation of unexplained investment and noted that the assessee provided evidence of bonus shares.
• Key Evidence and Findings: The Tribunal accepted the assessee's explanation regarding the acquisition of shares.
• Conclusions: The Tribunal directed the deletion of the addition related to unexplained investment in shares.

3. Disallowance of Various Expenses

• Relevant Legal Framework: Deductibility of expenses under the Income Tax Act.
• Court's Interpretation and Reasoning: The Tribunal found that the disallowance of expenses was based on faulty reasoning, particularly regarding interest on debenture call money.
• Key Evidence and Findings: The Tribunal noted that the expenses were related to business operations and supported by evidence.
• Conclusions: The Tribunal allowed the deduction of the claimed expenses.

4. Enhancement of Income and Compliance with Section 251

• Relevant Legal Framework: Section 251 of the Income Tax Act regarding enhancement of income.
• Court's Interpretation and Reasoning: The Tribunal found that the CIT(A) did not comply with the procedural requirements for enhancing income.
• Conclusions: The Tribunal directed the deletion of the enhanced income.

5. Validity of Reopening of Assessment under Section 147

• Relevant Legal Framework: The provisions of Section 147 regarding the reopening of assessments.
• Court's Interpretation and Reasoning: The Tribunal did not delve deeply into this issue as it was not pressed by the assessee.
• Conclusions: The issue was dismissed as not pressed.

SIGNIFICANT HOLDINGS

• Core Principles Established: Only registered shareholders are entitled to receive dividends, and the Department bears the burden of proving taxable income.
• Final Determinations on Each Issue: The Tribunal allowed the appeals partly, directing the deletion of several additions and disallowances made by the CIT(A) and AO.
• Verbatim Quotes of Crucial Legal Reasoning: "Income-tax is a levy on income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise."

The Tribunal's decision reflects a thorough analysis of the facts and applicable legal principles, resulting in favorable outcomes for the assessee on several contested issues.