2021 (4) TMI 200 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - HELD THAT - There is merit in the argument of the assessee's counsel that assessee has established that it is a business transaction for purchase of property belonging to FDITPL in favour of the assessee and such business transactions outside the purview of section 2(22)(e) of the Act. The alternative argument of the assessee is that Costal Construction Company is not a shareholder in FDITPL. As such, section 2(22)(e) of the Act cannot be applied. For this purpose, he relied on the judgment of the Hon'ble High Court of Karnataka in the case of CCIT-III v. Sarva Equity P. Ltd. 2014 (4) TMI 788 - KARNATAKA HIGH COURT wherein it was held that it is only where a loan advanced by a company to registered shareholder and other conditions set out in section 2(22)(e) are satisfied, such amount of loan would be liable to regarded as deemed dividend within the meaning of the said section - Being so, in our opinion, the case is squarely covered by the judgment of Hon'ble High Court of Karnataka (supra). Accordingly, we are inclined to delete the addition made by the AO. Initiation of proceedings u/s. 153C of the Act on the reason that initiation of search in the case of searched person is illegal and ultra vires the provisions of section 132(1)(a),(b) (c) of the Act and framing assessment is also bad in law in view of the judgment of the Supreme Court in the case of Ajit Jain 2003 (1) TMI 97 - SC ORDER - As before us, the assessee raised a specific ground that framing assessment u/s. 143(3) r.w.s. 153A r.w.s. 153C is bad in law. Being so, it is appropriate to remit this issue to the file of CIT (Appeals) for fresh adjudication after examining the seized material, if any, and to decide in accordance with law, after providing assessee opportunity of being heard.

Issues Involved:
1. Deletion of addition under Section 2(22)(e) of the Income Tax Act.
2. Legality of assessment under Section 143(3) read with Sections 153A and 153C of the Income Tax Act.
3. Validity of search and seizure under Section 132 of the Income Tax Act.
4. Applicability of interest under Sections 234A and 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 2(22)(e) of the Income Tax Act:
The primary issue raised by the Revenue was the deletion of an addition of ?4,14,57,934 made under Section 2(22)(e) of the Income Tax Act by the CIT (Appeals). The Assessing Officer had treated this amount as deemed dividend in the hands of the assessee firm, Coastal Construction, on the grounds that the funds were used to purchase property, which could have been distributed as dividends. The CIT (Appeals) deleted this addition, reasoning that the purpose of Section 2(22)(e) is to tax deemed dividends in the hands of shareholders, and Coastal Construction was not a shareholder of Fiza Developers & Inter Trade Pvt. Ltd. (FDITPL). The Tribunal upheld the CIT (Appeals)'s decision, noting that the transaction was a business transaction and not a loan or advance meant to be treated as deemed dividend. The Tribunal also referred to the Karnataka High Court's judgment in the case of CCIT-III v. Sarva Equity P. Ltd., which clarified that deemed dividends under Section 2(22)(e) apply only to loans or advances given to shareholders, not to business transactions.

2. Legality of Assessment under Section 143(3) read with Sections 153A and 153C of the Income Tax Act:
The assessee challenged the legality of the assessment made under Section 143(3) read with Sections 153A and 153C, arguing that the conditions to invoke jurisdiction under these sections were not met. The CIT (Appeals) upheld the validity of the assessment, stating that the Assessing Officer had assumed jurisdiction in accordance with the law. However, the Tribunal remitted this issue back to the CIT (Appeals) for fresh adjudication, instructing the CIT (Appeals) to examine the seized material and decide the matter in accordance with the law after providing the assessee an opportunity of being heard.

3. Validity of Search and Seizure under Section 132 of the Income Tax Act:
The assessee contended that the search initiated under Section 132 was illegal and ultra vires the provisions of Section 132(1)(a), (b), and (c) of the Act. The CIT (Appeals) dismissed this ground, stating that the Assessing Officer had assumed jurisdiction correctly. The Tribunal did not provide a separate analysis for this issue but implied its relevance by remitting the legality of the assessment issue back to the CIT (Appeals).

4. Applicability of Interest under Sections 234A and 234B of the Income Tax Act:
The assessee argued against the levy of interest under Sections 234A and 234B, stating that the period, rate, quantum, and method of calculation were incorrect. The Tribunal did not specifically address this issue in its final order, focusing instead on the primary issues of deemed dividend and the legality of the assessment.

Conclusion:
The Tribunal dismissed the Revenue's appeal regarding the addition under Section 2(22)(e) and remitted the issue of the legality of the assessment under Sections 153A and 153C back to the CIT (Appeals) for further examination. The Tribunal's decision emphasized the importance of distinguishing business transactions from loans or advances when applying Section 2(22)(e) and the necessity of proper jurisdictional compliance for assessments under Sections 153A and 153C.

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