2016 (3) TMI 1202 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - loan taken by the assessee from M/s. Surya Business Pvt. Limited on interest - Held that - Addition made by the Assessing Officer and sustained by the ld. CIT(Appeals) under section 2(22)(e) on account of loan received by the assessee from M/s. Surya Business Pvt. Limited on which consideration in the form of interest was paid by the assessee to the benefit of the Company is not sustainable. We therefore delete the same. See Pradip Kumar Malhotra Versus Commissioner of Income-tax West Bengal-V 2011 (8) TMI 16 - CALCUTTA HIGH COURT as held that gratuitous loan or advance given by a Company to those classes of shareholders thus would come within the purview of section 2(22)(e) but not the cases where the loan or advance is given in return to an advantage conferred upon the Company by such shareholder. - Decided in favour of assessee Disallowance of travelling & conveyance telephone expenses and sales promotion expenses - Held that - the assessee has not been able to establish that proper record in the form of log book call register etc. is maintained by the assessee in order to show that all the expenses incurred under these three heads are wholly and exclusively for the purpose of assessee s business. Keeping in view this failure of the assessee and having regard to the nature of expenses claimed we find ourselves in agreement with the authorities below that the involvement of personal element in these expenses cannot be ruled out and since the disallowance made at 10% for such personal element in our opinion is quite fair and reasonable we find no justifiable reason to interfere with the same. - Decided against assessee

Summary

Issues Involved:
1. Addition on account of deemed dividend under section 2(22)(e) of the Income Tax Act.
2. Disallowance of expenses under the heads of travelling & conveyance, telephone expenses, and sales promotion expenses.

Issue-wise Detailed Analysis:

1. Addition on Account of Deemed Dividend under Section 2(22)(e):

The primary issue involved in the appeal was the addition made by the Assessing Officer (AO) and sustained by the Commissioner of Income Tax (Appeals) [CIT(A)] on account of deemed dividend under section 2(22)(e) of the Income Tax Act. The assessee, an individual, had received a loan of Rs. 64,55,800/- from M/s. Surya Business Pvt. Limited, a company in which the assessee held more than 10% of the equity shares. The AO added this loan amount to the assessee's total income as deemed dividend under section 2(22)(e), which was partly sustained by the CIT(A) to the extent of Rs. 49,01,812/-, corresponding to the accumulated profits of the company.

The CIT(A) observed that the conditions for invoking section 2(22)(e) were satisfied as the company was not substantially interested by the public, and the assessee held more than 10% of the voting power. The CIT(A) rejected the assessee's contention that the company was engaged in the business of money lending, noting that the company's primary business activities did not include substantial money lending. The CIT(A) also held that the addition should be restricted to the accumulated profits of Rs. 49,01,812/- and not the entire loan amount.

The Tribunal, however, accepted the assessee's argument that the loan was taken on interest and thus did not confer any gratuitous benefit to the assessee. Citing the Calcutta High Court's decision in the case of Pradip Kumar Malhotra, the Tribunal held that loans given in return for consideration beneficial to the company do not qualify as deemed dividends under section 2(22)(e). Consequently, the addition made by the AO and sustained by the CIT(A) was deleted.

2. Disallowance of Expenses:

The second issue involved the disallowance of Rs. 28,267/-, Rs. 11,869/-, and Rs. 38,353/- made by the AO and confirmed by the CIT(A) out of travelling & conveyance, telephone expenses, and sales promotion expenses, respectively. These disallowances were made on the grounds of involvement of personal elements in the expenses.

The Tribunal noted that the assessee failed to maintain proper records, such as log books or call registers, to substantiate that the expenses were incurred wholly and exclusively for business purposes. Given the nature of the expenses and the lack of evidence to prove their exclusive business use, the Tribunal agreed with the authorities below that a 10% disallowance for personal use was fair and reasonable. Therefore, the disallowance was upheld.

Conclusion:

The appeal was partly allowed. The addition on account of deemed dividend under section 2(22)(e) was deleted, while the disallowance of expenses was upheld. The order was pronounced in the open court on March 11, 2016.