2012 (6) TMI 387 - AT - Income Tax

Deemed dividend - advance received from M/s A - addition made on ground that M/s P is a common share holder, having 18.99% shareholding in M/s A and 19.72% in assessee company - Held that - AO has made refernce to Section 2(22)(e), however has not examined provisions of section 2(32) with reference to company which has a substantial interest in company, wherein it was specifically mentioned of carrying not less than 20% of voting power. Admittedly M/s P has less than 20% share holding in both companies. Also, assessee is not owning any share in M/s A. For both the reasons, order of CIT (A) is upheld and issue is decided in favor of assessee. Rejection of books of account on alleged failure of assessee to reconcile turnover disclosed in P/L A/c and reconcile the turnover with STT - estimation of income 21% of turnover - dis-allowance of expenditure - Held that - Reconciling the turnover on the basis of STT is if not impossible, virtually cumbersome considering the nature of the business, turnover involved and different rates of STT paid for different transactions. Therefore, books of account cannot be rejected simply because the assessee failed to reconcile the turnover to the satisfaction of AO. There is no allegation that the assessee was indulging in any transactions outside the books outside the stock exchange. The books of account were also audited. Hence, CIT (A) was correct in accepting the assessee s books of account and rejection of estimation at 1% therein, and allowing the expenditure - Decided in favor of assessee. Business Income vs Income from Other Sources - other Income viz IPO referral fee, auction charges and Interest received - Held that - There is no dispute with reference to the IPO referral fee, auction charges and Interest received being part of business operations and business income except the Income tax Refund. We uphold the order of the CIT (A) as it does not have any tax impact on the small amount of Rs.3,300/-.

Issues Involved:
1. Deletion of addition under Section 2(22)(e) of the I.T. Act, 1961.
2. Rejection of books of account and estimation of income.
3. Classification of "Miscellaneous and Other Income" as business income or income from other sources.
4. Allowance of administrative and other expenses.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 2(22)(e):
The Revenue contested the deletion of an addition of Rs. 67,10,483/- made by the Assessing Officer (AO) under Section 2(22)(e) of the I.T. Act, 1961. The AO added the loan amount as deemed dividend due to common shareholding by M/s Predict Investment & Financial Consultants (P) Ltd in both the lending and the assessee companies. However, the CIT (A) deleted the addition, noting that the assessee did not hold any shares in the lending company, Amit Capital & Securities Pvt. Ltd., and M/s Predict Investment held less than 20% shareholding, which does not constitute 'substantial interest' under Section 2(32). The Tribunal upheld the CIT (A)'s decision, emphasizing that the provisions of Section 2(22)(e) do not apply unless the assessee is a shareholder in the lending company.

2. Rejection of Books of Account and Estimation of Income:
The AO rejected the books of account, estimating income at 1% of the turnover due to the assessee's failure to reconcile the turnover disclosed in the Profit & Loss Account with the gross sales and purchases. The CIT (A) overturned this decision, stating that the AO's reasons for rejecting the books were vague and that the nature of the assessee's business (arbitrage and derivative trading) made it impractical to reconcile turnover based on STT alone. The Tribunal agreed with the CIT (A), noting that the assessee's books were audited, and there was no evidence of transactions outside the stock exchange. The Tribunal found the AO's estimation arbitrary and upheld the CIT (A)'s acceptance of the books of account.

3. Classification of "Miscellaneous and Other Income":
The AO classified Rs. 31,20,337/- as "Income from other sources," while the CIT (A) treated it as business income. The Tribunal reviewed the details of the income, which included IPO referral fees, auction charges, and interest received. Except for a small interest on Income Tax refund (Rs. 3,300/-), all amounts were received in the course of business. The Tribunal upheld the CIT (A)'s decision, noting that the classification had no significant tax impact.

4. Allowance of Administrative and Other Expenses:
The AO disallowed Rs. 62,45,345/- in administrative and other expenses due to the rejection of the books of account and estimation of income. The CIT (A) allowed these expenses, a decision upheld by the Tribunal. The Tribunal reasoned that since the rejection of the books and estimation of income were overturned, the expenses claimed in the books should be allowed. The Tribunal found no merit in the Revenue's contention against the allowance of these expenses.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT (A)'s decisions on all grounds, including the deletion of additions under Section 2(22)(e), acceptance of the books of account, classification of income, and allowance of expenses. The Tribunal emphasized the importance of accurate and fair assessment practices, rejecting arbitrary estimations and unsupported rejections of audited books.

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