2021 (4) TMI 200 - AT - Income Tax

Tribunal rules on Revenue's appeal on deemed dividends vs. business transactions under Income Tax Act

The Tribunal dismissed the Revenue's appeal regarding the addition under Section 2(22)(e) of the Income Tax Act, emphasizing the distinction between ... Deemed dividend under section 2(22)(e) - business transaction excluding section 2(22)(e) - beneficial interest/substantial interest for deeming - assessment under section 153C r.w.s. 153A - validity of search and initiation under section 132Deemed dividend under section 2(22)(e) - business transaction excluding section 2(22)(e) - beneficial interest/substantial interest for deeming - Whether the amount treated as deemed dividend under section 2(22)(e) in the hands of the assessee firm is exigible to tax or is a business transaction not attracting section 2(22)(e). - HELD THAT: - The Tribunal found that the assessee established the transaction to be a bona fide business transaction for purchase of property from FDITPL, supported by the ledger entries and payments made by the assessee for the property. The Tribunal accepted the contention that the assessee (M/s. Coastal Constructions) is not a shareholder of FDITPL and that the deeming fiction in section 2(22)(e) applies to shareholders or to concerns in which such shareholder is a member or partner and which are treated as receiving the benefit on behalf of the shareholder. Relying on the reasoning in the Karnataka High Court decision cited by the assessee, the Tribunal held that the provision cannot be extended to treat the assessee as a shareholder where it is not one, and that loans/advances to a non shareholder concern cannot be treated as deemed dividend merely because common persons have substantial interest; the fiction does not enlarge the concept of shareholder. Applying these principles to the facts and books of account, the Tribunal deleted the addition made under section 2(22)(e). [Paras 12, 13, 14, 15]Addition treated as deemed dividend under section 2(22)(e) deleted.Assessment under section 153C r.w.s. 153A - validity of search and initiation under section 132 - Validity of framing assessment under sections 143(3) r.w.s. 153A r.w.s. 153C in light of alleged illegal search and non compliance with mandatory conditions for invoking those provisions. - HELD THAT: - The assessee challenged the initiation and validity of proceedings under sections 153A/153C on the ground that the search was illegal and mandatory conditions for assuming jurisdiction were not satisfied. Although the CIT(A) had previously upheld the assumption of jurisdiction, the Tribunal observed that the assessee raised a specific ground before it challenging the framing of assessment under the said provisions. The Tribunal considered it appropriate to remit the matter to the file of the CIT(A) for fresh adjudication, directing the CIT(A) to examine the seized material, if any, and decide the validity of the proceedings in accordance with law after affording the assessee an opportunity of being heard. [Paras 16, 17, 18, 19]Issue remitted to the CIT (Appeals) for fresh adjudication after examination of seized material and opportunity to the assessee.Final Conclusion: Revenue's appeal dismissed; the addition under section 2(22)(e) deleted. The assessee's cross objection challenging the validity of assessments under sections 153A/153C is partly allowed in that the matter is remitted to the CIT (Appeals) for fresh consideration after examination of seized material and hearing. Issues Involved:1. Deletion of addition under Section 2(22)(e) of the Income Tax Act.2. Legality of assessment under Section 143(3) read with Sections 153A and 153C of the Income Tax Act.3. Validity of search and seizure under Section 132 of the Income Tax Act.4. Applicability of interest under Sections 234A and 234B of the Income Tax Act.Issue-wise Detailed Analysis:1. Deletion of Addition under Section 2(22)(e) of the Income Tax Act:The primary issue raised by the Revenue was the deletion of an addition of Rs. 4,14,57,934 made under Section 2(22)(e) of the Income Tax Act by the CIT (Appeals). The Assessing Officer had treated this amount as deemed dividend in the hands of the assessee firm, Coastal Construction, on the grounds that the funds were used to purchase property, which could have been distributed as dividends. The CIT (Appeals) deleted this addition, reasoning that the purpose of Section 2(22)(e) is to tax deemed dividends in the hands of shareholders, and Coastal Construction was not a shareholder of Fiza Developers & Inter Trade Pvt. Ltd. (FDITPL). The Tribunal upheld the CIT (Appeals)'s decision, noting that the transaction was a business transaction and not a loan or advance meant to be treated as deemed dividend. The Tribunal also referred to the Karnataka High Court's judgment in the case of CCIT-III v. Sarva Equity P. Ltd., which clarified that deemed dividends under Section 2(22)(e) apply only to loans or advances given to shareholders, not to business transactions.2. Legality of Assessment under Section 143(3) read with Sections 153A and 153C of the Income Tax Act:The assessee challenged the legality of the assessment made under Section 143(3) read with Sections 153A and 153C, arguing that the conditions to invoke jurisdiction under these sections were not met. The CIT (Appeals) upheld the validity of the assessment, stating that the Assessing Officer had assumed jurisdiction in accordance with the law. However, the Tribunal remitted this issue back to the CIT (Appeals) for fresh adjudication, instructing the CIT (Appeals) to examine the seized material and decide the matter in accordance with the law after providing the assessee an opportunity of being heard.3. Validity of Search and Seizure under Section 132 of the Income Tax Act:The assessee contended that the search initiated under Section 132 was illegal and ultra vires the provisions of Section 132(1)(a), (b), and (c) of the Act. The CIT (Appeals) dismissed this ground, stating that the Assessing Officer had assumed jurisdiction correctly. The Tribunal did not provide a separate analysis for this issue but implied its relevance by remitting the legality of the assessment issue back to the CIT (Appeals).4. Applicability of Interest under Sections 234A and 234B of the Income Tax Act:The assessee argued against the levy of interest under Sections 234A and 234B, stating that the period, rate, quantum, and method of calculation were incorrect. The Tribunal did not specifically address this issue in its final order, focusing instead on the primary issues of deemed dividend and the legality of the assessment.Conclusion:The Tribunal dismissed the Revenue's appeal regarding the addition under Section 2(22)(e) and remitted the issue of the legality of the assessment under Sections 153A and 153C back to the CIT (Appeals) for further examination. The Tribunal's decision emphasized the importance of distinguishing business transactions from loans or advances when applying Section 2(22)(e) and the necessity of proper jurisdictional compliance for assessments under Sections 153A and 153C.