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2008 (4) TMI 331 - ITAT BOMBAY-ECredit 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.
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