2022 (7) TMI 277 - AT - Income Tax

Tribunal overturns CIT(A) decision, directs deletion of addition under IT Act Section 2(22)(e)

Shreerang Prakash Chikhalikar Versus ITO – 1 (3) (2), Mumbai

The Tribunal allowed the appeal, overturning the CIT(A)'s decision and directing the Assessing Officer to delete the addition made under Section 2(22)(e) ... Deemed dividend addition u/s 2(22)(e) - substantial shareholding in the company - As submitted assessee has advanced the money on interest to the company and there is a running current account between the company and the assessee - HELD THAT:- We on perusal of the notes to accounts & significant accounting policies of the Company find that at note 1 (F) disclosure required as per Accounting Standard -18 of ICAI on “Related Party Disclosure” the assessee is part of Key Management Personal, receives salary as Director of the Company, Interest on loan, and the Company has taken Loan and the company has repaid loan - The Tax Audit Report FORM NO 3CA u/sec44AB of the Act at S.no.31&32 column confirms the loan transactions. Prima facie, considering the evidences and disclosures in the financial statements, the assessee in wholly involved with the business operations of the company in the capacity as a director and drawing the salary. The assessee is making Loan transactions with the company in regular/ ordinary course of business, therefore the provisions of Sec. 2(22)(e) of the Act cannot be applied. The Assessing officer has overlooked the factual aspects of regular business transactions and the Audited financial statements. We do not find merits in the addition sustained by the CIT(A). Accordingly, we set aside the order of the CIT(A) and direct the Assessing officer to delete the addition and allow grounds of appeal in favour of the assessee. Issues:1. Addition made u/s. 2(22)(e) of the IT Act as deemed dividend2. Rejection of submissions regarding Section 2(22)(e) provisions3. Non-consideration of detailed submissions supported by accounts4. Dispute over the applicability of Section 2(22)(e) due to company's debt to the appellant5. Interpretation of accumulated profit under Explanation 2 to Section 226. Request to restrict addition u/s. 2(22)(e) to appellant's shareholding percentageAnalysis:Issue 1 - Addition u/s. 2(22)(e) as deemed dividend:The appellant challenged the addition of Rs.70,41,658 under Section 2(22)(e) of the IT Act. The Assessing Officer (A.O) found that the appellant had advanced money to a company in which they held a share. Despite explanations provided, the A.O invoked the provisions of deemed dividend. The CIT(A) upheld the A.O's decision. However, the Tribunal disagreed, noting that the transactions were part of the appellant's regular business dealings with the company, supported by ledger accounts and financial statements. The Tribunal found no merit in the CIT(A)'s decision, directing the A.O to delete the addition.Issue 2 - Rejection of submissions on Section 2(22)(e):The appellant argued that the provisions of Section 2(22)(e) were not applicable due to the nature of transactions being in the ordinary course of business. The A.O and CIT(A) disagreed, leading to the appeal before the Tribunal. The Tribunal, after reviewing the ledger accounts and financial statements, concluded that the provisions of Section 2(22)(e) did not apply, as the transactions were regular business dealings.Issue 3 - Non-consideration of detailed submissions:The appellant contended that the CIT(A) failed to consider the detailed submissions supported by accounts. The Tribunal observed that the appellant had provided comprehensive information and evidence, which the A.O and CIT(A) had overlooked. The Tribunal, upon reviewing the submissions, found in favor of the appellant.Issue 4 - Dispute over Section 2(22)(e) applicability due to company's debt:The appellant argued that the company's debt to them should exempt them from the provisions of Section 2(22)(e). The A.O, however, invoked the provisions based on the company's financial transactions with the appellant. The Tribunal, after analyzing the nature of the transactions, ruled in favor of the appellant, emphasizing the regularity and business context of the dealings.Issue 5 - Interpretation of accumulated profit under Explanation 2 to Section 22:The appellant raised concerns regarding the interpretation of accumulated profit under Explanation 2 to Section 22. The Tribunal, after examining the financial records and submissions, determined that the provisions of Section 2(22)(e) did not apply, as the transactions were part of the appellant's routine business operations.Issue 6 - Request to restrict addition u/s. 2(22)(e) to appellant's shareholding percentage:The appellant requested the addition u/s. 2(22)(e) to be limited to their shareholding percentage in the company. The Tribunal, after considering the appellant's arguments and evidence, directed the A.O to delete the addition, ruling in favor of the appellant.In conclusion, the Tribunal allowed the appeal filed by the appellant, setting aside the CIT(A)'s decision and directing the A.O to delete the addition made under Section 2(22)(e) of the IT Act.