2016 (12) TMI 1411 - AT - Income Tax

Tribunal quashes order under Income Tax Act, transaction deemed trade advance

Goldjyoti Polymers Versus CIT, Valsad

The Tribunal allowed the appeal, quashing the order under Section 263 of the Income Tax Act, as the Assessing Officer had conducted thorough enquiries and ... Revision u/s 263 - Deemed dividend addition u/s.2(22)(e) - Held that:- The issue raised by ld. CIT in his notice u/s 263 of the Act has been adequately enquired and thoroughly examined by ld. Assessing Officer during the course of assessment proceedings and he has taken one of the legally possible views as per judicial pronouncements available at that particular point of time and has framed the assessment order by not invoking the provisions of section 2(22)(e) of the Act on the amount of ₹ 1.25 crores received by assessee from M/s Canon Lamination Pvt. Ltd. for the very reason that assessee firm was not registered beneficial shareholder of Canon Lamination Pvt. Ltd. and also for the reason that assessee was having regular current account transactions round the year for making sales to M/s Canon Lamination Pvt. Ltd. and impugned amount of ₹ 1.25 crores was accepted in the nature of trade advance by ld. Assessing Officer. Therefore, we are of the view that order of ld. CIT passed u/s 263 of the Act is invalid and liable to quashed and we restore the assessment order passed u/s 143(3) of the Act on 28.3.2013. - Decided in favour of assessee Issues Involved:1. Validity of the order under Section 263 of the Income Tax Act, 1961.2. Applicability of Section 2(22)(e) of the Income Tax Act, 1961 to the transaction of Rs. 1.25 crores received from M/s Canon Lamination Private Ltd.Detailed Analysis:1. Validity of the Order under Section 263 of the Income Tax Act, 1961:The primary issue is whether the Commissioner of Income Tax (CIT) was correct in invoking Section 263, which allows for the revision of an order if it is considered erroneous and prejudicial to the interests of the revenue.- Arguments by the Assessee: The assessee argued that the original assessment under Section 143(3) was completed after thorough verification and examination of the facts, including the transaction of Rs. 1.25 crores. The assessee contended that the CIT's invocation of Section 263 was invalid because the Assessing Officer (AO) had already conducted sufficient enquiry. The assessee cited several judicial pronouncements, including Malabar Industrial Co. v. CIT, to support their claim that an order cannot be revised merely because the CIT holds a different opinion.- Arguments by the Department: The Department argued that the AO did not properly examine the nature of the Rs. 1.25 crores transaction, which was deemed to be a loan and thus should be considered as deemed dividend under Section 2(22)(e). The CIT held that the AO's failure to conduct a specific enquiry into this transaction rendered the original order erroneous and prejudicial to the interests of the revenue.- Tribunal’s Findings: The Tribunal observed that the AO had indeed made specific enquiries regarding the transaction during the original assessment proceedings. The Tribunal noted that the AO had raised relevant queries, and the assessee had provided detailed replies, including evidence that the transaction was a trade advance and not a loan. The Tribunal emphasized that the AO had taken one of the possible views based on judicial precedents and thus the order was neither erroneous nor prejudicial to the interests of the revenue.- Conclusion: The Tribunal concluded that the CIT had wrongly invoked Section 263, as the AO had conducted adequate enquiries and applied his mind to the issue. Therefore, the order under Section 263 was quashed, and the original assessment order was restored.2. Applicability of Section 2(22)(e) of the Income Tax Act, 1961:The second issue was whether the transaction of Rs. 1.25 crores received from M/s Canon Lamination Private Ltd. should be treated as deemed dividend under Section 2(22)(e).- Arguments by the Assessee: The assessee argued that it was not a shareholder of M/s Canon Lamination Private Ltd., and thus the provisions of Section 2(22)(e) were not applicable. The assessee also contended that the transaction was a trade advance for regular business dealings and not a loan.- Arguments by the Department: The Department maintained that the partners of the assessee firm were significant shareholders in M/s Canon Lamination Private Ltd., and thus the provisions of Section 2(22)(e) were applicable. The CIT observed that the transaction was recorded as a loan in the audit report and interest was paid on it, indicating its nature as a loan rather than a trade advance.- Tribunal’s Findings: The Tribunal referred to several judicial pronouncements, including the Supreme Court’s decision in Rameshwarlal Sanwarmal v. CIT, which held that deemed dividend provisions apply only to registered shareholders. The Tribunal noted that the assessee firm was not a registered shareholder of M/s Canon Lamination Private Ltd. Additionally, the Tribunal found that the transaction was part of regular business dealings and was treated as a trade advance in the assessee’s books.- Conclusion: The Tribunal held that the provisions of Section 2(22)(e) were not applicable to the assessee, as it was not a shareholder of M/s Canon Lamination Private Ltd. and the transaction was a trade advance. Thus, the amount of Rs. 1.25 crores could not be treated as deemed dividend.Final Order:The Tribunal allowed the appeal of the assessee, quashing the order under Section 263 and restoring the original assessment order. The Tribunal concluded that the AO had conducted sufficient enquiry and the transaction in question did not fall under the purview of deemed dividend as per Section 2(22)(e).