2016 (2) TMI 426 - AT - Income Tax

Revision u/s 263 - deemed dividend addition u/s 2(22)(e) in assessments framed u/s 153C - Held that - The addition towards deemed dividend u/s 2(22)(e) of the Act in the assessments framed u/s 153C of the Act for the Asst Years 2007-08 to 2010-11 without any incriminating materials found during the course of search with respect to those assessment years, is not warranted and held as not in accordance with law. We hold that the Learned CIT had just entertained a belief that order passed by the Learned AO u/s 153 C of the Act is erroneous , which otherwise does not emanate from the provisions of the Act. Hence in this scenario, invoking jurisdiction under section 263 proceedings is not permissible. - Decided in favour of assessee

Issues Involved:

1. Validity of the revision order under Section 263 of the Income Tax Act, 1961.
2. Applicability of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
3. Limitation period for invoking revision jurisdiction under Section 263.
4. Assessment of income under Section 153C based on incriminating material.
5. Whether the inter-corporate deposit can be considered as a loan.
6. Whether the lending of inter-corporate deposits constitutes a substantial part of the business.

Issue-Wise Detailed Analysis:

1. Validity of the Revision Order under Section 263:
The assessee contended that the CIT erred in passing the revision order under Section 263 dated 16.03.2015, arguing that the proceedings had become barred by limitation prior to 01.04.2014. The CIT's order was challenged on the grounds of being ab initio void. The Tribunal admitted these additional grounds based on the decision of the Hon'ble Apex Court in NTPC Ltd vs CIT (229 ITR 383).

2. Applicability of Deemed Dividend under Section 2(22)(e):
The CIT revised the assessment order on the grounds that deemed dividend under Section 2(22)(e) was not assessed. The assessee argued that it did not hold any shares in the lending company, M/s Geeta Ganesh Promoters Ltd (GGPL), and thus, deemed dividend could not be assessed in its hands. The Tribunal upheld this view, citing the Hon'ble Apex Court's decision in Rameshwarlal Sanwarmal vs CIT (122 ITR 1) and the Special Bench of Mumbai Tribunal in V.Bhaumick Color Lab Pvt Ltd (118 ITD 1), which stated that deemed dividend could only be assessed in the hands of the shareholder.

3. Limitation Period for Invoking Revision Jurisdiction under Section 263:
The assessee argued that the period of limitation for invoking Section 263 should be computed with reference to the original assessment order dated 26.02.2009. If so, the proceedings under Section 263 could only be initiated until 31.03.2011. The Tribunal did not find it necessary to address this issue in detail as the primary issues were decided in favor of the assessee.

4. Assessment of Income under Section 153C Based on Incriminating Material:
The Tribunal noted that no incriminating materials were found during the search regarding the issue of deemed dividend. Therefore, it could not be the subject matter of addition in Section 153C proceedings for completed assessments. The Tribunal referenced the Bombay High Court's decision in CIT vs Murli Agro Products Ltd, which stated that the AO could not disturb the finalized assessment/reassessment unless the materials gathered during the 153A proceedings established that the reliefs granted were contrary to the facts unearthed.

5. Whether the Inter-Corporate Deposit Can Be Considered as a Loan:
The Tribunal held that the monies received by the assessee from GGPL were inter-corporate deposits, not loans, and thus outside the ambit of Section 2(22)(e). The Tribunal cited multiple High Court decisions, including CIT vs Sarva Equity Pvt Ltd and CIT vs AR Magnetics (P) Ltd, which supported this view.

6. Whether the Lending of Inter-Corporate Deposits Constitutes a Substantial Part of the Business:
The Tribunal found that GGPL deployed more than 20% of its Net Owned Funds in granting loans and inter-corporate deposits, which constituted a substantial part of its business. This was supported by the Hon'ble Allahabad High Court's decision in Kishori Lal Agarwal vs CIT (364 ITR 158), which held that the advance or loan must be made in the ordinary course of business. The Tribunal concluded that clause (ii) of Section 2(22)(e) was applicable, and any amount granted by GGPL did not come within the mischief of Section 2(22)(e).

Conclusion:
The Tribunal quashed the order passed under Section 263 by the CIT, holding that the addition towards deemed dividend under Section 2(22)(e) in the assessments framed under Section 153C was not warranted. The appeals of the assessee were allowed, and the order was pronounced in open court on 20-01-2016.

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