2015 (5) TMI 717 - AT - Income Tax

Addition on account of deemed dividend u/s 2(22)(e) - Held that - After going through the provision of section 2(22)(e) and conditions thereof, we are of the considered view that the a provisions makes it clear that deemed dividend is to be brought to tax in the hands of the recipient company and not in the hands of the entity granting the loan. Under the facts and circumstances of the present case, we find that the Company had not received any loans from any of the persons falling within the ambit of sec 2(22)(e) of the Income-Tax Act, 1961 and accordingly the addition in dispute is not sustainable in the eyes of law. Therefore, we delete the addition in dispute made by the AO and confirmed by the Ld. CIT(A) - Decided in favour of assesse. Unaccounted cash credit - Held that - The overall circumstances clearly indicate that the Bank A/c of the parties have only been utilized for justifying the loan of the assessee. Considering the specific direction of the ITAT for examining the credit worthiness of the parties, the A.R of the assesse has not provided any detail like Balance Sheet, regular source of income or the reason why such huge amount of loan was given, in some cases, interest free also. Thus find considerable force in the finding of the Ld. CIT(A) that assessee has not discharged the onus of establishing the creditworthiness of the parties. Accordingly, Ld. CIT(A), has rightly dismissed this ground of the assesse - Decided against assesse.

Summary

Issues Involved:
1. Addition of Rs. 2,40,00,000/- under Section 68 of the Income Tax Act, 1961.
2. Addition of Rs. 96,98,457/- as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition of Rs. 2,40,00,000/- under Section 68 of the Income Tax Act, 1961:

The Assessing Officer (AO) made an addition of Rs. 2,40,00,000/- under Section 68, citing the assessee's failure to establish the creditworthiness of six parties from whom unsecured loans were taken. Despite various opportunities, the assessee could not substantiate the creditworthiness of these parties, nor could they provide supporting information or produce the parties to establish the genuineness of the transactions. The AO emphasized that the assessee failed to fulfill the onus of proving the creditworthiness of the loan creditors.

The Commissioner of Income Tax (Appeals) [CIT(A)] initially deleted this addition, observing that the creditors were identified and had lent money to the company. However, the Income Tax Appellate Tribunal (ITAT) directed that the creditworthiness of these parties needs to be established.

During the appellate proceedings, the assessee provided details such as PAN numbers, bank account details, and Income Tax Returns (ITRs) of the loan creditors. However, the CIT(A) observed that the returned income in four cases was below Rs. 10,00,000/-, despite the loans given ranging from Rs. 5.75 lakh to Rs. 1.40 crores, which did not justify the huge amount of loans given by these parties. Additionally, the bank accounts of the loan creditors showed large deposits immediately before the loan amounts were advanced to the assessee, raising doubts about the genuineness of the transactions.

The CIT(A) concluded that the assessee failed to establish the creditworthiness of the loan creditors, as there was no evidence of regular income or assets justifying the loans. Consequently, the CIT(A) dismissed this ground, and the ITAT upheld this decision, dismissing the ground raised by the assessee.

2. Addition of Rs. 96,98,457/- as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961:

The AO made an addition of Rs. 96,98,457/- as deemed dividend under Section 2(22)(e), observing that the assessee had not furnished the shareholding pattern of the companies and that the company had accumulated profits to the extent of Rs. 96,98,457/- and had given advances of Rs. 5,31,50,000/-.

The CIT(A) initially deleted this addition, stating that the provisions of Section 2(22)(e) were not attracted. However, the ITAT observed that the CIT(A) had passed a cryptic order and set aside the matter for passing a speaking order.

Upon further consideration, the ITAT noted that deemed dividend under Section 2(22)(e) is to be taxed in the hands of the recipient company and not in the hands of the entity granting the loan. The ITAT found that the company had not received any loans from persons falling within the ambit of Section 2(22)(e). Therefore, the addition of Rs. 96,98,457/- was not sustainable in law. Consequently, the ITAT deleted this addition and allowed the ground raised by the assessee.

Conclusion:

The appeal of the assessee was partly allowed. The ITAT upheld the addition of Rs. 2,40,00,000/- under Section 68 due to the failure to establish the creditworthiness of the loan creditors but deleted the addition of Rs. 96,98,457/- as deemed dividend under Section 2(22)(e), finding it unsustainable in law. The order was pronounced in the Open Court on 07/05/2015.