2019 (9) TMI 370 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on deemed dividend & unaccounted sales, dismisses Revenue's appeal

Dy. CIT-2 Kanpur Versus Shri Krishna Mohan Agarwal

The Tribunal upheld the CIT(A)'s decision to delete the addition of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961, as the ... Deemed dividend as per Section 2(22)(e) - determination of substantial interest / voting rights in the company - clubbing of the shares held by the individual and shares held by the HUF through its Karta - clubbing of the shares held by the partner in his individual capacity and shares held by the partnership firm - CIT(A) deleted the addition, holding that the intention behind enacting the provisions of Section 2(22) (e) of the Act is that closely held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits, would not distribute such profit as dividend - HELD THAT:- As decided in NATIONAL TRAVEL SERVICES [2011 (7) TMI 288 - DELHI HIGH COURT] Assessing Officer’s contention that for purposes of applicability of section 2(22)(e) shareholding of individual & HUF can be clubbed is not valid and therefore this stand cannot be upheld. The primary condition of 10% beneficial shareholding of Mr. K.M Aggarwal is not established the remaining amount/ part of the addition becomes an exercise in futility because nothing can be added under section 2(22)(e). Person both as registered and beneficial owner, he is not covered by the provisions of section 2(22)(e). Addition made is deleted on this ground as not sustainable. - Decided against revenue Unaccounted sales - unaccounted purchase by the assessee-company; and that similarly, the same amount of difference was found as unexplained sales - HELD THAT:- As observed by the CIT(A), it is a settled accounting practice that in a customer's account, the amount of sale is debited inclusive of the amount of VAT & Excise. However, for purchase, the customer’s account is the net of excise & VAT, as the aforesaid taxes are available to the customer as Cenvat/ Input Vat against Excise duty payable/output Vat payable. Through the reconciled account statements filed befoe the ld. CIT(A), both in the books of SCPL and M/s Synthetic Silica Products & M/s Chhavi Microfine together with Tax Audit report of SCPL, the assessee established that there were no difference in the books of the two accounts. Therefore, we find that the ld. CIT(A) has decided the issue in correct perspective and no interference is called for in his order on this issue. Accordingly, ground of the Revenue is rejected. Addition on account of interest expenses on unsecured loans - HELD THAT:- CIT(A) has decided the issue, placing reliance on various case laws and partly sustained the addition made by the Assessing Officer. No cogent material or case law was brought to our notice by the D.R., contrary to that brought on record by the ld. CIT(A). We, therefore, confirm the order of the CIT(A) on this issue and reject ground taken by the Revenue. Issues Involved:1. Deletion of addition on account of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.2. Voting power and shareholding consideration of Shri K.M. Agarwal in individual and HUF capacity.3. Deletion of addition on account of unaccounted sales.4. Deletion of disallowance on account of interest expenses on unsecured loans.Issue-wise Detailed Analysis:1. Deletion of Addition on Account of Deemed Dividend under Section 2(22)(e):The Revenue challenged the deletion of Rs. 10,45,07,000/- added as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) had clubbed the shareholding of Shri K.M. Agarwal in individual capacity (8.84%) with his shareholding as Karta of HUF (9.54%), concluding that the combined shareholding exceeded the 10% threshold required to invoke Section 2(22)(e). The AO treated the loan given by M/s Sumit Chemicals Pvt. Ltd. to Shri K.M. Agarwal as deemed dividend. However, the CIT(A) deleted the addition, stating that the intention behind Section 2(22)(e) is to tax dividends in the hands of shareholders and that the shareholder must have a 10% voting right and be a registered and beneficial owner of shares. The CIT(A) concluded that the shareholding of K.M. Agarwal and K.M. Agarwal HUF cannot be clubbed, as individually, the shareholding was below 10% in both cases. The Tribunal upheld the CIT(A)'s decision, finding no error and confirming that the primary condition of 10% beneficial shareholding was not met.2. Voting Power and Shareholding Consideration of Shri K.M. Agarwal:The Revenue argued that the CIT(A) erred by not considering the correct voting power of Shri K.M. Agarwal as a registered shareholder and beneficial owner of shares in both individual and HUF capacities. The AO had clubbed the shareholding of K.M. Agarwal (individual) and K.M. Agarwal (HUF), concluding that the combined shareholding exceeded 10%, thus invoking Section 2(22)(e). However, the CIT(A) held that the shareholding of K.M. Agarwal and K.M. Agarwal HUF cannot be taken together for the purpose of Section 2(22)(e), as the Karta is not the beneficial owner of the shares held by HUF. The Tribunal upheld this view, citing the Delhi High Court decision in 'CIT vs. National Travel Service,' which emphasized that for Section 2(22)(e) to apply, the shareholder must be both a registered and beneficial owner of shares.3. Deletion of Addition on Account of Unaccounted Sales:The AO added Rs. 1,04,86,510/- as unaccounted sales based on discrepancies between the sales reported in the audit report and the ledgers. The AO applied a gross profit rate of 16.25% to the difference, treating it as concealed income. The CIT(A) deleted the addition, observing that the difference was due to VAT and excise duties, which are accounted for differently in sales and purchase ledgers. The CIT(A) found that the reconciled account statements established no difference in the books of the two accounts. The Tribunal upheld the CIT(A)'s decision, confirming that the reconciliation provided by the assessee was satisfactory and no addition was warranted.4. Deletion of Disallowance on Account of Interest Expenses on Unsecured Loans:The AO disallowed Rs. 49,96,712/- of interest expenses on unsecured loans, arguing that the assessee had invested Rs. 50 lakhs out of balance in his Savings Bank account, which was not used for business purposes. The CIT(A) partly sustained the addition, allowing the interest expenses as per Section 36(1)(iii) of the Act, which requires that the borrowed funds be used for business purposes. The CIT(A) concluded that the assessee failed to prove that the borrowed funds were utilized for business purposes. The Tribunal upheld the CIT(A)'s decision, finding no contrary material or case law presented by the Revenue to challenge the CIT(A)'s findings.Conclusion:The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s decisions on all issues. The additions on account of deemed dividend, unaccounted sales, and disallowance of interest expenses were deleted, and the assessee's appeal was allowed.