2022 (11) TMI 273 - AT - Income Tax

Validity of order passed by CIT-A - Whether CIT(A) had not given opportunity of hearing to the assessee which was violation of principal of Natural Justice? - HELD THAT - On perusal of the order of the Ld.CIT(A) it is observed that the assessee s submission has been reproduced by the Ld.CIT(A). The Ld.CIT(A) had considered the submission of the assessee before deciding the case. Assessee was granted opportunity by the Ld.CIT(A). Thus there was no violation of natural justice. Hence the ground number 1 of the assessee is dismissed. Addition u/s 14A r.w.r. 8D - .AR submitted that there was no exempt income earned by the assessee during the year hence there cannot be any disallowance u/s 14A - HELD THAT - As relying on Kohinoor Project (P.) Ltd. 2020 (1) TMI 1161 - BOMBAY HIGH COURT and Kumar Properties and Real Estate (P.) Ltd. 2021 (4) TMI 1163 - ITAT PUNE it is held that since there was no exempt income earned during the year no disallowance u/s 14A is called for. Accordingly Ground No.2 of the Assessee is allowed. Deemed dividend u/s 2(22)(e) - assessee has received Loan - AR submitted that the Assessee is not shareholder in Trenton Investment Company Pvt Ltd but Trenton Investment Company Pvt. Ltd is holding 99% share in the assessee company - HELD THAT - In the case before us the Trenton Investment Company Pvt. Ltd is 99% shareholder in the Assessee Company. The Trenton Investment Company Pvt. Ltd has given loan of Rs.1, 00, 00, 000/- to the assessee company. Thus the loan has been given by share holder. Therefore provisions of Section 2(22)(e) will not be applicable to the impugned loan by Trenton Investment Company Pvt. ltd.- AO is directed to delete the said addition. Loan from Kimplas Piping System Ltd - The facts of the present case explains that Provisions of Section 2(22)(e) are attracted for the loan of Rs.Rs.11, 12, 387/- from Kimplas Piping System Ltd to the assessee. Therefore respectfully following the ITAT Mumbai bench decision we hold that the AO has rightly treated loan received from Kimplas Piping System Ltd as deemed dividend. Accordingly impugned addition is upheld. Therefore the Ground No.3 is partly allowed as discussed in earlier paras. Correct head of Income - Rental Income - Income from House Property or Income from other Sources - assessee had given the premises on rent along with furniture fixtures car parking - AO treated the said income as Income from other sources on the ground that the rent was not just for the premises but for furniture fixtures hence it was composite rent - HELD THAT - In this case for earlier AY 2013-14 and AY 2014-15 the assessee had shown the rent as Income from House Property and department had accepted it in the order u/s 143(3). Thus for the same premises for earlier year department accepted it as Income from House Property. No valid reason given by the AO for changing the head of Income from Income from House Property to Income from other Sources. We are aware that the principle of Res Judicate does not apply to the income tax proceedings but principle of consistency needs to be followed when facts are same. Once Income tax department had accepted the income as Income from House property for two years on the same facts for the same source of income there is no reason to deviate from earlier stand. In these facts and circumstances of the case we are of the opinion that the assessee has rightly offered the rent as Income from House property. Hence the AO is directed to treat it as Income from house Property. As far as the difference in amount of rent offered for taxation and the amount of rent as per 26AS the AO is directed to verify the documents and reconcile. Calculating Book Profit u/s.115JB - Addition of undisclosed rent - HELD THAT - As relying on Forever Diamonds Pvt. Ltd 2015 (8) TMI 772 - BOMBAY HIGH COURT it is held that the addition made by AO to Book Profit u/s.115JB is not maintainable. Hence AO is directed to delete it. Thus Ground No.5 of the assessee is allowed.

Summary

Issues Involved:
1. Violation of principles of natural justice.
2. Disallowance under Section 14A read with Rule 8D.
3. Addition as deemed dividend under Section 2(22)(e).
4. Classification of rental income.
5. Recalculation of book profit under Section 115JB.

Issue-wise Detailed Analysis:

1. Violation of Principles of Natural Justice:
The assessee claimed that the CIT(A) did not provide a proper opportunity for being heard, violating the principles of natural justice. However, it was observed that the CIT(A) had considered the assessee's submissions before deciding the case. Therefore, there was no violation of natural justice, and this ground was dismissed.

2. Disallowance under Section 14A read with Rule 8D:
The AO made an addition of Rs. 12,81,831/- under Section 14A read with Rule 8D, which was upheld by the CIT(A). The assessee argued that no exempt income was earned during the year, making Section 14A inapplicable. The Tribunal referred to several judicial precedents, including the Bombay High Court in Pr.CIT Vs. Kohinoor Project (P.) Ltd., which held that Section 14A does not apply if no exempt income is received. Consequently, the Tribunal allowed this ground, ruling that no disallowance under Section 14A was warranted.

3. Addition as Deemed Dividend under Section 2(22)(e):
The AO added Rs. 1,11,12,387/- as deemed dividend under Section 2(22)(e), which was upheld by the CIT(A). The Tribunal examined two transactions:
- Loan from Trenton Investment Company Pvt Ltd: The Tribunal noted that the assessee was not a shareholder in Trenton Investment Company Pvt Ltd, which held 99% shares in the assessee company. Citing the Bombay High Court in CIT Vs. Jignesh Shah, the Tribunal ruled that Section 2(22)(e) applies only if the assessee is a shareholder in the lender company. Therefore, the addition of Rs. 1,00,00,000/- was deleted.
- Loan from Kimplas Piping System Ltd: The assessee held 20.22% shares in Kimplas Piping System Ltd, and the loan of Rs. 11,12,387/- was classified as borrowings in the audit report. The Tribunal upheld the addition, stating that the provisions of Section 2(22)(e) were satisfied. Thus, this ground was partly allowed.

4. Classification of Rental Income:
The AO treated the rental income as "Income from Other Sources" instead of "Income from House Property" because the rent included furniture and fixtures. The Tribunal noted that the premises were commercial and the furniture was incidental. For previous assessment years, the rental income was accepted as "Income from House Property." The Tribunal emphasized the principle of consistency and directed the AO to treat the rental income as "Income from House Property." The issue of the difference in rent amounts was set aside for verification. Thus, this ground was partly allowed.

5. Recalculation of Book Profit under Section 115JB:
The AO added Rs. 3,00,000/- to the book profit under Section 115JB, considering it undisclosed rent. The Tribunal referred to the Bombay High Court in CIT Vs. Forever Diamonds Pvt. Ltd., which held that the AO cannot alter the book profits as certified under the Companies Act. Therefore, the Tribunal directed the deletion of the addition, allowing this ground.

Conclusion:
The appeal was partly allowed, with specific directions for each issue, maintaining adherence to judicial precedents and principles of natural justice. The Tribunal's decision emphasized the importance of consistency and proper application of legal provisions.