2011 (6) TMI 387 - AT - Income Tax

Tribunal rules in favor of assessee on deemed dividends & consistency in assessment years

Nirmala Realtors (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle 4(1), Agra

Nirmala Realtors (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle 4(1), Agra - TMI Issues Involved:1. Applicability of Section 2(22)(e) of the Income-tax Act regarding deemed dividend.2. Calculation of demand and tax.3. Addition under Section 68 of the Income-tax Act.Issue-wise Detailed Analysis:1. Applicability of Section 2(22)(e) of the Income-tax Act regarding deemed dividend:The primary issue in all three appeals is whether the amounts paid by M/s. MPPL to various parties can be treated as deemed dividends under Section 2(22)(e) of the Income-tax Act.Assessment Year 2003-04 and 2004-05:The Assessing Officer (AO) treated Rs. 72,00,000 and Rs. 17,00,000 paid by M/s. MPPL to Smt. Savita Bhasker as deemed dividends. The AO's reasoning was that these payments were made on behalf of the assessee company, which had entered into an agreement with Shri Sanjeev Bhasker for a project. The CIT(A) upheld the AO's decision, stating that the provisions of Section 2(22)(e) were applicable as the payments were made on behalf of the assessee, and the shareholders of M/s. MPPL had substantial interest in the assessee company.Assessment Year 2006-07:For the assessment year 2006-07, the AO treated Rs. 57,01,406 paid by M/s. MPPL on behalf of the assessee as deemed dividends. The CIT(A) confirmed this addition.Tribunal's Decision:The Tribunal found that the assessee company was not a registered shareholder of M/s. MPPL. Following the Supreme Court's rulings in C.P. Sarathy Mudaliar and Rameshwarlal Sanwarmal, and the Special Bench decision in Bhaumik Colour (P.) Ltd., it was held that deemed dividends under Section 2(22)(e) could only be taxed in the hands of the registered shareholder. The Tribunal also referred to the Rajasthan High Court's decision in Hotel Hilltop, which supported this interpretation. Consequently, the Tribunal deleted the additions made by the AO under Section 2(22)(e) for all the assessment years in question.2. Calculation of demand and tax:The assessee contended that the calculation of demand and tax was incorrect. However, since the primary issue of deemed dividends was resolved in favor of the assessee, this ground became redundant and did not require separate adjudication.3. Addition under Section 68 of the Income-tax Act:For the assessment year 2006-07, the AO made an addition of Rs. 2,85,470 under Section 68, treating the sale proceeds from agricultural produce as unexplained cash credits. The CIT(A) upheld this addition.Tribunal's Decision:The Tribunal noted that the assessee had consistently shown agricultural income in previous years, which had been accepted by the Revenue. The agricultural income for the current year was in line with the income shown in previous years. Applying the rule of consistency, the Tribunal deleted the addition of Rs. 2,85,470 under Section 68.Conclusion:The Tribunal allowed the appeals for the assessment years 2003-04, 2004-05, and 2006-07, holding that the provisions of Section 2(22)(e) regarding deemed dividends were not applicable to the assessee company as it was not a registered shareholder of M/s. MPPL. The Tribunal also deleted the addition under Section 68 for the assessment year 2006-07, applying the rule of consistency.