The Ahmedabad Bench of the Income Tax Appellate Tribunal ( ITAT ) deleted an addition of Rs. 25.93 lakh categorized as a “deemed dividend” under Section 2(22)(e) of the Income Tax Act due to the Assessing Officer’s ( AO ) failure to verify whether the transaction constituted an actual loan or merely a Journal entry in shareholder’s account.
Ramesh Nagindas Shah, the assessee was a director and substantial shareholder (49.71%) in Mahavir Submersible Pvt. Ltd. (MSPL), with shares worth Rs. 35,00,000. During the assessment year 2013-14, the assessee received a loan amounting to Rs. 65,22,947 from Mahavir Submersible Pvt. Ltd.
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The company’s accumulated profits at the end of the relevant period amounted to Rs. 25,93,812. The Assessing Officer (AO) observed that due to the assessee’s significant shareholding in MSPL, the loan of Rs. 65,22,947 was considered a “deemed dividend” under Section 2(22)(e) of the Income Tax Act.
Consequently, the AO added Rs. 25,93,812 to the assessee’s total income as a deemed dividend. On appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee argued that the transaction was part of a running account, involving journal entries linked to property acquisition, not an actual cash loan.
The assessee’s counsel claimed that the provisions of Section 2(22)(e) should only apply to direct cash payments, not to journal entries recorded for internal accounting purposes.
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However, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, confirming that the provisions of Section 2(22)(e) were applicable given the assessee’s significant shareholding and the company’s accumulated profits.
Aggrieved, the assessee challenged the CIT(A)’s order before the ITAT. The two-member bench comprising Annapurna Gupta (Accountant Member) and Siddhartha Nautiyal (Judicial Member) noted that the explanation regarding the journal entries had been consistently presented during earlier proceedings.
The tribunal found that neither the AO nor the CIT(A) verified the claim regarding the nature of the transactions. The tribunal highlighted that the tax authorities did not sufficiently assess whether the transaction constituted an actual loan or merely a book entry.
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Therefore, the tribunal set aside CIT(A)’s order and remanded the matter to the AO to verify the assessee’s claim. The appeal of the assessee was allowed.
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