2010 (11) TMI 999 - AT - Income Tax

Appeal success on deemed dividend, bad debts allowed, interest upheld.

Mr. Raja Bagmane Versus The Asst. Commissioner of Income Tax, Central Circle 2 (3), Bangalore

In the case, for Assessment Year 2001-02, the appeal was dismissed as the advance received by the assessee was treated as deemed dividend under Section ... - Issues Involved:1. Applicability of the provisions of Section 2(22)(e) of the Income Tax Act.2. Inclusion of investment allowance reserve and subsidy from DIC in accumulated profits for computing dividends.3. Levy of interest under Section 234B of the Income Tax Act.4. Disallowance of bad debts written off.Issue-wise Detailed Analysis:I. Applicability of the Provisions of Section 2(22)(e) of the Income Tax Act:Assessment Year 2001-02:- Facts: The assessee received an advance of Rs. 16.64 lakhs from Bagmane Pharmaceuticals (P) Ltd (BPPL). The AO treated this amount as deemed dividend under Section 2(22)(e) of the Act, as the assessee was a beneficial owner holding more than 10% of equity shares in BPPL.- AO's View: BPPL was a closely-held company and the transaction could not be considered part of its normal business activities. The AO relied on the Supreme Court ruling in P. Sarada v. CIT (229 ITR 444) to treat the amount as deemed dividend.- CIT(A)'s Decision: Upheld the AO's decision, noting that the amount was shown under 'loans and advances' in BPPL's balance sheet and that the assessee failed to prove the transaction was not for individual benefit.- Tribunal's Decision: Confirmed the AO's and CIT(A)'s findings, stating that the assessee did not provide sufficient evidence to contradict the AO's conclusions.Assessment Years 2002-03 to 2007-08:- Facts: The assessee received various amounts from Bagmane Developers (P) Ltd (BDPL), which were treated as deemed dividends by the AO under Section 2(22)(e) of the Act.- AO's View: The amounts were unsecured loans and advances, and BDPL had accumulated profits. The AO concluded these amounts were for the individual benefit of the assessee.- CIT(A)'s Decision: Upheld the AO's decision, reasoning that the payments were made for the individual benefit of the assessee and not for business purposes.- Tribunal's Decision: Reversed the AO's and CIT(A)'s findings, stating that the transactions were in the course of business and for business exigency. The Tribunal relied on the Supreme Court ruling in S.A. Builders v. CIT (288 ITR 1) and the Delhi High Court decision in CIT v. Creative Dyeing and Printing Pvt. Ltd. (318 ITR 476), concluding that the amounts were not advances or loans but business transactions.II. Inclusion of Investment Allowance Reserve and Subsidy from DIC in Accumulated Profits for Computing Dividends:Assessment Year 2001-02:- Facts: The AO included investment allowance reserve and subsidy from DIC in the accumulated profits for computing deemed dividends.- CIT(A)'s Decision: Upheld the AO's inclusion, supported by the Supreme Court decision in P.K. Badiani v. CIT (105 ITR 642).- Tribunal's Decision: Agreed with the CIT(A), noting that accumulated profits should be taken in a commercial sense, including investment allowance reserve and subsidy.III. Levy of Interest under Section 234B of the Income Tax Act:All Assessment Years:- Facts: The assessee contested the levy of interest under Section 234B.- CIT(A)'s Decision: Upheld the levy of interest, stating it is mandatory and consequential.- Tribunal's Decision: Dismissed the assessee's appeal on this ground, affirming that the levy of interest under Section 234B is mandatory and consequential.IV. Disallowance of Bad Debts Written Off:Assessment Year 2004-05:- Facts: The AO disallowed the bad debts written off by the assessee, totaling Rs. 49.35 lakhs.- CIT(A)'s Decision: Upheld the AO's disallowance, stating the assessee failed to provide sufficient evidence.- Tribunal's Decision: Reversed the CIT(A)'s decision, citing various judicial pronouncements, including T.R.F. Ltd. v. CIT, which held that it is sufficient if the bad debt is written off as irrecoverable in the accounts of the assessee.Conclusion:- Assessment Year 2001-02: The assessee's appeal was dismissed.- Assessment Years 2002-03 to 2007-08: The assessee's appeals were partly allowed, with the Tribunal reversing the applicability of Section 2(22)(e) and allowing the bad debts written off. The levy of interest under Section 234B was upheld for all years.