2025 (5) TMI 1394 - AT - Income Tax

Disallowance on account of deemed dividend u/s 2(22)(e) - HELD THAT - We are in agreement with the Ld. Sr. Dr. that the Ld. CIT(A) has considered the submissions of the assessee. Ld. CIT(A) has recorded findings on fact on each issue. The assessee was required to rebut the same. But the assessee chose not to make any rebuttal and remained absent from the proceedings. In the absence of specific rebuttal by the assessee by way of supporting evidences we do not see any reason to disturb the finding of Ld. CIT(A). Moreover despite having given multiple opportunities the assessee failed to attend the proceedings that goes to demonstrate that the assessee is not interested for prosecuting the present appeal. We therefore dismiss the grounds of appeal of the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the addition of Rs. 70,64,782/- as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961 ("the Act") was justified, given the nature of transactions between the assessee and M/s. R.K. Agro Pvt. Ltd., and whether these transactions constituted loans or regular business dealings.

(b) Whether the direction under section 153(3)(ii) read with section 150(1) for making similar additions in assessment years 2011-12 and 2012-13 without giving the assessee opportunity violated procedural fairness and statutory provisions.

(c) Whether the disallowance of Rs. 13,26,600/- under section 41(1) of the Act on account of outstanding payment to M/s. Scrap Tin Enterprises was justified, considering the nature of liability and absence of opportunity to the assessee.

(d) Whether the disallowance of Rs. 10,00,000/- out of packing material expenses was warranted, particularly in light of payment of purchase tax and verifiability of expenses.

(e) Whether the enhancement of disallowance by Rs. 8,94,690/- under packing expenses and Rs. 13,37,000/- under freight expenses without giving opportunity under section 251(2) of the Act was legally permissible.

(f) Whether the valuation of closing stock excluding freight expenses was correct and whether the method of accounting was changed unjustifiably.

(g) Whether the addition of Rs. 2,23,561/- under section 14A of the Act for disallowance of expenditure relating to exempt income was justified in the absence of exempt income and satisfaction recorded by authorities.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Addition of Rs. 70,64,782/- as deemed dividend under section 2(22)(e)

Legal Framework and Precedents: Section 2(22)(e) of the Act treats any payment by a closely held company to a substantial shareholder by way of loan or advance as deemed dividend to the extent of accumulated profits. Exceptions include advances made in the ordinary course of business where lending money is a substantial part of the business. The expression "accumulated profits" is defined and the section aims to tax indirect distribution of profits.

Several judicial decisions establish that regular business transactions between parties do not attract deemed dividend provisions.

Court's Interpretation and Reasoning: The Assessing Officer (AO) found that the assessee had received Rs. 2.50 crores as loan from M/s. R.K. Agro Pvt. Ltd., a company where the assessee held over 80% shares and was a director. The AO noted that the loan was used for purchase of shares in another company. The AO examined the shareholding pattern and found substantial interest of the assessee in the company.

The AO observed that the account with M/s. R.K. Agro Pvt. Ltd. was a current account containing transactions beyond ordinary course of business, including advances treated as loans. The accumulated profits of the company as on 31.03.2011 plus profits till September 2011 were Rs. 70,64,782/-, which was taken as the maximum deemed dividend amount.

The assessee contended that the transactions were regular business dealings involving purchase and sale of agro products, supported by ledger accounts showing large-scale purchases and sales, with an opening debit balance. The assessee relied on judicial precedents holding that section 2(22)(e) does not apply to regular business transactions.

Key Evidence and Findings: The AO relied on the shareholding pattern, the nature of transactions in the current account, and the admitted use of funds for share purchase. The assessee's ledger showed extensive trading with the company but the AO found that advances were also made which were not linked to business transactions.

Application of Law to Facts: The AO applied section 2(22)(e) to treat the advances as deemed dividend to the extent of accumulated profits. The Tribunal noted that the assessee failed to rebut the AO's findings with substantive evidence or attend hearings.

Treatment of Competing Arguments: The assessee's argument that transactions were regular business dealings and thus exempt was considered but rejected due to lack of sufficient explanation and evidence. The AO's detailed analysis and invocation of statutory provisions prevailed.

Conclusion: The addition of Rs. 70,64,782/- as deemed dividend under section 2(22)(e) was upheld.

(b) Direction under section 153(3)(ii) read with section 150(1) for similar additions

The assessee challenged the direction to the AO to make similar additions in other assessment years without opportunity to explain. The Tribunal observed that the CIT(A) had given sufficient opportunity in the present year and that the assessee failed to avail the opportunity or rebut the findings. No interference was warranted.

(c) Disallowance of Rs. 13,26,600/- under section 41(1) on outstanding liability to M/s. Scrap Tin Enterprises

Legal Framework: Section 41(1) provides that if a liability is found to have ceased to exist, the amount of liability is treated as income in the year of cessation.

