2015 (12) TMI 187 - AT - Income Tax

Addition made by AO on account of low gross profit rate - CIT(A) deleted the addition - Held that - AO has estimated the gross profit @ 6.46% on sales of spare being the same rates of profit shown by the assessee in the immediately preceding assessment year. The AO has examined the books of account including the stock register but could not point out any defect as is evident from the above that the assessee has maintained complete books of account including the stock register and complete details of purchase of spare parts were filed before the AO and none of the purchase and sales or opening or closing stock have been doubted or disputed. Another notable feature is that the AO has missed out to note that the three free services have to be provided to the customers after purchase of car with free spare parts. This fact has not been recognized by the AO above all. The AO has not rejected the books of account and without rejection of books of account no disturbance in the profit rate can be made by AO and hence, the issue is squarely covered in favour of assessee Addition of deemed dividend - CIT(A) deleted the addition - whether the transaction is commercial in nature and even otherwise the lender company is not a shareholder in the assessee company - Held that - We find that the assessee has taken loan on interest from MTPL and paid interest to the tune of ₹ 9,55,288/- and the lender company s business is that of money lending. MTPL is not shareholder in assessee company although it is a sister concern. Only common feature is that one of the directors Shri M. D. Jindal is holding common shareholding of the assessee company at 50.25% and in MTPL at 64.16%. But admittedly, assessee is not a shareholder in MTPL nor MTPL is a shareholder in assessee company not holding 10% or more shares or voting powers. We find that the assessee has paid interest on the above loans and this is purely a commercial transaction. Once this is the position, the issue is covered by the judgment of Hon ble Calcutta High Court in the case of Pradip Kr. Malhotra, 2011 (8) TMI 16 - CALCUTTA HIGH COURT wherein it is held the authorities below erred in law in treating the advance given by the company to the assessee by way of compensation to the assessee for keeping his property as mortgage on behalf of the company to reap the benefit of loan as deemed dividend within the meaning of section 2(22)(e) of the Act. Also as none of the company i.e. neither lender nor the assessee company is registered shareholder in each other to the extent of 10% as mandated in the provision of section 2(22)(e) of the Act for charging deemed dividend. This issue is also covered by the order of Hon ble Special bench of this Tribunal in the case of ACIT Vs. Bhaumick Colour Pvt. Ltd. (2008 (11) TMI 273 - ITAT BOMBAY-E ) wherein held deemed dividend could be assessed only in the hands of the person, who is a shareholder of the lender company and not in the hands of a person other than a shareholder, i.e., the concern. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of the addition made by AO on account of low gross profit rate.
2. Deletion of the addition of deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of the Addition Made by AO on Account of Low Gross Profit Rate:
The first issue concerns the deletion of the addition made by the Assessing Officer (AO) on account of a low gross profit rate. The AO observed a substantial loss in the trading account of spare parts and accessories, which contrasted sharply with the profit in the preceding year. The AO noted the absence of a stock register for spare parts, making quantitative analysis impossible. Consequently, the AO applied the gross profit rate from the previous year and added Rs. 26,62,416 to the total income of the assessee.

The CIT(A) deleted this addition, stating that the AO had examined the books of accounts without finding any defects. The assessee had produced complete details and explanations, which the AO could not fault. The CIT(A) noted that the assessee maintained complete books of accounts, including a stock register, and directed the AO to delete the addition.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not reject the book results despite the complete production of books of accounts. The Tribunal referenced the decision in Shree Hari Agro Industries Ltd. Vs. DCIT, which clarified that for rejecting book results, the AO must be dissatisfied with the correctness or completeness of the accounts and must specifically point out defects. The Tribunal found that the AO's estimation of the gross profit rate was based on surmises and conjectures without rejecting the books of accounts. Therefore, the Tribunal confirmed the CIT(A)'s order in deleting the addition.

2. Deletion of the Addition of Deemed Dividend Under Section 2(22)(e):
The second issue pertains to the deletion of the addition of deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961. The AO noted that the assessee received a loan of Rs. 1.77 crore from Machino Transport Pvt. Ltd. (MTPL), where a common shareholder held substantial shares in both companies. The AO added the loan amount as deemed dividend, citing the reserve and surplus in MTPL.

The CIT(A) deleted this addition, explaining that the assessee company was not a beneficial owner of shares in MTPL and had taken the loan for business purposes, paying interest on it. The CIT(A) relied on the judgment of the Calcutta High Court in Pradip Kr. Malhotra Vs. CIT, which held that advances or loans given for business considerations beneficial to the company do not constitute deemed dividends.

The Tribunal agreed with the CIT(A), noting that the loan was a commercial transaction with interest paid, and MTPL was not a shareholder in the assessee company. The Tribunal referenced the Calcutta High Court's judgment, which clarified that loans given for business advantages do not fall under deemed dividends. Additionally, the Tribunal cited the Special Bench decision in ACIT Vs. Bhaumick Colour Pvt. Ltd., which stated that deemed dividends could only be assessed in the hands of the shareholder, not a non-shareholder. Therefore, the Tribunal found no infirmity in the CIT(A)'s order and confirmed the deletion of the addition.

Conclusion:
Both the appeal of the revenue and the cross-objection of the assessee were dismissed. The Tribunal upheld the CIT(A)'s decisions on both issues, confirming the deletion of the additions made by the AO. The judgment emphasized the necessity for the AO to reject the book results with specific defects before making estimations and clarified the conditions under which loans and advances could be considered deemed dividends.