2012 (5) TMI 457 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - assessee s shareholding in Claris Lifesciences Ltd. was less than 10% - advance on a date prior to 03.03.2006 - held that - since on the date of receipt of the amount, the assessee was having less than 10% of beneficial interest in that company, by no stretch of imagination the amount of Rs. 25 lacs received by the assessee can qualify as deemed income under the provisions of Section 2(22)(e) - Held that the provisions of Section 2(22)(e) of the Act are not applicable in the present case under these facts - Decided in favor of the assessee Addition u/s 43B on account of service tax - The assessee enclosed a copy of the service tax payable account and service tax receivable account for the financial year 2005-06. It was further submitted by the assessee before the A.O. that the amount of consultancy fee credited to P and L account does not include service tax and expenditure debited to P and L account also does not include services tax as the company is merely an agent or government and is liable to collect and pay service tax in accordance with the provisions of law - Held that even if this balance amount of Rs.10.93,542/- was paid by the assessee after 31.03.2006 but before the date of filing of return of income of the present year being 29.12.2006, assessee is eligible for deduction u/s 43B of the act in respect of future payment whether by way of cash or by way of adjustment against service tax receivable account - Decided in favor of the assessee

Summary

Issues Involved:
1. Deletion of addition as deemed dividend.
2. Deletion of addition on account of service tax receivable.
3. Disallowance on account of sundry balances written off.

Detailed Analysis:

Issue 1: Deletion of Addition as Deemed Dividend
The revenue challenged the deletion of an addition of Rs. 1,26,34,049/- as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (A.O.) added this amount on the grounds that the assessee company received payments from Claris Lifesciences Ltd., where it held more than 10% shareholding. However, the assessee argued that its shareholding was less than 10% until 03.03.2006, and thus the provisions of Section 2(22)(e) were not applicable. The CIT(A) deleted the addition, and the ITAT upheld this decision, noting that the assessee's shareholding was indeed less than 10% when the payments were received. The ITAT relied on the judgment of the Hon'ble Delhi High Court in CIT vs Late C.R. Das, which held that if the shareholding is less than 10% at the time of receiving the amount, it cannot be considered deemed income under Section 2(22)(e).

Issue 2: Deletion of Addition on Account of Service Tax Receivable
The revenue contested the deletion of an addition of Rs. 45,90,000/- made on account of service tax receivable. The A.O. argued that as per Section 145A, service tax collected should be included in gross receipts and claimed as a deduction under Section 43B on a payment basis. The assessee contended that service tax was neither claimed as a deduction nor included in the profit and loss account, as it acted merely as an agent for the government. The CIT(A) deleted the addition, and the ITAT upheld this decision, referencing judgments from the Hon'ble Delhi High Court in CIT vs Nobles and Hewitt (I) Pvt. Ltd. and the Tribunal decision in ACIT vs Real Image Media Technologies (P) Ltd., which supported the assessee's position. The ITAT concluded that since the service tax was not claimed as a deduction, Section 43B was not applicable.

Issue 3: Disallowance on Account of Sundry Balances Written Off
The assessee challenged the disallowance of Rs. 4,15,798/- on account of sundry balances written off. The A.O. disallowed this amount, citing non-compliance with Section 36(2) of the Act, and the CIT(A) upheld this disallowance. The ITAT noted the Supreme Court judgment in TRF Ltd. vs CIT, which stated that it is not necessary for the assessee to establish that the debt has become bad; however, compliance with Section 36(2) is still required. The ITAT found no evidence that the amounts were considered income in the current or previous years, thus failing the Section 36(2) requirements. The ITAT also rejected the alternative claim for deduction as a business loss due to a lack of evidence showing the amounts as business advances. Consequently, the disallowance was upheld.

Conclusion:
The ITAT dismissed both the revenue's appeal and the assessee's cross-objection, upholding the CIT(A)'s decisions regarding deemed dividend and service tax receivable, while confirming the disallowance on account of sundry balances written off. The order was pronounced in the open court on 20.10.2011.