2010 (11) TMI 141 - AT - Income Tax

Search and seizure Addition Deemed dividend u/s 2(22)(e) - sister concern - property on lease - security deposit received does not fall in the category of deemed dividend . The Legislature has not used in its wisdom the word deposit in this section alongwith loans and advances. Thus, this provision is not attracted for security deposits received by an assessee in the normal course of its business activity. Advance Received for land - sister concern - shareholding pattern - transfer of shares - substantial interest - Held that advance of more than Rs. 5 crores to Shri M. Rajkumar and the alleged clandestine embezzlement of the fund by him has no bearing on the addition made by the Assessing Officer However, the Assessing Officer is found to have erred in law while resorting to this addition because there is no cogent evidence brought on record by him to prove that the transfer of shares from Shri V. Ayyadurai/ Shri V.A. Shiva to their relatives was executed with the sole intention of defrauding the revenue. - the conditions stipulated in Section 2(22)(e) were not at all satisfied in the appellant s case during the relevant accounting year. - No deemed dividend Interest under the head income from other sources - An amount of Rs. 10 lakhs was adjusted during the previous year 2005-06 on account of interest - it was stated by the assessee that this transaction was notional in nature and the assessee had not received any amount in cash or through cheque - There is no supporting evidence for treating Rs. 10 lakhs as interest income of the assessee particularly when the transaction has clearly not resulted pre-receipt of money or any benefit by the assessee Decided in the favour of the assessee Payment of Rs. 1.5 crores - The appellant who is a director in both the companies holds 4.99 per cent of the share capital of MMPPL at the time of this transaction. - The issue to be decided is whether the payment of the amount of Rs. 1.5 crores by MMPPL to the appellant (even without going into the merits of whether the amount was paid as purchase consideration or was spent by the appellant for undisclosed purposes) would attract the provisions of section 2(22)(e) of the Act. Since the shareholding of the appellant in MMPPL is less than 10 per cent, - the provisions of section 2(22)(e) are not attracted in the instant case. Therefore the addition of Rs. 1.5 crores as deemed dividend under section 2(22)(e) is not warranted and is deleted

Issues Involved:
1. Applicability of Section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividend.
2. Classification of rental advance/security deposit.
3. Treatment of ROC fees borne by a group concern.
4. Treatment of various payments and advances as deemed dividend.
5. Validity of share transfers and their impact on deemed dividend.
6. Treatment of accrued interest as income from other sources.
7. Assessment of agricultural income as undisclosed income.

Issue-wise Detailed Analysis:

1. Applicability of Section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividend:
The main issue revolves around whether certain payments and advances received by the assessee-company and its directors should be classified as deemed dividends under Section 2(22)(e) of the Act. The Tribunal emphasized that for a payment to be deemed a dividend, it must be an advance or loan to a shareholder holding at least 10% of voting power or to a concern in which such shareholder has a substantial interest. The Tribunal found that the payments in question were security deposits and not advances or loans, thus not attracting the provisions of Section 2(22)(e).

2. Classification of rental advance/security deposit:
The Assessing Officer treated the rental advance/security deposit received by the assessee from its sister concern as deemed dividend. However, the Tribunal agreed with the CIT(A) that the payment was a security deposit, a common business practice, and not an advance. The Tribunal noted that the lease agreements and the nature of the transactions supported this classification, thus excluding it from the ambit of deemed dividend.

3. Treatment of ROC fees borne by a group concern:
The ROC fees paid by the group concern on behalf of the assessee were initially treated as deemed dividend by the Assessing Officer. The Tribunal upheld the CIT(A)'s decision that since this amount was part of the total security deposit, treating it separately as deemed dividend would result in double addition, which was incorrect.

4. Treatment of various payments and advances as deemed dividend:
Several payments and advances, including rental advances, further advances, and payments for land purchases, were scrutinized. The Tribunal found that these payments were made in the ordinary course of business and were not for the individual benefit of the shareholders. The Tribunal also noted that the shareholding structure and the nature of the transactions did not satisfy the conditions for deemed dividend under Section 2(22)(e).

5. Validity of share transfers and their impact on deemed dividend:
The Assessing Officer questioned the validity of share transfers from the directors to their relatives, suggesting they were collusive to avoid tax. The Tribunal, however, found no evidence to support this claim and upheld the CIT(A)'s finding that the transfers were genuine and legally executed. Consequently, the share transfers did not affect the applicability of Section 2(22)(e).

6. Treatment of accrued interest as income from other sources:
The Assessing Officer added Rs. 10 lakhs as accrued interest under 'income from other sources'. The Tribunal found that the transaction was notional and the assessee did not receive any actual benefit or cash. Given the assessee's cash system of accounting, the Tribunal upheld the CIT(A)'s deletion of this addition.

7. Assessment of agricultural income as undisclosed income:
The Assessing Officer treated Rs. 1 lakh returned as agricultural income as income from undisclosed sources. The Tribunal, however, did not provide a detailed analysis of this issue in the judgment, focusing primarily on the deemed dividend and related matters.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions, finding that the payments in question were security deposits and not advances or loans, thus not attracting the provisions of Section 2(22)(e). The share transfers were found to be genuine, and the accrued interest was notional and not actual income. Consequently, all appeals filed by the Revenue were dismissed.

← Previous Next →