2014 (7) TMI 1197 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Held that - The allegation of the department that the payments by the company to the assessee is a gratuitous one also cannot be accepted not only because of the fact that it is towards advance for purchase of land but also considering the fact that the assessee has put all her personal properties as collateral security for the loan availed by the company. Therefore, the company has certainly derived advantage on account of the assessee. That being the case, it cannot be said that the amount paid, even assuming that it is not towards sale consideration of the property, is a loan or advance and not for the business purpose of the company. The payment cannot be treated as deemed dividend u/s 2(22)(e) of the Act. Accordingly, we direct the assessing officer to delete the addition made of the said amount. So far as the other additions are concerned, it is the contention of the Ld. A.R. that if at all they are to be treated as deemed dividend, then opening balance as appearing at the beginning of the year has to be excluded and proportionate addition has to be made on the balance amount. However, considering the fact that this argument was not made before the departmental authorities, we consider it appropriate to remit the matter back to the file of the assessing officer for considering the same afresh after verifying the facts and materials on record. - Decided partly in favour of assessee

Issues Involved:

1. Justification of addition of Rs. 4,21,48,280/- under section 2(22)(e) of the Income-tax Act.
2. Validity of the sale agreement for the property.
3. Nature of the payment made by the company to the assessee.
4. Proportionate addition of deemed dividend for advances given to other entities.

Issue-wise Detailed Analysis:

1. Justification of Addition under Section 2(22)(e):

The primary issue was whether the addition of Rs. 4,21,48,280/- as deemed dividend under section 2(22)(e) of the Income-tax Act was justified. The assessee argued that the amounts given were for consideration and not gratuitous payments. The assessing officer treated the amount as deemed dividend, relying on various judicial precedents. The CIT(A) upheld this view, noting deficiencies in the sale agreement and questioning the transaction's validity.

2. Validity of the Sale Agreement:

The sale agreement dated 2.4.2008 was scrutinized. The assessing officer and CIT(A) questioned its validity due to it being unregistered and unsigned by all vendors. The assessee contended that the agreement was genuine, executed on non-judicial stamp paper, and signed by her in multiple capacities. The Tribunal found merit in the assessee's explanation, noting that the department did not conduct any enquiry to disprove the transaction. The Tribunal emphasized that technical deficiencies alone could not invalidate the agreement without concrete evidence.

3. Nature of the Payment:

The Tribunal examined whether the payment was a loan/advance or for consideration. The assessee provided collateral security and personal guarantees for the company's loans, suggesting the payment was not gratuitous. The Tribunal noted that the company benefited from the assessee's guarantees, thus the payment was for consideration and business purposes. Judicial precedents, including cases from the Madhya Pradesh and Bombay High Courts, supported the view that payments towards property purchase do not constitute loans/advances under section 2(22)(e).

4. Proportionate Addition for Advances to Other Entities:

The assessee argued that the opening balances of advances given to other entities should be excluded when computing deemed dividend. The Tribunal remitted this issue back to the assessing officer for fresh consideration and verification of facts, as this argument was not previously raised before the departmental authorities.

Conclusion:

The Tribunal concluded that the payment of Rs. 3,63,21,635/- could not be treated as deemed dividend under section 2(22)(e) of the Act and directed the assessing officer to delete this addition. The other additions were remitted back for fresh consideration, taking into account the opening balances. The appeal was partly allowed, with directions for reassessment of specific components.

Pronouncement:

The judgment was pronounced in the open Court on 4th July 2014.

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