2014 (2) TMI 1226 - AT - Income Tax

Deemed dividend u/s 2(22)( e) - Whether the Tribunal was right holding that the advance (rental) received by the assessee from the company in which he is a shareholder cannot be termed as a deemed dividend for the purpose of section 2(22)( e)? - Held that - The company had agreed to pay an advance of 10 lakhs when it had taken the first floor on lease for the purpose of meeting the cost of construction of the other three floors and that the lease deed provided explicitly that the advance so paid was to be adjusted against the rent payable for the other three floors. The amount of rent payable for those floors was also set out in the further lease. The advance therefore was required to be set off against the rents payable in future years and thus adjusted. The amount at 10 lakhs paid was clearly as advance though it was an advance which was to be set off against the rents payable in future. - Decided in favour of the Revenue and against the assessee.

Summary

Issues:
1. Whether the advance (rental) received by the assessee from the company can be termed as a deemed dividend for the purpose of section 2(22)(e)?

Analysis:
The assessee, an individual and managing director of a company, leased out a property to the company. The company paid an advance of &8377; 10 lakhs to the assessee, which was to be adjusted against future rent. The Assessing Officer treated this advance as a loan, falling under section 2(22)(e) of the Income-tax Act. The Commissioner and the Tribunal provided some relief to the assessee based on accumulated profits of the company. However, the Tribunal ultimately held that the amount received was advance rent in a landlord-tenant transaction, not deemed as a dividend under section 2(22)(e).

In the case of Miss P. Sharda v. CIT [1998] 229 ITR 444, the Supreme Court emphasized that even if the advance is repaid or adjusted later, it does not change the fact that the assessee received a dividend from the company during the relevant period. The Tribunal's decision was based on the understanding that the advance paid by the company was to be set off against future rents, which did not alter the fact that it constituted a dividend in the eyes of the law.

The counsel for the assessee argued that the term "advance" implies payment of a sum not due at the time of payment. However, the Tribunal found that the company agreed to pay the advance to meet construction costs for future floors, with a clear provision for adjustment against future rents. The advance of &8377; 10 lakhs was explicitly intended to be set off against future rent payments, making it a bona fide advance, albeit to be adjusted in the future.

In conclusion, the Tribunal's decision was in favor of the Revenue and against the assessee. The advance received by the assessee from the company, intended to be adjusted against future rent payments, was deemed a dividend under section 2(22)(e) of the Income-tax Act.