Court's Reasoning: The AO found that the creditor M/s. Scrap Tin Enterprises denied any outstanding dues and refused to confirm the liability. Despite the assessee's claim that the liability was old and payable, no confirmation or supporting documents were produced. The AO conducted an independent inquiry and obtained a certificate from the creditor denying any dues.

The assessee admitted that the liability may be treated as income but argued on moral grounds that the liability should continue. The AO rejected this, holding that cessation of liability was established.

Competing Arguments: The assessee contended that liability cannot cease by unilateral denial and cited Gujarat High Court decision supporting continuation of liability if identity and transactions exist. However, the AO's independent verification and absence of confirmation weighed against the assessee.

Conclusion: The addition under section 41(1) was upheld.

(d) Disallowance of Rs. 10,00,000/- out of packing material expenses

Legal Framework and Precedents: Expenses claimed must be supported by evidence and verifiable. The Supreme Court has held that disallowance on mere guesswork is impermissible.

Court's Reasoning: The AO noted cash purchases of packing material without supporting vouchers, suspecting bogus expenses. Despite submissions that cash purchases were made due to business exigencies, no evidence was produced. The AO disallowed Rs. 10,00,000/- on an ad hoc basis to cover possible leakages.

The assessee submitted that purchase tax @5% was paid and the expenses were verifiable. Reliance was placed on judicial decisions holding that disallowance without specific defect or reason is arbitrary.

Application of Law to Facts: The Tribunal agreed that the AO failed to point out any specific defect and that the books were tax audited without qualification. The ad hoc disallowance was held to be arbitrary and unsupported by evidence.

Conclusion: The disallowance of Rs. 10,00,000/- was deleted.

(e) Enhancement of disallowance under packing and freight expenses without opportunity

The assessee argued that enhancement of disallowance without opportunity violated section 251(2) of the Act. The Tribunal noted absence of representation by the assessee and no rebuttal to the enhancement. The Tribunal did not find merit in the contention given the assessee's non-participation.

(f) Valuation of closing stock excluding freight expenses

The AO questioned the valuation of closing stock at purchase price excluding freight and overheads, noting that freight expenses debited were excessive and unsupported. The assessee explained that purchases from sister concerns involved no freight as goods were transferred within the same premises.

The AO disallowed Rs. 10,00,000/- on an ad hoc basis for lack of verification. The assessee contended that the method of accounting was consistent and no change was made, and that the addition should be adjusted in opening stock of subsequent year.

The Tribunal observed that the assessee failed to rebut the AO's findings and did not attend proceedings. The enhancement was sustained.

(g) Addition of Rs. 2,23,561/- under section 14A for disallowance of expenditure relating to exempt income

Legal Framework: Section 14A read with Rule 8D mandates disallowance of expenditure incurred to earn exempt income, even if no exempt income is earned in the year, as clarified by CBDT Circular No. 5/2014.

Court's Reasoning: The AO found that the assessee had investments and interest expenditure on borrowed funds without segregating funds used for exempt income. The AO applied Rule 8D to compute disallowance. The assessee argued that no exempt income was earned and no satisfaction was recorded by AO as required.

The Tribunal noted that the AO had recorded satisfaction and applied statutory provisions correctly. The assessee failed to produce evidence to rebut mixed fund flow. Precedents support disallowance even in absence of exempt income.

Conclusion: The disallowance under section 14A was upheld.

3. SIGNIFICANT HOLDINGS

"The transactions of Rs. 2,50,00,000/- have undoubtedly found transaction other than ordinary course of business and assessee admittedly stated... that he had taken loan of Rs. 2,50,00,000/- for purchase of shares. So the nature & purpose of transaction has already been proved and admitted by the assessee. Therefore, by applying provisions of section 2(22)(e) of the Act, the said amount of loan would be treated as Income of the assessee for the year as deemed dividend."

"Since the amount of loan received by the assessee is higher than that of accumulated profits so the loan amount to the extent of accumulated profits would be taxed as deemed dividend in the hands of the assessee."

"The liability shown by the assessee in respect of M/s. Scraptin Enterprises amounting to Rs. 13,26,600/- is found bogus liability which is not payable by him. Hence, the same would be added to the total income of the assessee u/s 41(1) of the Act as cessation of liability."

"The addition was unsustainable because it had been made 'on the basis of pure guess work' and the Tribunal's conclusion is final."

"The accounts which are regularly maintained in the course of business and are duly audited, free from any qualification by the auditors, should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable."

"Section 14A of the Act does not use the word 'income of the year' but 'Income under the Act.' This also indicated that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration."

"In the absence of specific rebuttal by the assessee by way of supporting evidences, we do not see any reason to disturb the finding of Ld. CIT(A). Moreover, despite having given multiple opportunities, the assessee failed to attend the proceedings, that goes to demonstrate that the assessee is not interested for prosecuting the present appeal."

The Tribunal dismissed the appeal, holding that the additions and disallowances made by the AO and upheld by the CIT(A) were justified on facts and in law, given the assessee's failure to rebut or participate in the proceedings.