2023 (1) TMI 754 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - substantial amount of Reserve Surplus has advanced its director having major shareholding an amount as a Loan Advance which was considered as covered under the ambit of Sec. 2(22)(e) as such - CIT(A) holds a view that the whole transaction was designed by the managing director(assessee in this case) of the company to enrich himself through advance of money without declaring Dividend the provision of section 2(22)(e) is brought into operation as anti abuse measure - HELD THAT - Addition to the facts of the case the provision of section 2(22)(e) shall not apply but even otherwise on going through the provisions of above sections it is eventually clear that the assessee company is not a private limited company and the shares of the companies are not restricted for transfer therefore considering the decisions of National Bearing Com Ltd. 1993 (10) TMI 56 - RAJASTHAN HIGH COURT as held in the absence of evidence to show that the directors had been exercising their power under article 37 freely and virtually eliminated the element of free transferability of the shares as provided in the articles of the company and in the absence of restriction in any other articles of the company interfering with the free transfer of shares by one shareholder to another the mere existence of an article like article 37 would not affect the free transferability of the shares within the meaning of the Explanation to section 23A(1) of the Indian Income-tax Act 1922. The assessee-company was therefore regarded as one in which the public were substantially interested. It was held that article 37 did not confer any uncontrolled or unrestricted discretion upon the directors to refuse to register the transfer of shares in a given case; in other words the directors could not act arbitrarily or capriciously. Provisions of Section 2(22)(e) is directly not applicable in this case we do not concur with the view of the lower authorities and based on the set of facts it is clear that since the security deposits received by the assessee from a company wherein the public are substantially interested even though not considered as commercial transaction then even based on the above findings the provisions of section 2(22)(e) is not applicable and therefore we vacated the addition made by the Assessing Officer and thus the ground No. 1 of the assessee is allowed. Addition u/s 56 - deemed consideration received by assessee over above of the face value of equity shares - HELD THAT - As decided in assessee own case 2022 (4) TMI 805 - ITAT JAIPUR even if it is assumed that the shareholders to whom shares were not allotted have given up their right of allotment in shares to other shareholders it is a case of transfer of right in shares by one relative to another relative and therefore also section 56(2)(vii)(c) would not get attracted. For receipt of share there should be shares in existence and a person holding such share transferring it to another person. As against this in case of allotment of shares it comes into existence after it is allotted and there is no transfer of shares from one person to another person. Therefore allotment of shares cannot be equated with receipt of shares because in case of receipt of shares the property is already in existence whereas in case of allotment of shares the property comes into existence after it is allotted. The transaction between the close relatives is not taxable under the head income from other sources u/s 56(2) of the Act. We are of the opinion that the section 56(2)(vii)(c) has no application and the company is liable to be taxed . The opinion and well known facts that in a private limited company major percentage of shares are holded by the relatives only. For receipt of share there should be shares in existence and a person holding such share transferring it to another person.There is no dispute that existing shareholders prior to fresh allotment was the assessee and his relatives and the provisionsof section 56(2)(viii)(c)(ii) shall not apply in case of money or any property received from any close relative - In the present case it is fresh allotment of shares. Appeal of assessee allowed. Addition u/s 69 - assessee has purchased two properties - assessee has appreciated the value of these two properties by the amount mentioned as above and the cash in hand has been reduced by the same amount - HELD THAT - It is not disputed by the lower authority that the assessee is having sufficient cash balance in the balance sheet already filed and placed on record this cash balance being not disputed the genuine error of not considering the cash paid for an amount if reduced then also there exist a cash balance this fact support the contention of the assessee that it is the genuine mistake of the accountant and the ld. DR did not controvert this availability of cash on hand with the assessee before and after recording the stamp duty expenses and in view of this non disputed fact we hold that the explanation given by the assessee is on account of the genuine error on the part of his accountant and same was disclosed before the assessing officer but the view of the ld. AO is against the fact that the assessee is having sufficient cash balance and therefore the addition made is not survived and we vacate the addition therefore the ground no. 3 raised by the assessee is allowed. Addition u/s 68 - Unexplained cash credits - HELD THAT - As assessee has filed all the four Loan creditor s confirmation and thereafter neither he has carried out further inquiry nor asked the assessee to submit any further details and considering the jurisdiction high court decision relied upon by the ld.AR of the assessee in the case of CIT Vs. Bhawani Oil Mills 2010 (10) TMI 796 - RAJASTHAN HIGH COURT assessee has filed the confirmation and thereafter he has not controverted these confirmation the addition cannot be made. In the result ground no. 4 raised by the assessee is allowed.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Addition under Section 2(22)(e) of the Income Tax Act, 1961.
3. Addition under Section 56(2)(vii)(c) of the Income Tax Act, 1961.
4. Addition under Section 69 of the Income Tax Act, 1961.
5. Addition under Section 68 of the Income Tax Act, 1961.

Detailed Analysis:

1. Condonation of Delay:
The assessee filed an appeal with a delay of 10 days. The assessee argued that the delay was due to a misunderstanding regarding the filing timeline, supported by an email from the ITAT Mumbai e-filing team. The Revenue did not object to the condonation of delay. The Tribunal, citing the Supreme Court decision in Collector, Land Acquisition vs. Mst. Katiji and Others, condoned the delay, acknowledging that the assessee was prevented by sufficient cause.

2. Addition under Section 2(22)(e):
The assessee, a managing director of M/s Amit Colonizers Ltd. (ACL), received Rs. 1.50 Crore from the company, which the AO treated as a deemed dividend under Section 2(22)(e). The assessee argued that the amount was a security deposit for a joint venture project, supported by an MOU. The AO and CIT(A) found inconsistencies in the MOU and treated it as a sham document. The Tribunal, however, noted that the transaction was commercial, the property was under an agreement to sell since 2010, and the company was a public limited company. The Tribunal concluded that Section 2(22)(e) was not applicable and vacated the addition.

3. Addition under Section 56(2)(vii)(c):
The AO added Rs. 83,96,410/- under Section 56(2)(vii)(c) for shares received by the assessee at face value, which had a higher fair market value. The assessee contended that the provision does not apply to fresh allotment of shares. The Tribunal, referencing a similar case (Mr. Prakash Chand Sharma HUF), held that fresh allotment of shares is not akin to receiving shares and thus not covered under Section 56(2)(vii)(c). The addition was deleted.

4. Addition under Section 69:
The AO added Rs. 6,75,000/- for unexplained stamp duty expenses on property purchases, which were not initially recorded in the books. The assessee argued it was an accountant's mistake and provided a revised balance sheet showing sufficient cash balance. The Tribunal found the explanation plausible, noting the availability of cash and the genuine error, and vacated the addition.

5. Addition under Section 68:
The AO added Rs. 30,87,700/- for unsecured loans and interest, citing lack of evidence for the creditors' identity and creditworthiness. The assessee provided confirmations from creditors but not bank statements or ITRs. The Tribunal, relying on jurisdictional High Court precedent (CIT vs. Bhawani Oil Mills), held that mere non-appearance of creditors does not invalidate their confirmations. The Tribunal found the confirmations sufficient and deleted the addition.

Conclusion:
The Tribunal allowed the appeal, condoning the delay and vacating all additions made under Sections 2(22)(e), 56(2)(vii)(c), 69, and 68 of the Income Tax Act, 1961. The Tribunal emphasized the commercial nature of transactions, the sufficiency of confirmations, and the genuine errors in accounting.