2021 (5) TMI 652 - AT - Income Tax

Deemed dividend made u/s 2(22)(e) - transaction entered between the two concerns - HELD THAT - Source and application of funds clearly spells out that the alleged sum received during instant year(s) under appeal were not for the benefit of the assessee share holder Mr. Sanjay Patidar. The alleged transactions are purely entered between the two concerns in the ordinary course of business as advance or loan for which interest was also paid by MLFS to VSPL for Assessment Year 2016-17. Thus the alleged transaction clearly falls in the exclusion (ii) to section 2(22)(e) of the Act and thus both the lower authorities have erred in treating the alleged sum as deemed dividend in the hands of the assessee for Assessment Years 2015-16 and 2016-17 respectively and therefore addition made is uncalled for. - Decided in favour of assessee. House Rent Allowance exemption u/s 10(13A) - HELD THAT - Assessee is not entitled to exemption u/s 10(13A) of the Act if the residential accommodation occupied by the assessee is owned by him or the assessee has not actually incurred the expenditure for payment of rent. In the instant case no evidence has been brought on record to show that the assessee had paid House Rent during the year. Under the given facts and circumstances of the case we find no reason to interfere in the finding of Ld. CIT(A) and confirm the finding of Ld. A.O. Thus Ground No.6 of appeal of the assessee is dismissed.

Issues Involved:

1. Validity of assessment framed under Section 143(3) read with Section 153A of the Income Tax Act, 1961.
2. Addition of ?7,00,000 as deemed dividend under Section 2(22)(e) for inter-company loan transactions.
3. Disallowance of ?77,200 as House Rent Allowance (HRA) without reference to incriminating material.

Detailed Analysis:

1. Validity of Assessment under Section 143(3) read with Section 153A:

The assessee challenged the validity of the assessment framed under Section 143(3) read with Section 153A, claiming it was contrary to the material on record and the provisions of the Act. However, no specific submissions were made by the assessee’s counsel on this issue, indicating a lack of interest in pressing this ground. Consequently, the Tribunal dismissed this ground as not pressed.

2. Addition of ?7,00,000 as Deemed Dividend under Section 2(22)(e):

The primary issue was the addition of ?7,00,000 as deemed dividend under Section 2(22)(e) for inter-company loan transactions between M.L. Securities and Finance Pvt. Ltd (MLSF) and Vinay Securities Pvt. Ltd (VSPL). The assessee held 50% and 20% shareholding in VSPL and MLSF, respectively. The lower authorities confirmed the addition based on the second limb of Section 2(22)(e), which deals with loans or advances to any "concerns" where the shareholder has substantial interest.

The counsel for the assessee argued that the transactions were in the ordinary course of business, and lending money was a substantial part of the business for both companies. MLSF is a registered non-banking finance company, and VSPL's main object includes investing finance. The transactions were continuous since the financial year 2009-10, and the amount received was utilized for business purposes, not for the benefit of the assessee.

The Tribunal observed that the transactions were indeed in the ordinary course of business, and interest was paid by MLSF to VSPL. Therefore, the transactions fell under the exclusion provided in Section 2(22)(e)(ii), which excludes loans made in the ordinary course of business where lending is a substantial part of the business. Consequently, the Tribunal allowed the grounds related to the addition of deemed dividend for both assessment years.

3. Disallowance of ?77,200 as House Rent Allowance (HRA):

The assessee claimed an exemption of ?77,200 as HRA under Section 10(13A). The Assessing Officer (A.O.) disallowed the claim due to the absence of evidence of rent payment. During the appellate proceedings, the assessee contended that no incriminating material was found during the search, and the correct figure of HRA was ?68,360, not ?77,200.

The Tribunal noted that no evidence was provided to substantiate the claim of rent payment. The provisions of Section 10(13A) require actual expenditure on rent, and in the absence of evidence, the claim could not be allowed. Therefore, the Tribunal upheld the disallowance of ?77,200 as HRA.

Conclusion:

The Tribunal partly allowed the appeals, deleting the additions of ?7,00,000 as deemed dividend under Section 2(22)(e) for both assessment years, but upheld the disallowance of ?77,200 as HRA. The ground challenging the validity of the assessment was dismissed as not pressed.

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