ITAT Allows Appeal After Section 2(22)(e) Addition of Rs.22.71 Crore Was Deleted in Rectification:

Sindhu Farms Pvt. Ltd. Is engaged in farming and trading in agricultural goods, filed its return of income for AY 2020-21 declaring total income of Rs.11.44 crore, including agricultural income of Rs.8.69 crore. The return was processed under Section 143(1) and the case was subsequently selected for complete scrutiny under CASS.

The AO completed the assessment under Section 143(3) and made an addition of Rs.22,71,17,369 by invoking Section 2(22)(e) of the Income Tax Act, treating the amount paid to an entity as deemed dividend. The assessee challenged the addition before the NFAC, which dismissed the appeal. 

During the pendency of the appeal, the assessee moved a rectification application under Section 154. The DCIT allowed the application by order dated 6 March 2023 and deleted the entire demand of Rs.22.71 crore. The assessee thereafter requested the CIT(A) to permit withdrawal of its pending appeal, but the request was not accepted and the appeal was decided on merits.

The Tribunal noted that the addition had already been deleted by the AO in the Section 154 proceedings. The rectification order recorded that, under Section 2(22)(e), the chargeability of tax in respect of the deemed dividend was in the hands of the recipient and that the existing addition represented an error apparent from the record.

The Tribunal observed that the CIT(A) had adjudicated the appeal on merits even though the  addition had already been deleted before the appellate order was passed. In such circumstances, the CIT(A) ought to have allowed the assessee's withdrawal application rather than proceeding to decide an issue concerning an addition that no longer survived.

Accordingly, the Tribunal set aside the order of the CIT(A) and directed that the appeal before the CIT(A) would stand dismissed as withdrawn.