Case Law Details
Ramesh Nagindas Shah Vs ITO (ITAT Ahmedabad)
ITAT Ahmedabad held that addition u/s. 2(22)(e) of the Income Tax Act is liable to be set aside since advance was received was merely recorded as journal entry and no sum was received by the assessee. Thus, appeal allowed.
Facts- During the course of assessment proceedings, AO observed that the assessee was a director and substantial shareholder in M/s. Mahavir Submersible Pvt. Ltd., holding 49.71% of the total shares amounting to ₹35,00,000/-. AO noted that the assessee had received a loan of ₹65,22,947/- from the aforesaid company and observed that the company had accumulated profits of ₹25,93,812/- as of March 31, 2013. This situation, as per AO fell under the purview of Section 2(22)(e) of the Income Tax Act, which defines deemed dividends. Thus, the payment to the extent of accumulated profit of Rs.25,93,812/- of the company was added to the total income of the assessee as deemed dividend u/s. 2(22)(e) of the I.T. Act.
CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.
Conclusion- Held that since the contention of the assessee has all throughout been that no sum was received by the assessee, but a mere journal entry was passed and therefore there is no occasion to invoke the provisions of section 2(22)(e) of the Act has not been examined or verified by the Revenue Authorities, we are of the considered view that the order passed by Ld. CIT(Appeals) is liable to be set aside in absence of any finding on the above contention of the assessee.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals)-5, (in short “Ld. CIT(A)”), Ahmedabad vide order dated 15.07.2019 passed for A.Y. 2013-14.
2. The Assessee has taken the following grounds of appeal:-
“1.1 The order passed u/s 250 passed on 15-7-2019 for A.Y.2013-14 by CIT(A)- 5, A’bad upholding the addition of Rs.25,93,812/- as deemed dividend u/s.2(22)(e) and Rs.20,000/- towards house property income is wholly illegal, unlawful and against the principles of natural justice.
1.2 The Ld. CIT(A) has grievously erred in law and or on facts in not considering fully and properly the explanations furnished and the evidence produced by the appellant.
2.1 The Ld. CIT(A) has grievously erred in law and or on facts in upholding the addition towards provisions of section 2(22)(e) in respect of Rs.65,22,947/- taken by the appellant from Mahavir Submersible P Ltd. and holding the as deemed dividend and thereby making an addition to the extent of accumulated profit of Rs. 2593,812/-.
2.2 That in the facts and circumstances of the case as well as in law, the Ld. CIT(A) has grievously erred in upholding the provisions of section 2(22)(e) in respect of Rs.65,22,947/- taken by the appellant from Mahavir Submersible P Ltd. and holding the as deemed dividend and thereby making an addition to the extent of accumulated profit of Rs. 25,93,812/-.
3.1 The Ld. CIT(A) has grievously erred in law and or on facts in upholding the addition of Rs. 20,000/- as deemed rental income of the house property.
3.2 The Ld. CIT(A) ought not have uphold the addition of Rs.20,000/- as deemed rental income of the house property.
It is therefore prayed that the additions aggregating to Rs.26,13,812/- upheld by the CIT(A) deserves to be deleted.”
