Tribunal rules in favor of assessee on deemed dividend & unexplained investment additions

The Tribunal upheld the deletion of the protective addition of deemed dividend in the hands of the assessee, as the transactions were recognized as business transactions and not loans or advances under Section 2(22)(e) of the Income Tax Act. Additionally, the Tribunal directed the Assessing Officer to delete the protective addition of unexplained investment in the hands of the assessee following settlement by another shareholder under the Direct Taxes Vivad Se Vishwas Act. The cross-objection challenging the validity of search proceedings and deletion of deemed dividend was dismissed as not pressed.

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Issues Involved:
1. Deemed dividend assessed under Section 2(22)(e) of the Income Tax Act.
2. Unexplained investment assessed protectively.
3. Validity of search proceedings and the deletion of the addition of deemed dividend.

Issue-Wise Detailed Analysis:

1. Deemed Dividend Assessed under Section 2(22)(e) of the Income Tax Act:

The first issue pertains to the addition made under Section 2(22)(e) of the Income Tax Act as deemed dividend. The Assessing Officer (A.O.) noticed that the assessee, being a substantial shareholder in both M/s. Brindavan Beverages Pvt. Ltd. (BBPL) and M/s. Cauveri Aqua Pvt. Ltd. (CAPL), had received a loan of Rs. 1.00 crore from CAPL. The A.O. deemed this loan as "deemed dividend" under Section 2(22)(e) of the Act, as the loan was given to a concern in which the assessee had a substantial interest. The assessee contended that the funds were provided for business purposes, specifically for joint investments in property development projects with Embassy Group. However, the A.O. rejected this explanation, stating that CAPL should have directly given money to Embassy Group rather than BBPL. Consequently, the A.O. assessed the loan amount as deemed dividend, but on a protective basis since it was already assessed in the hands of another shareholder, Shri Prakash Ladhani.

The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the explanations provided by Shri Prakash Ladhani in his appeal, recognizing the transactions as business transactions and deleting the addition of Rs. 1.00 crore made under Section 2(22)(e). The Tribunal upheld this decision, noting that the transactions between CAPL and BBPL were indeed business transactions, supported by an agreement dated 14.11.2005 and assignment agreements dated 28.03.2015. The Tribunal confirmed that these transactions were not loans or advances as contemplated under Section 2(22)(e) and thus upheld the deletion of the protective addition in the hands of the assessee.

2. Unexplained Investment Assessed Protectively:

The second issue involved the addition of Rs. 53,69,040/- as unexplained investment assessed on a protective basis in the hands of the assessee. The substantive addition was made in the hands of Shri Prakash Ladhani and confirmed by the CIT(A). The CIT(A) subsequently deleted the protective addition in the hands of the assessee. The Tribunal noted that Shri Prakash Ladhani had opted to settle the issue under the Direct Taxes Vivad Se Vishwas Act, accepting the additions made on a substantive basis. Consequently, the Tribunal directed the A.O. to delete the protective addition in the hands of the assessee upon furnishing the final certificate (Form No. 5) issued to Shri Prakash Ladhani under the settlement scheme.

3. Validity of Search Proceedings and Deletion of Deemed Dividend:

In the cross-objection, the assessee challenged the validity of the search proceedings and contended that the CIT(A) should have deleted the addition of deemed dividend under Section 2(22)(e) on the grounds that the provisions would fail in the facts and circumstances of the case. However, this specific issue was not pressed by the assessee during the proceedings and hence was dismissed as not pressed.

Conclusion:

The Tribunal dismissed the appeal of the revenue and upheld the deletion of the protective addition of deemed dividend in the hands of the assessee. The Tribunal also directed the A.O. to delete the protective addition of unexplained investment upon the settlement of the dispute by Shri Prakash Ladhani under the Direct Taxes Vivad Se Vishwas Act. The cross-objection filed by the assessee was dismissed as not pressed. The order was pronounced in the open court on 25th October 2021.

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