2014 (2) TMI 425 - AT - Income Tax

Assessee's Appeal Partly Allowed: Deemed Dividend Upheld, Deduction Remitted

Girishbhai M Patel Versus Dy CIT, Mehsana Circle, Mehsana

The Tribunal dismissed the first ground of the Assessee, holding that the amount received from the company should be considered as deemed dividend under ... Addition made u/s 2(22)(e) of the Act – Deemed dividend - Held that:- Inspite of the request of the Assessee, the company was unable to release the property from the mortgage - the advance given was not a gratuitous advance to the shareholder but was given to protect the interest of the Company and therefore the advance was held not to be in the nature of deemed dividend – Relying upon P. Sarada Vs CIT [1997 (12) TMI 1 - SUPREME Court] - The assessee must be deemed to have received dividends on the dates on which she withdrew the aforesaid amounts of money from the company - The loan or advance taken from the company may have been ultimately repaid or adjusted but that will not alter the fact that the assessee, in the eye of law, had received dividend from the company during the relevant accounting period - the amount received by the Assessee will have to be considered as deemed dividend and therefore we find no infirmity in the order of A.O. and CIT(A) - Decided against Assessee. Denial in deduction of Interest – Interest paid on borrowings – Repayment of housing loan – Held that:- There are no details of the parties from whom the Assessee had borrowed funds and the interest paid to him - there is no certificate of Bank certifying the repayment of loan and closure of the bank loan account of Assessee – the Assessee has not submitted any evidence to support that the interest payment was allowed while making assessments in past and in subsequent years – the issue needs to be re-examined at the end of AO – thus, the matter remitted back to the AO for fresh adjudication – Decided partly in favour of Assessee. Issues Involved:1. Addition of Rs. 21,71,160/- as deemed dividend under Section 2(22)(e) of the Income Tax Act.2. Denial of deduction of interest paid on borrowings used for repayment of housing loan amounting to Rs. 1,13,176/- while computing 'Income from House Property'.Issue-wise Detailed Analysis:1. Addition of Rs. 21,71,160/- as Deemed Dividend under Section 2(22)(e) of the Income Tax Act:The Assessee, a director holding more than 10% of the voting power in B. Patel Infrastructure Pvt. Ltd., received a loan of Rs. 21,71,160/- from the company, which had accumulated reserves. The Assessing Officer (A.O.) treated this loan as deemed dividend under Section 2(22)(e) of the Income Tax Act, as the payment was made by a private company to a person holding not less than 10% of the voting power.The Assessee argued that the amount was paid for business considerations, including providing a personal guarantee and securing credit facilities for the company. However, the A.O. did not accept this explanation and considered the amount as deemed dividend. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the A.O.'s decision, stating that Section 2(22)(e) needs to be interpreted strictly and that the advance given to the Assessee retained the character of an advance.Upon appeal, the Tribunal considered the Assessee's reliance on various case laws, including CIT vs. Rajkumar, CIT vs. Creative Dyeing and Printing Pvt. Ltd., and Pradip Kumar Malhotra vs. CIT. However, the Tribunal found these cases distinguishable from the present case. The Tribunal referred to the Supreme Court decision in P. Sarada vs. CIT, which held that the legal fiction of deemed dividend applies as soon as the monies are paid, regardless of repayment or adjustment later.The Tribunal concluded that the amount received by the Assessee must be considered as deemed dividend, affirming the decisions of the A.O. and CIT(A). Thus, this ground of the Assessee was dismissed.2. Denial of Deduction of Interest Paid on Borrowings Used for Repayment of Housing Loan:During the assessment proceedings, the A.O. noticed that the Assessee claimed a deduction for interest on funds borrowed for the construction/repayment of a housing loan. The A.O. denied the claim, stating that the funds were borrowed for business purposes, not for housing loan repayment.The CIT(A) upheld the A.O.'s decision, noting that the Assessee failed to prove the substitution of the bank loan with private funds. The CIT(A) emphasized that unless it is specifically shown that private funds replaced the bank loan, the claim for interest deduction cannot be accepted.Upon appeal, the Assessee argued that the housing loan from Visnagar Nagrik Bank was repaid in FY 2002-03 by raising funds from outside parties and that the interest deduction was allowed in earlier years. However, the Tribunal noted the lack of evidence, such as details of the parties from whom funds were borrowed, interest payments, and bank certificates confirming loan repayment.The Tribunal decided to remit the issue back to the A.O. for re-examination, allowing the Assessee to submit necessary evidence. The A.O. was directed to grant adequate opportunity for hearing and decide the issue afresh as per law. Thus, this ground of the Assessee was allowed for statistical purposes.Conclusion:The appeal of the Assessee was partly allowed for statistical purposes, with the first ground dismissed and the second ground remitted back to the A.O. for re-examination. The order was pronounced in Open Court on 07-02-2014.