2010 (2) TMI 804 - AT - Income Tax

Tribunal rules against revenue on deemed dividend, allows assessee's appeal on set off

The Tribunal dismissed the revenue's appeal regarding the deletion of an addition made under Section 2(22)(e) of the Income Tax Act, agreeing with the ... Addition u/s. 2(22)(e) on the basis that the lender companies and the assessee have common share holder having more than 20% of share holding in both doner and donee companies. - held that:- the present assessee company is not a registered shareholder in the companies, who had advanced the loan to the assessee company, the provisions of section 2(22)(e) cannot be applied. - decided in favour of Assessee. Loss incurred in earlier year and held by the AO as was speculative loss was of different nature than gain arising during the year without appreciating that in the facts of the appellant nature of loss as well as income was same and both had arisen on account of valuation of shares held as stock in trade. - held that:- the gain or profit arising to the assessee during the current year as a result of valuation of shares in respect of which the loss was determined in earlier years, is also to be treated as a speculation. decided in favour of Assessee but remand back to AO for Statistical Purpose. Issues Involved:1. Deletion of addition made under Section 2(22)(e) of the Income Tax Act.2. Set off of brought forward losses against current year's income.3. Applicability of Section 234B of the Income Tax Act for charging interest.Issue-wise Detailed Analysis:1. Deletion of Addition Made Under Section 2(22)(e):The revenue appealed against the deletion of an addition of Rs. 1,03,00,000/- made under Section 2(22)(e) of the Income Tax Act by the CIT(A). The Assessing Officer (AO) had treated loans taken by the assessee from various companies as deemed dividends under Section 2(22)(e), citing common shareholding. The CIT(A) deleted the addition, reasoning that the assessee company itself was not a shareholder in the lending companies, and thus, the condition for deemed dividend was not met. This view was supported by the Rajasthan High Court's decision in CIT vs. Hotel Hiltop and the Special Bench of ITAT in Bhaumik Colour Pvt. Ltd. The Tribunal upheld the CIT(A)'s decision, confirming that the provisions of Section 2(22)(e) could not be applied as the assessee was not a registered shareholder in the lending companies.2. Set Off of Brought Forward Losses Against Current Year's Income:The assessee appealed against the CIT(A)'s decision not to allow the set off of brought forward losses from earlier years against the current year's income. The AO had rejected this set off, and the CIT(A) upheld the AO's decision, stating that the transactions in the current year were different from those in the earlier years. The CIT(A) cited the Calcutta High Court's decision in K.L. Jhunjhunwalla, which distinguished between income earned from holding shares and losses from speculative transactions. The Tribunal, however, found merit in the assessee's argument that both the losses and the income arose from the valuation of shares held as stock-in-trade. It relied on the ITAT Calcutta Bench's decision in ACIT vs. Sungrace Merchandise Pvt. Ltd., which allowed the set off of speculation losses against speculation profits irrespective of the nature of the transactions. The Tribunal restored the matter to the AO to verify whether the current year's profit from the valuation of shares was of the same nature as the earlier years' losses and directed the AO to allow the set off if the nature was consistent.3. Applicability of Section 234B for Charging Interest:The assessee also contested the CIT(A)'s decision on the automatic applicability of Section 234B for charging interest. However, the Tribunal's detailed analysis on this issue is not explicitly mentioned in the provided judgment text.Conclusion:The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal for statistical purposes, directing the AO to verify the nature of the transactions and allow the set off of brought forward losses if consistent with the earlier years' transactions. The decision was pronounced in the open court on 19th February 2010.