By TIOL News Service

NEW DELHI, MAR 11, 2016: THE issue is - Whether only the sum received during the year as advance can be brought to tax as deemed dividend u/s 2(22)(e) and not the amount which was received during earlier period. YES is the answer.

Facts of the case

The assessee is a Company. Search and seizure was carried out at the assessee's of 'Tulip Group' including the assessee and notice u/s 153A of the Act was issued to the assessee for filing return of income for the assessment years involved. In response to the notice, the assessee filed return. Subsequently, notices u/s 143(2)/142(1) of the Act were issued and certain disallowances/additions were made by the AO. Aggrieved with the additions/disallowances the assessee filed appeal before the CIT(A), who partly allowed the appeal of the assessee. Aggrieved with the findings, the Revenue filed appeal before Tribunal. The Revenue raised the issue of addition made on account of deemed dividend u/s 2(22)(e) of the Act. The AO observed that the share holding of the assessee being more than 10 percent of another company and there was an accumulated profit in the books of that another Company, hence the assessee was liable for deemed dividend. The CIT(A), observing that the advance was not received during the year and the assessee became shareholder subsequent to the receipt of the advance held that additions u/s 2(22)(e) was not sustainable and he accordingly allowed the relief to the assessee.The Revenue also challenged the deletion of addition made u/s 14A of the Act. The AO had observed that during the relevant year the assessee company had received certain dividend and the same had been claimed as exempt from tax. AO held that the expenditure incurred on account of dividend income was liable to be disallowed by invoking rule 8D of IT Rules. When matter reached to CIT(A), it held that disallowance be restricted to cover the expenditure relating to investment activity.

After hearing parties, Tribunal held that,

++ in the fact of the case of the assessee, the payment was received in a year prior to the relevant previous year and at that relevant point of time of receiving the advance, the assessee was not the beneficial shareholder of M/s. Sharda Enterprises Pvt. Ltd. and thus the conditions of Section 2(22)(e) of the Act are not fulfilled in the case of the assessee. The finding of the CIT(A) on the issue are therefore well reasoned. The relevant para of the finding of the CIT(A) is reproduced as under:

"..... I agree with the submissions of the AR. It is only the payment by a company during the relevant previous year which could be brought to tax (when it satisfies other conditions of section 2(22)(e) as deemed dividend. The phrase used u/s 2(22)(e) is "any payment by company". In case the AO's action is to be upheld, then the appellant becomes liable to tax every year as long as the opening balance of advance continues in his books of accounts. This could not be the meaning of section 2(22)( e). Therefore, I find no merit in the addition made by the AO under this head.";

++ in view of the above discussion, we are of the opinion that no interference is required in the finding of the CIT(A). Accordingly, we dismiss this ground of the appeal;

++ we find that the AO has not complied with the requirement of recording dissatisfaction as to the correctness of claim of the assessee as held in Judgement of Delhi High Court in the case of Maxopp Investement, the action of the AO in invoking rule 8D was not justified. Despite the observation, the CIT(A) has upheld disallowance of Rs. 4,22,000 towards administrative expenses. In view of the above discussion, we find that the order of CIT(A) on the issue in dispute is well reasoned and, therefore, no interference is required. Accordingly this ground of the Revenue is dismissed.

(See 2016-TIOL-354-ITAT-DEL)