2013 (12) TMI 903 - AT - Income Tax

Loan taken from company - Deemed dividend - Held that - The assessee has taken loan from the company in which he is substantially interested - Provisions of Section 2(22)(e) were attracted with respect to the loan taken by the assessee as discussed by the CIT in his order u/s 263 - The advance given by the company for purchase of property in the name of assessee also amounts to advance by company to the assessee, therefore, attracts the provisions of Section 2(22)(e) - The amount of deemed dividend cannot be more than accumulated profits - The issue was set aside for fresh adjudication by AO to determine the factual position and the quantum of advance given by the company and deemed dividend.

Summary

Issues:
Appeal against order passed by CIT u/s 263 of the Income-tax Act, 1961 regarding assessment of income, specifically under Section 2(22)(e) for advances taken by the assessee from a company.

Analysis:
The appeal was filed by the assessee against the order passed by the Commissioner of Income-tax (CIT) u/s 263 of the Income-tax Act, 1961. The assessee, an individual and Director in a company, had filed a return of income showing total income and agricultural income. The CIT observed that the company maintained accounts in the name of the assessee, reflecting transactions related to the purchase of a flat. The CIT held that the Assessing Officer (AO) did not make necessary inquiries regarding advances taken by the assessee, which should have been taxed u/s 2(22)(e). The CIT set aside the assessment order to the AO for fresh inquiry and investigation.

The Authorized Representative argued that the AO had made inquiries regarding the assessee's directorship in the company and that the flat was purchased in the name of another individual. It was further contended that the advances for the flat were adjusted against credit balances in other accounts, and a portion of the advance should be attributed to a joint owner. Documents supporting these claims were submitted during assessment proceedings.

The Senior DR supported the CIT's observations, stating that the AO did not inquire about loans taken by the assessee from the company, falling under Section 2(22)(e). The AO's failure to apply his mind while framing the assessment rendered the order erroneous and prejudicial to revenue interests.

The ITAT found that the AO did not discuss any loans taken by the assessee from the company while framing the assessment u/s 143(3). The ITAT agreed with the CIT that Section 2(22)(e) was applicable to the loans and advances made by the company to the assessee. However, the ITAT clarified that the addition u/s 2(22)(e) cannot exceed the accumulated profit of the company at the beginning of the relevant financial year. The ITAT directed the AO to ascertain the quantum of advances made by the company and adjust for credit balances in different accounts before making any additions u/s 2(22)(e).

In conclusion, the ITAT allowed the appeal in part for statistical purposes, modifying the CIT's order and directing the AO to restrict any addition u/s 2(22)(e) to the extent of accumulated income.