2017 (6) TMI 479 - AT - Income Tax

Addition of deemed dividend under section 2(22)(e) - Held that - As find from the above provisions of the Companies Act 1956, the amended provisions, that the assessee taken inter corporate deposit from its subsidiary named Balkrishna Paper Mills Ltd. and AO assessed the same as deemed dividend under section 2(22) (e) of the Act. We find that in view of the amended provisions of Companies Act 1956, the assessee being a Public Ltd. Company has taken loan from a subsidiary which is also a public Ltd. Company, by virtue of the amended provisions and therefore, the assessee falls within the provisions of section 2(18) read with relevant provisions of the Companies Act and hence, there is no dispute that the provisions of section 2(22)(e) will not attract to the present case of the assessee. - Decided in favour of assessee. Addition made on non reconciled AIR data - Held that - This issue can be sent back to the file of the AO for fresh reconciliation statement of the assessee so that he can verify vis- vis AIR information relevant reconciliation and accordingly, decide the issue. We direct the AO accordingly. Addition of valuation of closing stock by treating the change in method of closing stock as sham - Held that - We find that the assessee has followed a bonafide system of accounting and once the system is bonafide no interference can be done by Revenue in the valuation of stock. None of the authorities below have doubted the bonafide of the assessee in regard to change in method of valuation of closing stock, we delete the addition and allow the appeal of the assessee on this issue. See Melmould Corporation Versus CIT 1993 (2) TMI 82 - BOMBAY High Court - Decided in favour of assessee.

Issues Involved:
1. Addition of deemed dividend under Section 2(22)(e) of the Income Tax Act.
2. Addition of non-reconciled AIR data.
3. Addition due to change in the method of valuation of closing stock.

Detailed Analysis:

1. Addition of Deemed Dividend under Section 2(22)(e):

The first issue concerns the addition of ?2,36,16,645 as deemed dividend under Section 2(22)(e) of the Income Tax Act. The Assessing Officer (AO) noted that the assessee received a loan from its subsidiary, Balkrishna Paper Mills Ltd., which is not a company in which the public is substantially interested. The AO concluded that the provisions of Section 2(22)(e) were applicable, treating the loan as a deemed dividend. The CIT(A) upheld this decision, stating that all conditions prescribed in Section 2(22)(e) were satisfied.

The assessee argued that Balkrishna Paper Mills Ltd. is a public company as per the amended Companies Act, 2000, and thus, the provisions of Section 2(22)(e) should not apply. The Tribunal agreed with the assessee, noting that the amended Companies Act defines a public company to include a private company which is a subsidiary of a public company. Consequently, the Tribunal held that the provisions of Section 2(22)(e) were not applicable and deleted the addition.

2. Addition of Non-Reconciled AIR Data:

The second issue involves an addition of ?52,905 due to non-reconciliation of Annual Information Report (AIR) data. The assessee contended that it had no transactions with the company mentioned in the AIR data and did not claim any credit for the TDS on the same. Both parties agreed to remand the matter back to the AO for a fresh reconciliation statement. The Tribunal directed the AO to verify the reconciliation and decide the issue accordingly, allowing the appeal for statistical purposes.

3. Addition Due to Change in the Method of Valuation of Closing Stock:

The third issue pertains to an addition of ?6,17,59,737 due to a change in the method of valuation of closing stock from FIFO to the weighted average cost method following the implementation of an ERP system. The AO viewed this change as a tool to offset increased tax liability due to the demerger of undertakings and treated it as a sham transaction. The CIT(A) upheld the AO's decision, asserting that the change was not bona fide and aimed at reducing tax liability.

The Tribunal, however, found no evidence to support the AO's and CIT(A)'s conclusions that the change in the method of accounting was not bona fide. It noted that the assessee had adopted the new method consistently and that the change was a strategic decision necessitated by the new ERP system. Citing the Bombay High Court's decision in Melmould Corporation vs. CIT, the Tribunal held that the change in the method of valuation was bona fide and should be accepted. Consequently, the Tribunal deleted the addition.

Conclusion:

The Tribunal allowed the appeal of the assessee on the first and third issues, deleting the additions made by the AO. The second issue was remanded back to the AO for fresh reconciliation, allowing the appeal for statistical purposes. The appeal was thus partly allowed for statistical purposes.

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