3. The brief facts of the case are that during the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee was a director and substantial shareholder in M/s. Mahavir Submersible Pvt. Ltd., holding 49.71% of the total shares amounting to ₹35,00,000/-. The AO noted that the assessee had received a loan of ₹65,22,947/- from the aforesaid company and observed that the company had accumulated profits of ₹25,93,812/- as of March 31, 2013. This situation, as per the Assessing Officer fell under the purview of Section 2(22)(e) of the Income Tax Act, which defines deemed dividends. The AO held that any payment made by a company, particularly one not substantially held by the public, to a substantial shareholder or a concern in which that shareholder has a significant interest, should be treated as deemed dividend to the extent of the company’s accumulated profits. The Assessing Officer held that assessee, a substantial shareholder in Private Ltd company namely Mahavir Submersibles Pvt. Ltd. (MSPL a company in which public are not substantially interested) has received the loan of Rs, 65,22,947/- Therefore, the payment to the extent of accumulated profit of Rs.25,93,812/- of the company was added to the total income of the assessee as deemed dividend u/s. 2(22)(e) of the I.T. Act
4. In appeal before Ld. CIT(Appeals), he observed that before the AO, the assessee had argued that the AO failed to acknowledge that the loan transaction involved a running account, which included journal entries related to property acquisition, thus disputing the applicability of Section 2(22)(e). The assessee contended that the provisions of Section 2(22)(e) of the Act only apply to actual cash payments, not journal entries, and the assessee placed reliance on case laws suggesting that current account transactions between related parties cannot be deemed as dividends. However, Ld. CIT(Appeals) found the appellant’s arguments unconvincing, and held that the provisions of Section 2(22)(e) clearly applied given the assessee’s significant shareholding in MSPL and the company’s accumulated profits. Accordingly, Ld. CIT(Appeals)upheld the AO’s decision, confirming the addition of ₹25,93,812/- as deemed dividend under Section 2(22)(e) of the Income Tax Act, resulting in the dismissal of the appeal of the assessee.
5. The assessee is in appeal before us against the order passed by Ld. CIT(Appeals). In the present case, the assessee has challenged the confirmation of addition related to deemed dividend under Section 2(22)(e) of the Act. We observe that the Assessing Officer contended that the assessee received advances from M/s. Mahavir Submersible P. Ltd. (MSPL), which qualified as deemed dividends due to the assessee’s substantial shareholding in the assessee company. The Counsel for the assessee submitted before us that the funds purportedly advanced by MSPL did not originate from the company itself. Instead, the directors and shareholders of MSPL, including the assessee, had taken a bank loan to purchase property, with the loan disbursed in the names of the individual Directors rather than the company. To support this argument, the Counsel for the assessee submitted copies of the ledger accounts and bank loan documents, which indicated that the financial transactions were only recorded in MSPL’s books as journal entries. The counsel for the assessee requested the Bench to seek a report from the AO regarding this explanation and the accompanying evidence. However, we noted that the evidence presented was classified as additional evidence and needed admission for adjudication. Following this, the case was adjourned to allow both the assessee and the Department to comply with the Tribunal’s directives regarding the progress of the inquiry. The subsequent hearings revealed that the addition of deemed dividend was based on the advances from MSPL, which were presented as mere journal entries, suggesting that no actual loan had been received. During these proceedings before us, it emerged that the explanation concerning the journal entry had already been presented to the Principal Commissioner of Income Tax (PCIT) in earlier proceedings under Section 263 of the Act. The PCIT had noted that the AO had not adequately examined the issue in the original assessment, rendering the order erroneous and prejudicial to revenue interests. Consequently, the AO was directed to revisit the matter. We observe that the assessee had also reiterated this explanation before the CIT(A), emphasizing that the advance was recorded as a journal entry. This Bench acknowledged that this information had been consistently available with the Revenue Authorities throughout the proceedings. Given this context, this Bench decided that there was no need for further hearings regarding the admission of evidence, as these were not indeed new submissions. Therefore, it is clear that the AO and CIT(A) had not verified or considered the appellant’s explanation adequately during their assessments, especially when the assessee has all throughout contended that the advance was recorded as a journal entry. However, this aspect / submission was omitted to be considered by the AO / CIT(A).
6. Accordingly, in view of the above, since the contention of the assessee has all throughout been that no sum was received by the assessee, but a mere journal entry was passed and therefore there is no occasion to invoke the provisions of section 2(22)(e) of the Act has not been examined or verified by the Revenue Authorities, we are of the considered view that the order passed by Ld. CIT(Appeals) is liable to be set aside in absence of any finding on the above contention of the assessee.
7. In the result, appeal of the assessee is allowed.
This Order pronounced in Open Court on 23/10/2024
Author Bio
