2017 (8) TMI 1293 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - transactions with intergroup companies treated as deemed dividend in the hands of the assessee - Held that - AO as well as the CIT(A) having accepted the fact that goods sent on consignment basis is supported by delivery challans and also is a fact that it is possible that these goods were transferred between companies based on stock received by one company from the other, erred in rejecting the explanations of the assessee merely for the reason that there is no narration of entries given under the head other entries to indicate that money was given based on transfer of goods. We, further are of the opinion that if the goods sent on consignment basis is more than the amount of other entries appearing in the ledger accounts, and which has a direct and immediate nexus between money advanced and transfer of goods as claimed by the assessee, the AO was incorrect in including those items for the purpose of quantification of deemed dividend. Therefore, we deem it appropriate to set aside the issue to the file of the AO for further verification with reference to the details filed by the assessee to ascertain the correct facts as to whether the other entries appearing in the ledger accounts represent amount paid against goods sent on consignment basis; hence, we set aside the issue to the file of the AO and direct the AO to verify the issue before quantifying the amount of deemed dividend for the assessment years 2005-06 and 2007-08. Set off of deemed dividend against actual dividend paid by certain companies - liability to dividend distribution tax - Held that - Dividend declared and paid by ITPL was not liable to dividend distribution tax u/s 115-O read with section 2(22)(e). M/s ITPL had declared and paid dividend which needs to be set off against the deemed dividend quantified by the AO. We do not find any merits in the arguments of the assessee for the reason that dividend distribution tax as per section 115-O is in respect of dividend covered by clauses (a) to (d) of section 2(22) and such income is exempt in the hands of shareholders u/s 10(34). However, deemed dividend u/s 2(22)(e) is taxable as no dividend distribution tax is payable on this income. Therefore, the arguments of the assessee with regard to set off of deemed dividend against actual dividend paid is rejected. Disallowance of interest expenditure against interest income assessed under the head Income from other sources - Held that - We find merits in the arguments of the asssssee for the reason that any expenditure incurred wholly and exclusively for earning income which is taxable u/s 56 is allowable as deduction u/s 57 of the Act. In this case, the assessee claims to have taken overdraft loan against fixed deposit and the resultant interest has been claimed as deduction against interest income earned on Fixed Deposits. However, keeping it in view that assessee failed to furnish the purpose of taking overdraft facility to ascertain whether the said interest expenditure is wholly and exclusively incurred for earning interest income. Therefore, we are of the view that the issue needs to be examined by the AO in the light of the above discussions and hence, we set aside the issue to the file of the AO for further verification. Levy of penalty u/s 271(1)(c) - Held that - As the additions made by the AO u/s 2(22)(e) towards inter-group companies transfers has been set aside by us to the file of the AO for fresh adjudication in the light of explanations , the order passed by the AO levying penalty u/s 271(1)(c) cannot be sustained and hence, the same is hereby quashed and the issue is left open to the AO to initiate penalty proceedings after completion of assessment proceedings, as per law.

Summary

Issues Involved:

1. Applicability of Section 2(22)(e) of the Income-tax Act, 1961 to inter-group company transactions.
2. Quantification of deemed dividend.
3. Set-off of deemed dividend against actual dividend paid.
4. Disallowance of interest expenditure against interest income.
5. Levy of interest under Section 220(2) of the Income-tax Act.
6. Levy of interest under Sections 234B and 234C of the Income-tax Act.
7. Levy of penalty under Section 271(1)(c) of the Income-tax Act.

Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income-tax Act, 1961 to Inter-group Company Transactions:
The assessee filed returns for AY 2005-06 declaring income of ?18,97,277. The assessment was completed under Section 143(3) determining income at ?4,17,82,378 due to inter-group loans and advances deemed as dividend under Section 2(22)(e). The CIT(A) confirmed the additions, and the ITAT upheld the applicability of Section 2(22)(e) but remanded the issue to the AO for verifying the quantum of deemed dividend.

2. Quantification of Deemed Dividend:
The AO was directed to verify the nature of entries in inter-group transactions. The assessee classified transactions into sales/purchases, debtors, common expenses, and other entries. The AO accepted most transactions but added ?1,28,81,968 as deemed dividend based on peak balance of 'other entries'. The CIT(A) upheld the AO's decision, stating there was no direct nexus between money advanced and goods transferred. The ITAT found merit in the assessee's argument and remanded the issue to the AO for further verification of whether 'other entries' were payments against consignment stock.

3. Set-off of Deemed Dividend Against Actual Dividend Paid:
The assessee argued for setting off deemed dividend against actual dividend paid by ITPL, claiming it wasn't liable to dividend distribution tax under Section 115-O. The ITAT rejected this, clarifying that deemed dividend under Section 2(22)(e) is taxable without dividend distribution tax, unlike other dividends covered by Section 115-O.

4. Disallowance of Interest Expenditure Against Interest Income:
The AO disallowed interest expenditure of ?1,37,304 as the assessee couldn't co-relate it with interest income. The ITAT found merit in the assessee's claim that interest on overdraft against fixed deposit should be allowed under Section 57, but remanded the issue to the AO for verification of the overdraft loan's utilization.

5. Levy of Interest Under Section 220(2) of the Income-tax Act:
The ITAT noted that interest under Section 220(2) is consequential and depends on the final tax liability determined in the assessment. The AO was directed to re-compute interest after determining the final tax liability.

6. Levy of Interest Under Sections 234B and 234C of the Income-tax Act:
The ITAT stated that interest under Sections 234B and 234C is mandatory and consequential, with no discretionary power for the AO. The assessee's ground was dismissed.

7. Levy of Penalty Under Section 271(1)(c) of the Income-tax Act:
The AO levied a penalty of ?43,36,070 for furnishing inaccurate particulars/concealment of income. The CIT(A) confirmed this. The ITAT noted that since the quantum issue was remanded, the penalty order couldn't be sustained. The AO was allowed to initiate penalty proceedings afresh after completing the assessment.

Conclusion:
The appeals were partly allowed for statistical purposes, with key issues remanded to the AO for further verification. The penalty under Section 271(1)(c) was quashed, leaving it open for the AO to re-initiate penalty proceedings post reassessment. The ITAT emphasized detailed verification and proper classification of transactions to ascertain the correct quantum of deemed dividend.