2010 (3) TMI 323 - HC - Income Tax

Rs 32,00,000 treated as defalcation, not deemed dividend under s.2(22)(e); reassessed as business loss for assessee

Commissioner of Income-tax Versus Universal Medicare Private Limited

The HC upheld the Tribunal's view and reversed the AO's addition: the Rs. 32,00,000 transfer from the company was found to be defalcation, not a loan or ... Deemed dividend u/s 2(22)(e) - provision for leave encashment - No proof of payment furnished to the effect that the same was paid before the due date of filing the return u/s 139(1) - HELD THAT:- An amount of Rs. 32,00,000 was transferred from the bank account of CSPL, to the account of the assessee. V was the director of CSPL. He held over 10 % of the equity capital of CSPL and over 20% of the equity capital of the assessee. The Assessing officer, relied on the provisions of section 2(22)(e) and treated the amount of Rs. 35,00,000 as deemed dividend in the hands of the assessee and directed that the amount be added back to its total income. The assessee contended that one T vice president (Finance) had misappropriated large sums of money by opening bank accounts and the transaction by which an amount of Rs. 32,00,000 was transferred from CSPL was part of the misappropriation. The Assessing Officer came to the conclusion that the provisions of section 2(22)(e) were attracted the moment a loan or advance is made and the subsequent defalcation of funds was immaterial. The Tribunal reversed the order. - the Tribunal had found that as a matter of fact no loan or advance was granted to the assessee, since the amount in question had actually been defalcated and was not reflected in the book of account of the assessee. The fact that there was defalcation had been accepted since this amount was allowed as business loss during the course of assessment year 2006-07. Even assuming that it was a dividend, it would have to be taxed not in the hand of the assessee but in the hands of the shareholder. Issues:1. Deletion of addition of deemed dividend under section 2(22)(e)2. Taxation of provision for leave encashment3. Interpretation of section 2(22)(e) regarding deemed dividendAnalysis:1. Deletion of addition of deemed dividend under section 2(22)(e):The case involved an appeal by the Revenue under section 260A of the Income-tax Act, 1961, regarding the deletion of an addition of Rs. 35 lakhs treated as deemed dividend under section 2(22)(e). The Tribunal held that since the transaction was not reflected in the books of account, it cannot be treated as deemed dividend. The Assessing Officer treated the amount as deemed dividend, considering it a loan from a company to the assessee. However, the Tribunal reversed this decision, stating that the amount was part of a fraud and not reflected in the books. The Tribunal emphasized that even if deemed dividend, it should be taxed in the hands of the shareholder, not the assessee. The Court agreed with the Tribunal's interpretation, stating that the payment, if deemed dividend, should be taxed in the shareholder's hands, not the assessee's.2. Taxation of provision for leave encashment:The Tribunal directed the Assessing Officer to allow the provision for leave encashment, which was disallowed due to lack of proof of payment before the due date of filing the return. The issue was whether the Tribunal was justified in directing the allowance of the provision for leave encashment, considering the provisions of section 43B(f) of the Income-tax Act, 1961. The Tribunal relied on a judgment of the Calcutta High Court, which was pending in appeal before the Supreme Court. The Court noted the pending appeal and did not delve into the issue further, as it was sub judice.3. Interpretation of section 2(22)(e) regarding deemed dividend:Section 2(22)(e) of the Income-tax Act, 1961, defines the ambit of the expression 'dividend.' The provision covers payments by a company to a shareholder or a concern in which the shareholder has substantial interest. The Court analyzed the provision's language and emphasized that for the provision to apply, there must be an advance or loan made by the company. In this case, the Tribunal found no advance or loan as the amount was defalcated and not reflected in the books. The Court agreed with the Tribunal's interpretation that if deemed dividend, it should be taxed in the shareholder's hands. The Court highlighted that section 2(22)(e) broadens the definition of dividend but does not change the principle that dividend is taxed in the hands of the shareholder.In conclusion, the Court upheld the Tribunal's decision, stating that the first and second questions raised did not give rise to substantial questions of law. The judgment provided a detailed analysis of the issues involved, emphasizing the interpretation of section 2(22)(e) in determining the taxation of deemed dividend and the provision for leave encashment.