Case Note & Summary
The appeal by the Commissioner of Income Tax under Section 260A of the Income Tax Act, 1961, challenged an order of the Income Tax Appellate Tribunal (ITAT) pertaining to assessment year 2003-2004. The revenue raised three questions of law. The first two questions concerned the deletion of an addition of Rs.35 lac as deemed dividend under Section 2(22)(e). The admitted facts were that an amount of Rs.32,00,000 was transferred from the bank account of Capsulation Services Private Limited (CSPL) to the assessee's account. Mr. Vikram Tannan, a director of CSPL, held over 10% equity in CSPL and over 20% equity in the assessee. The Assessing Officer treated the amount as deemed dividend in the hands of the assessee. The assessee contended that the amount was received from Mr. Teredesai, Vice President of CSPL, and was not reflected in the books. The Tribunal deleted the addition, holding that since the transactions were not reflected in the books, they could not be treated as deemed dividend, and that the Assessing Officer had not established that the money was advanced for the benefit of any shareholder. The High Court upheld this finding as a finding of fact and dismissed the appeal on these questions. The third question related to the allowance of provision for leave encashment. The Tribunal had directed the Assessing Officer to allow the amount, relying on the Calcutta High Court judgment in Exide Industries Limited v. Union of India (292 ITR 470), which struck down Section 43B(f). The High Court noted that the correctness of that judgment is pending before the Supreme Court and interim orders have been passed. The appeal on this issue was admitted on the question of law whether the Tribunal was justified in directing allowance of the provision for leave encashment in view of Section 43B(f).
Headnote
A) Income Tax - Deemed Dividend - Section 2(22)(e) - Requirement of Book Entry - The Tribunal deleted the addition of Rs.35 lac as deemed dividend on the ground that the transaction was not reflected in the books of accounts. The High Court held that the Tribunal's finding that the transaction was not reflected in the books was a finding of fact, and the revenue failed to establish that the money was advanced for the benefit of any shareholder. The appeal on this issue was dismissed. (Paras 3-4) B) Income Tax - Leave Encashment - Section 43B(f) - Validity of Provision - The Tribunal relied on the Calcutta High Court judgment in Exide Industries Limited v. Union of India (292 ITR 470) which struck down Section 43B(f). The High Court noted that the correctness of that judgment is pending before the Supreme Court and interim orders have been passed. The appeal on this issue was admitted on the question of law regarding the allowance of provision for leave encashment. (Para 2)
Issue of Consideration
Whether the Tribunal was correct in deleting the addition of Rs.35 lac as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961, and whether the Tribunal was justified in directing allowance of provision for leave encashment under Section 43B(f).
Final Decision
Appeal dismissed on questions 1 and 2 regarding deemed dividend; appeal admitted on question 3 regarding leave encashment on the question of law framed.
Law Points
- Deemed dividend under Section 2(22)(e) requires actual benefit to shareholder and reflection in books
- Section 43B(f) leave encashment provision struck down by Calcutta High Court pending Supreme Court appeal
