While upholding the deletion of addition made on the deemed dividend by the CIT(A) Delhi bench of Income Tax Appellate Tribunal held that deemed dividend u/s 2(22)(e) of Income Tax Act, 1961 is not applicable on the non-shareholder company.
The assessee was represented by Sh. Gaurav Jain and the revenue was represented by Sh. Mahesh Shah & Sh. Sanket Gupta.
The AO observed that the gross profit of the assessee has significantly dropped for the year under consideration in comparison to the earlier Assessment Year. The gross profit for the current year was 15.24% and the net profit of 1.74%. The AO held that on deduction of income from other sources of Rs.14.46 Cr. the net profit would have been further steeped down.
The assessee submitted that the fall in the profits was due to renovation that has been undertaken and further, the AO observed that the complementary expenses were not shown in the P&L account but only reduced from the closing stock. The AO also observed that the service charges received are not shown in the P&L account. The AO estimated the GP @ 28% and made an addition of Rs.6.24 Cr. to the income of the assessee.
The Assessing Officer made protective additions amounting to Rs. 12.50 Crores in the hands of the assessee and substantive additions to be made in the hands of M/s Universal Business Solutions Limited (M/s UBSL), a 100% holding company of the Respondent on the ground that the transactions constituted deemed dividend in the hands of M/s UBSL as per the provisions of section 2(22)(e) of the Act.
The CIT(A) deleted the aforesaid addition and held that since the assessee is not a registered shareholder either in M/s AIPL or M/s GSL, the deeming provisions of section 2(22)(e) of the Act were not applicable in the case under consideration
It was observed that the entire details of complimentary expenses, the method of accounting charges, and the amount of the services charges paid of Rs.1.23 Cr. have been duly stated. Further, the reasons for declining the gross profit have been duly furnished substantiating the decline in receipts, incurring expenses of direct receipts such as electricity, water, staff, music and entertainment which have been and are to be provided irrespective of the percentage of occupancy.
The Tribunal viewed that the provisions of section 2(22)(e) of the Act are not applicable as the assessee was not a registered shareholder of the company from which the advance has been received.
Dr B. R. R. Kumar, Accountant Member and Sh. Yogesh Kumar US, Judicial Member while upholding the order of CIT(A) observed that the advances could not have been added in the hands of the assessee company, being not the registered shareholder of AIPL or GSL and the appeal of the Revenue was dismissed.
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