ITAT Decision on Deemed Dividend, Service Tax, and Sundry Balances

The ITAT upheld the deletion of the addition as deemed dividend under Section 2(22)(e) of the Income Tax Act, noting the assessee's shareholding was less than 10% when payments were received. Additionally, the ITAT confirmed the deletion of the addition on account of service tax receivable, as the service tax was not claimed as a deduction. However, the disallowance of sundry balances written off was upheld due to non-compliance with Section 36(2) requirements. The ITAT dismissed both the revenue's appeal and the assessee's cross-objection, affirming the CIT(A)'s decisions.

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Issues Involved:
1. Deletion of addition as deemed dividend.
2. Deletion of addition on account of service tax receivable.
3. Disallowance on account of sundry balances written off.

Detailed Analysis:

Issue 1: Deletion of Addition as Deemed Dividend
The revenue challenged the deletion of an addition of Rs. 1,26,34,049/- as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (A.O.) added this amount on the grounds that the assessee company received payments from Claris Lifesciences Ltd., where it held more than 10% shareholding. However, the assessee argued that its shareholding was less than 10% until 03.03.2006, and thus the provisions of Section 2(22)(e) were not applicable. The CIT(A) deleted the addition, and the ITAT upheld this decision, noting that the assessee's shareholding was indeed less than 10% when the payments were received. The ITAT relied on the judgment of the Hon'ble Delhi High Court in CIT vs Late C.R. Das, which held that if the shareholding is less than 10% at the time of receiving the amount, it cannot be considered deemed income under Section 2(22)(e).

Issue 2: Deletion of Addition on Account of Service Tax Receivable
The revenue contested the deletion of an addition of Rs. 45,90,000/- made on account of service tax receivable. The A.O. argued that as per Section 145A, service tax collected should be included in gross receipts and claimed as a deduction under Section 43B on a payment basis. The assessee contended that service tax was neither claimed as a deduction nor included in the profit and loss account, as it acted merely as an agent for the government. The CIT(A) deleted the addition, and the ITAT upheld this decision, referencing judgments from the Hon'ble Delhi High Court in CIT vs Nobles and Hewitt (I) Pvt. Ltd. and the Tribunal decision in ACIT vs Real Image Media Technologies (P) Ltd., which supported the assessee's position. The ITAT concluded that since the service tax was not claimed as a deduction, Section 43B was not applicable.

Issue 3: Disallowance on Account of Sundry Balances Written Off
The assessee challenged the disallowance of Rs. 4,15,798/- on account of sundry balances written off. The A.O. disallowed this amount, citing non-compliance with Section 36(2) of the Act, and the CIT(A) upheld this disallowance. The ITAT noted the Supreme Court judgment in TRF Ltd. vs CIT, which stated that it is not necessary for the assessee to establish that the debt has become bad; however, compliance with Section 36(2) is still required. The ITAT found no evidence that the amounts were considered income in the current or previous years, thus failing the Section 36(2) requirements. The ITAT also rejected the alternative claim for deduction as a business loss due to a lack of evidence showing the amounts as business advances. Consequently, the disallowance was upheld.

Conclusion:
The ITAT dismissed both the revenue's appeal and the assessee's cross-objection, upholding the CIT(A)'s decisions regarding deemed dividend and service tax receivable, while confirming the disallowance on account of sundry balances written off. The order was pronounced in the open court on 20.10.2011.

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