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2014 (12) TMI 801 - AT - Income TaxAddition of deemed dividend u/s 2(22)(e) - loans taken by assessee Held that - Both the parties are beneficiary of the transaction being current account of the above transactions i.e. shifting balances the same matter has been decided in Pradip Kumar Malhotra v. CIT 2011 (8) TMI 16 - CALCUTTA HIGH COURT wherein it has been held that section 2(22)(e) of the Act was inserted to bring within the purview of taxation those amounts which are actually a distribution of profits but are disbursed as a loan so that tax thereon can be avoided - when dividends are declared by a company it is solely the shareholders who benefit from the transaction - No benefits accrue to the company by way of dividend distribution - Thus section 2(22)(e) of the Act covers only such situations where the shareholder alone benefits from the loan transaction because if the company also benefits from the said transaction it will take the character of a commercial transaction and hence will not qualify to be dividend - by giving and taking financial assistance from each other both the assessee and the company were benefited and such transactions between them were nothing but commercial transactions and dividend attributable to the shareholder is nothing to do with such business transaction - it can be said that sec. 2(22)(e) of the Act covers only those transactions which benefit the shareholder alone and results in no benefit to the company - the loan account differs from current account and the provisions of section 2(22)(e) of the Act being a deeming section cannot be applied to current account thus the addition is to be set aside Decided in favour of assessee. Interest payment made on utilization of borrowed fund by giving interest free advances to the relatives of the assessee and other group companies disallowed Held that - The AO has simply disallowed the interest by observing that the assessee deducted 1, 34, 988/- on account of payment of interest against interest from other sources consisting of Royalty and Interest of 1182/- from bank - borrowed fund was not utilized for earning the income - borrowed fund on which interest of 1, 34, 988/- was paid was used mainly for giving interest free advance to the relatives of the assessee and to the concerns of the Group - hence the borrowed fund cannot be said to have been used for purpose of earning income - interest paid on borrowed fund which was not used for earning income is disallowed and added to the total income of the assessee - for making disallowance the AO should have found out the nexus first of all and it is also a fact that the assessee is having substantial capital in the form of shares and other reserves and surpluses to meet out these loans - once this is the position the interest on borrowed funds cannot be disallowed Decided in favour of assessee. Unexplained investment in jewellery disallowed Held that - During the course of search on the residence of assessee on 04.10.2007 jewellery consists of 39 items valuing 24, 51, 316/- was found out of which jewellery valuing 17, 26, 660/- was seized - assessee was required to explain the jewellery found - details are described in the assessment order but the AO has not believed the explanation of the assessee and made addition but CIT(A) deleted the addition after considering the explanation of the assessee - CIT(A) only sustained the addition made by AO of jewellery valuing at 3, 95, 859/- Hence out of total addition of 10, 36, 187/- on account of undisclosed investment in jewellery addition of 6, 40, 328/- is deleted and balance addition of 3, 95, 895/- is confirmed from the records it was found that the assessee has filed evidences of remodeling of jewellery that these jewellery to the extent of 3, 95, 895/- was made out of old jewellery which was acquired prior to the date of search Decided in favour of assessee. Assessment in pursuance of research u/s 153A - claim of deduction which were not claimed earlier Demat Charges - deleting the addition under the head Capital Gain - Held that - There is no seized incriminating materials found during the course of search and without any evidence the AO has made addition of deemed dividend following the decision in All Cargo Global Logistics Ltd. v. DCIT 2012 (7) TMI 222 - ITAT MUMBAI(SB) as well as in Jai Steel (India) Versus Assistant Commissioner of Income Tax(Alongwith other 16 similar matters) 2013 (6) TMI 161 - RAJASTHAN HIGH COURT Decided against revenue.
