2008 (4) TMI 331 - AT - Income Tax

Tribunal Orders Recalculation of Deemed Dividend, Finds Explanation to Section 73 Inapplicable, and Allows Interest-Free Advances.

The Tribunal partly allowed the appeal, directing the AO to recompute the deemed dividend under Section 2(22)(e) by considering only the net amount of ... Credit Balance of Current opened account mutually by the party - deemed dividend u/s 2(22)(e) or not? - Interpolate the entries of the trading account in the current account u/s 145 - Applicability of Explanation to section 73 - single transaction of purchase of shares 'constituted a separate, independent business' or not? - interest-free advances. Credit Balance of Current opened account mutually by the party - deemed dividend u/s 2(22)(e)? - HELD THAT:- It is seen that any payment made by a company in which public are not substantially interested, out of its accumulated profits, to a shareholder or to any concern in which such a shareholder is a member or partner and has substantial interest, by way of loan or advance is deemed dividend income of the recipient. In this case, undisputedly assessee is the recipient of the loan from M/s. PIPL. It is also not disputed that M/s. PIPL has accumulated profits. The assessee is not the shareholder of M/s. PIPL, but it is the concern in which the shareholder of M/s. PIPL, Mr. Gaurang Gandhi holds more than 20 per cent of equity share capital. Therefore, the provisions of section 2(22)(e) are very much applicable. Whether the Assessing Officer was empowered to interpolate the entries of the trading account in the current account? - Section 145 entrusts the Assessing Officer not only with the right but also a duty to consider whether or not the books disclose the true state of accounts and whether the correct income can be deduced therefrom and to proceed according to his judgment on this question. The Hon'ble Supreme Court in the case of CIT v. British Paints India Ltd.[1990 (12) TMI 2 - SUPREME COURT], has held that section 145 confers sufficient power upon the officer-nay it imposes a duty upon him-to make such computation in such manner as he determines for deducing the correct profits and gains. In view of the same, we uphold the action of the Assessing Officer in treating the entries of the trading account as entries of financial transaction account after considering the nature of transactions. In the case on hand the assessee had received payment in excess of the regular transactions with PIPL in order to discharge its liabilities and therefore the transactions would fall within the purview of section 2(22)(e) of the Income-tax Act. We are in agreement with the learned counsel for the assessee that only the net amount and on the days when the credit is in excess has to be considered for the purpose of deemed dividend u/s 2(22)(e) and only that part of the amount which has been paid by PIPL to discharge the liability of the assessee company in excess of what it is due to pay to the assessee company for its regular business transactions, is to be considered as deemed dividend under section 2(22)(e) of the Act. We, accordingly, direct the Assessing Officer to recompute the deemed dividend under section 2(22)(e). The assessee's ground of appeal is therefore partly allowed. Single transaction of purchase of shares 'constituted a separate, independent business'? - Having gone through the material on record as well as the decision of the Tribunal in the assessee's own case for the AY 2002-03 cited supra, we find that the Tribunal has considered the fact that the assessee has only a single transaction of purchase of shares without any further trading activity at all and, therefore, the provisions of Explanation to section 73 do not apply. We find that the facts and circumstances for this year are exactly the same and the decision of the co-ordinate Bench in the assessee's own case cited supra is in favour of the assessee.Thus, this ground of appeal of the assessee is allowed. Interest-free advance - We find that both the Assessing Officer as well as the CIT(A) have held that the interest paid was towards the loan taken for purchase of shares. As long as the nexus between the interest-bearing funds and the interest-free advances is not established, the disallowance cannot be made. We find that this issue is covered by the decision in the case of Bombay Samachar Ltd. [1969 (6) TMI 2 - BOMBAY HIGH COURT] and the assessee is entitled to succeed. This ground of appeal is, therefore, allowed. In the result, assessee's appeal is partly allowed. Issues Involved:1. Confirmation of the order under Section 143(3) assessing total income and determining speculation loss.2. Addition of deemed dividend under Section 2(22)(e).3. Applicability of Explanation to Section 73 and allocation of interest paid to speculation business.4. Addition of interest on interest-free advances.Detailed Analysis:Issue 1: Confirmation of Order under Section 143(3)The assessee challenged the confirmation of the order passed under Section 143(3) of the Income Tax Act, which assessed the total income at Rs. 1,19,13,449 and determined a speculation loss of Rs. 1,27,26,924. The Tribunal did not specifically address this issue in isolation but discussed related matters in the context of other issues raised.Issue 2: Addition of Deemed Dividend under Section 2(22)(e)The core issue was whether the provisions of Section 2(22)(e) applied to the assessee. The assessee received a loan from M/s Pioneer Intermediaries (P) Ltd. (PIPL), and the AO treated this amount as deemed dividend, as the shareholder held significant shares in both the assessee company and PIPL. The Tribunal upheld the AO's decision, stating that the provisions of Section 2(22)(e) are applicable since the loan was given to a concern in which the shareholder had a substantial interest. However, the Tribunal directed the AO to recompute the deemed dividend considering only the net amount of advances on the days when the credit was in excess of what was due for regular business transactions.Issue 3: Applicability of Explanation to Section 73The assessee argued that the Explanation to Section 73, which treats certain losses as speculation losses, should not apply since there was no trading activity during the year. The AO had allocated the entire bank interest paid for the loan taken to purchase shares as speculation loss. The Tribunal referred to its earlier decision in the assessee's own case for the assessment year 2002-03, where it was held that the Explanation to Section 73 does not apply if there is no trading activity. Consequently, this ground of appeal was allowed in favor of the assessee.Issue 4: Addition of Interest on Interest-Free AdvancesThe AO disallowed interest expenses of Rs. 11,25,000 on the grounds that the assessee had given an interest-free advance of Rs. 75 lakhs to a related party while incurring interest expenses on borrowed funds. The Tribunal found that the interest paid was for loans taken to purchase shares, which were stock-in-trade, and there was no direct nexus between the interest-bearing funds and the interest-free advances. Citing the Bombay High Court decision in CIT vs. Bombay Samachar Ltd., the Tribunal allowed this ground of appeal in favor of the assessee, stating that the disallowance cannot be made without establishing the nexus.Conclusion:The Tribunal partly allowed the appeal, directing the AO to recompute the deemed dividend under Section 2(22)(e) and allowed the assessee's grounds regarding the applicability of Explanation to Section 73 and the addition of interest on interest-free advances.