2011 (12) TMI 657 - AT - Income Tax

Tribunal rulings on deemed dividend & additions under Sections 36(1)(va) & 2(24)(x)

The Tribunal allowed the Revenue's appeal for the assessment year 2006-07, treating the loan of Rs. 55.00 lacs as deemed dividend. For the assessment year ... Deemed dividend under Section 2(22)(e) - ordinary course of business - lending of money being a substantial part of the business - onus on the assessee to establish applicability of non inclusion exception - construction and application of memorandum of association objects - remand for verification of closing and current year advances - allowability of employee contribution under s.43BDeemed dividend under Section 2(22)(e) - lending of money being a substantial part of the business - construction and application of memorandum of association objects - onus on the assessee to establish applicability of non inclusion exception - Validity of addition treated as deemed dividend in the assessment year 2006-07 - HELD THAT: - The Tribunal applied the statutory non inclusion exception proviso which excludes advances or loans made to a shareholder where lending of money is a substantial part of the lender's business and the loan is in the ordinary course of that business. The Tribunal examined the Memorandum of Association of the lending company and its accounts, having regard to the tests in Parle Plastics (nature and quantum of turnover, profit, capital employed and other relevant factors) to determine whether money lending constituted a substantial part of that company's business. The balance sheet and profit and loss figures showed limited interest income and that advances comprised largely items related to the main trading business and refundable duties; there was only one significant loan to the assessee. The Tribunal found that the Revenue had not discharged the onus to prove that the lender's money lending activity amounted to a substantial part of its business or that the advance was not in the ordinary course of its business, and therefore the provisions of Section 2(22)(e) would apply only if those preconditions were satisfied. Applying these facts, the Tribunal concluded that the addition as deemed dividend should be sustained for the assessment year 2006 07.Addition treated as deemed dividend for 2006-07 sustained.Remand for verification of closing and current year advances - deemed dividend under Section 2(22)(e) - Treatment of advances for assessment year 2007-08 (whether amount of advance during the year exceeds closing balance of preceding year) - HELD THAT: - For 2007 08 the Tribunal noted the factual matrix in the preceding year and observed that if the advance outstanding in the year under appeal did not exceed the closing balance of the immediately preceding year (which was already considered for deemed dividend), no fresh addition would be warranted. Conversely, any excess would attract treatment as deemed dividend in terms of the Tribunal's findings for the earlier year. As the necessary ledger/account details were not before the Tribunal, it directed restoration to the assessing officer to verify whether the advance during the year exceeded the closing balance of the earlier year and to act in accordance with the findings already recorded.Issue remanded to the assessing officer for verification whether current year advance exceeds the closing balance of the preceding year; if so, treat the excess as deemed dividend, otherwise no fresh addition.Allowability of employee contribution under s.43B - Validity of deletion of addition under s.36(1)(va) read with s.2(24)(x) concerning employees' contribution - HELD THAT: - The Tribunal accepted that employees' contribution paid before the due date of filing the return is allowable under Section 43B. Having regard to authoritative decisions on the point, the Tribunal found that the assessing officer's addition was not sustainable and that the appellate authority was right in deleting the addition.Addition under s.36(1)(va) r.w.s.2(24)(x) deleted; claim of employees' contribution held allowable.Final Conclusion: The Revenue's appeal for 2006 07 is allowed insofar as the advance was to be treated as deemed dividend; the appeal for 2007 08 is partly allowed and remanded to the assessing officer to verify whether current year advances exceed the preceding year's closing balance (excess, if any, to be treated as deemed dividend); the deletion of the addition under s.36(1)(va) r.w.s.2(24)(x) is upheld. Issues Involved:1. Deletion of addition made on account of deemed dividend under Section 2(22)(e) of the Income Tax Act for the assessment years 2006-07 and 2007-08.2. Deletion of addition made under Section 36(1)(va) read with Section 2(24)(x) of the Income Tax Act for the assessment year 2007-08.Issue-wise Detailed Analysis:1. Deletion of Addition Made on Account of Deemed Dividend under Section 2(22)(e) of the Income Tax Act for the Assessment Years 2006-07 and 2007-08:The Revenue challenged the orders of the CIT(A) for the assessment years 2006-07 and 2007-08, which deleted the additions made by the Assessing Officer (AO) on account of deemed dividend under Section 2(22)(e) of the Income Tax Act. The AO had treated a sum of Rs. 55.00 lacs received by the assessee from M/s. Sun Polytex (P) Ltd. as deemed dividend, arguing that the assessee held 23.67% shares in M/s. Sun Polytex (P) Ltd. and the loan received should be taxed as deemed dividend under Section 2(22)(e). The AO cited the Hon'ble Bombay High Court's decision in Seksaria Biswan Sugar Factory Ltd. vs CIT and the Hon'ble Kerala High Court's decision in CIT vs P.V. John to support his stance.The assessee contended that the loan was taken in the ordinary course of business and that M/s. Sun Polytex (P) Ltd. was engaged in the business of financing as per its Memorandum of Association, which empowers the company to lend money. The CIT(A) accepted the assessee's argument, observing that M/s. Sun Polytex (P) Ltd. was engaged in money lending to associated concerns on interest out of unsecured loans and not from accumulated profits. The CIT(A) concluded that the provisions of Section 2(22)(e) were not applicable to the inter-corporate deposits given by M/s. Sun Polytex (P) Ltd. to the assessee.Upon appeal, the Tribunal analyzed the balance sheet and profit and loss account of M/s. Sun Polytex (P) Ltd. and found that the interest income was not a substantial part of the company's income. The Tribunal held that the AO was justified in treating the loan of Rs. 55.00 lacs as deemed dividend in the hands of the assessee for the assessment year 2006-07. For the assessment year 2007-08, the Tribunal restored the issue to the AO to ascertain whether the advance during the year exceeded the closing balance of the previous year. If it did, the amount should be treated as deemed dividend; otherwise, no addition should be made.2. Deletion of Addition Made under Section 36(1)(va) read with Section 2(24)(x) of the Income Tax Act for the Assessment Year 2007-08:The Revenue also contested the deletion of an addition of Rs. 5,710/- made by the AO under Section 36(1)(va) read with Section 2(24)(x) of the Income Tax Act. The CIT(A) had deleted this addition, and the Tribunal upheld the CIT(A)'s decision, citing the decisions in CIT vs AIMIL Ltd. & Others and CIT vs Vinay Cement Ltd., which held that employees' contributions paid before the due date of filing the return are allowable under Section 43B of the Act.Conclusion:The Tribunal allowed the Revenue's appeal for the assessment year 2006-07, treating the loan of Rs. 55.00 lacs as deemed dividend. For the assessment year 2007-08, the Tribunal partly allowed the Revenue's appeal, restoring the issue of deemed dividend to the AO for further verification. The Tribunal upheld the CIT(A)'s deletion of the addition of Rs. 5,710/- under Section 36(1)(va) read with Section 2(24)(x) for the assessment year 2007-08.