Issues Involved:
1. Addition on account of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. 2. Disallowance of interest payment due to alleged utilization of borrowed funds for interest-free advances. 3. Disallowance on account of unexplained investment in jewelry. 4. Deletion of addition on account of deemed dividend by CIT(A). 5. Deletion of addition on account of disallowance of Demat charges by CIT(A). 6. Deletion of addition on account of disallowance of interest by CIT(A). 7. Deletion of addition under the head Capital Gain by CIT(A). Issue-wise Detailed Analysis: 1. Addition on Account of Deemed Dividend: The first common issue in IT(SS)A Nos. 60 & 61/Kol/2011 of the assessee is against the order of CIT(A) confirming the addition made by the Assessing Officer (AO) on account of deemed dividend. The AO added advances taken from Mima Flour Mills Pvt. Ltd. and Ganesh Wheat Products Pvt. Ltd. as deemed dividends under Section 2(22)(e) of the Income Tax Act, 1961, due to the assessee holding more than 10% of voting power in these companies. The Tribunal found that the transactions were mutual and commercial in nature, not gratuitous loans or advances. Citing the case of Pradip Kumar Malhotra v. CIT, the Tribunal concluded that Section 2(22)(e) applies to loans benefiting only the shareholder without benefiting the company. Consequently, the Tribunal allowed the assessee's appeals and deleted the additions. 2. Disallowance of Interest Payment: The next common issue in these three appeals of the assessee is the disallowance of interest payment made by the assessee. The AO disallowed the interest on the ground that the borrowed funds were used for interest-free advances to relatives and other group companies. The Tribunal found that the AO did not establish a clear nexus between the borrowed funds and the interest-free advances. The Tribunal also noted that the assessee had substantial capital to cover these loans. Therefore, the disallowance of interest was not justified, and the Tribunal allowed the assessee's appeals on this issue. 3. Disallowance on Account of Unexplained Investment in Jewelry: In IT(SS)A No. 62/K/2011, the issue was the disallowance of Rs. 3,95,859 as unexplained investment in jewelry. During the search, jewelry worth Rs. 24,51,316 was found, out of which Rs. 17,26,660 was seized. The AO made an addition for the unexplained portion. The Tribunal found that the assessee had provided evidence of remodeling old jewelry, which was acquired before the search date. Hence, the Tribunal deleted the addition and allowed the assessee's appeal on this issue. 4. Deletion of Addition on Account of Deemed Dividend by CIT(A): The revenue's appeals (IT(SS)A Nos. 73 to 76/Kol/2011) challenged the CIT(A)'s deletion of additions made by the AO on account of deemed dividend. The Tribunal noted that no incriminating material was found during the search to suggest undisclosed income. Citing the case of Jai Steel (India) vs. ACIT, the Tribunal held that completed assessments could only be disturbed based on incriminating material found during the search. Since no such material was found, the Tribunal confirmed the CIT(A)'s order and dismissed the revenue's appeals. 5. Deletion of Addition on Account of Disallowance of Demat Charges by CIT(A): In IT(SS)A No. 73/K/2011, the revenue contested the deletion of disallowance of Demat charges. The Tribunal found that no incriminating material was found during the search to justify the addition. Following the precedent set in All Cargo Global Logistics Ltd. v. DCIT and Jai Steel (India) vs. ACIT, the Tribunal confirmed the CIT(A)'s order and dismissed the revenue's appeal. 6. Deletion of Addition on Account of Disallowance of Interest by CIT(A): In IT(SS)A Nos. 75 & 76/K/2011, the revenue challenged the deletion of disallowance of interest. The Tribunal reiterated that no incriminating material was found during the search, and the AO's additions were not justified. The Tribunal confirmed the CIT(A)'s order and dismissed the revenue's appeals. 7. Deletion of Addition under the Head Capital Gain by CIT(A): In IT(SS)A No. 76/K/2011, the revenue contested the deletion of an addition under the head Capital Gain. The Tribunal found that no incriminating material was found during the search, and the AO's additions were not based on any new evidence. Following the same legal precedents, the Tribunal confirmed the CIT(A)'s order and dismissed the revenue's appeal. Conclusion: All appeals of the assessee are allowed, and all appeals of the revenue are dismissed. The Tribunal emphasized the importance of incriminating material found during the search to justify additions in assessments under Section 153A of the Income Tax Act, 1961.
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