2014 (3) TMI 572 - AT - Income Tax

Deemed dividend u/s 2(22)(e) of the Act Quantum of disallowance - Whether the profit earned by the company during the year in which the loans were advanced can be considered to be included within the accumulated profits of the company Held that - The decision in Commissioner of Income-Tax, Kerala Versus V. Damodaran And Another 1979 (10) TMI 5 - SUPREME Court followed - the word accumulated profit , cannot mean to construe to include current profit for the purpose of deemed dividend - The contention of the assessee is accepted that the accumulated profits should not include the current profit - the disallowance of deemed dividend should be restricted to the accumulated profit, brought forward from earlier years and not the current year profit - Thus, the disallowance on account of deemed dividend u/s.2(22)(e), will be restricted in this ad-hoc and the balance disallowance will get deleted Decided partly in favour of Assessee. Confirmation of ad-hoc addition of various expenses Held that - The AO has made the ad-hoc disallowances on the ground that some of these expenses have been incurred in cash and necessary evidences required in respect of the said claim are not properly vouched - Some personal element of expenses also cannot be ruled out - This finding of the AO has not been rebutted - looking to the nature of expenses as incorporated, as far as conveyance expenses and telephone charges are concerned, personal element cannot be ruled out as the assessee is an individual - The other expenses also, though are for the business purposes, but due to lack of proper evidences, entire claim cannot be said to be fully verifiable thus, the disallowance is restricted to 5% - Decided partly in favour of Assessee.

Summary

Issues:
1. Confirmation of addition made on account of deemed dividend u/s 2(22)(e) of the Act.
2. Confirmation of ad-hoc addition of 10% of various expenses.

Issue 1:
The appeal was against the order passed by the CIT(A) confirming the addition made by the AO on account of deemed dividend u/s 2(22)(e) of the Act. The assessee, engaged in the business of registration of documents, received loans from a company wherein she had interest in excess of 10% of voting power. The AO invoked the provision of 2(22)(e) and made an addition of Rs.29,40,933 as deemed dividend, which was also upheld by the CIT(A). The assessee contended that current year profits should be excluded from accumulated profits for the purpose of disallowance. The ITAT referred to various legal precedents and held that current profits cannot be included in accumulated profits for the purpose of deemed dividend. Consequently, the disallowance was restricted to Rs. 1,864,751, the accumulated profit brought forward from earlier years.

Issue 2:
The second issue pertained to the ad-hoc addition of 10% of various expenses debited in the profit and loss account. The AO made the disallowance due to some expenses being incurred in cash without proper vouchers, potentially having a personal element. The CIT(A) confirmed the 10% disallowance. The ITAT observed that while some personal element couldn't be ruled out in certain expenses, the lack of proper evidence made the entire claim not fully verifiable. The ITAT reduced the disallowance to 5% for a more reasonable estimation. Consequently, the disallowance of Rs. 102,235 was reduced by half.

In conclusion, the ITAT partly allowed the appeal of the Assessee by restricting the deemed dividend disallowance to the accumulated profit from earlier years and reducing the ad-hoc disallowance of various expenses to 5% instead of 10%. The order was pronounced on March 14th, 2014.