2017 (11) TMI 1761 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - when the assessee company is neither a registered nor a beneficial shareholder of the lender companies the loan/advance received by the assessee company from these group companies could be taxed in its hand as deemed dividend within the provisions of section 2(22)(e) - Held that - The issue in dispute as to applicability of section 2(22)(e) to a non shareholder recipient of loan / advance thus now stands settled. As far case laws cited by the Ld DR are concerned it would be suffice to say that they do not address the specific issue of treating receipt of an advance/loan as deemed dividend in the hands of the non shareholder recipient which is the core dispute in the present appeal. In the present case the assessee company is neither a registered nor a beneficial shareholder of the lender companies and the loan / advance is also not alleged to have been received by the assessee company on behalf of or for the benefit of its alleged shareholder i.e. Sh Charanjeet Nagpal. No error in the order of the CIT(Appeals) in deleting the addition made by the AO u/s 2(22)(e) of the Act. Therefore appeal this ground of appeal of revenue is dismissed. Addition under the head Income from House Property - reasonable rent for which the property may be let out - Held that - Where a property is fully let out its Annual Value is to be taken at higher of the actual rent received / receivable from the said property or the sum for which the said property might reasonably be expected to let out from year to year. In the present case municipal valuation of the concerned property was made on 27/06/2009 by the Municipal Corporation fixing the annual value of the property at 7, 22, 640/- relevant for the Assessment Year under appeal. In view of the decision in the case of John Tipson 22, 25, 200/- which is much higher than the municipal valuation. Thus same is to be treated as standard rent for the property in question. So far as different rent fetched from different tenants is concerned it is suffice to say that area as well as terms of both the tenants were different and distinguishable in features. Rent received from M/s Axis Bank cannot be the basis of determining the rent from M/s Tanushaka Automobiles Pvt Ltd. Moreover the property did not consist of different units. It was a compact property some part of which was let out to one tenant and some part to other. Thus the annual value of the said property was to be considered as a single unit as is done by the Municipal Corporation. In our opinion there is considerable force in the arguments of the Ld AR. AO was not justified to make the impugned addition. Therefore we find no reason to interfere in the order of CIT(A) on this issue. - decided against revenue Addition u/s 40A(2)(b) - assessee had received security deposit from other tenant and had given security deposits to others for the premises taken on rent - No interest was either received or paid on such other deposits - Held that - Before making any disallowance it is to be established that the payment for such expenditure was excessive or unreasonable having regard to the fair market value for similar expenditure. Unless the expenditure is found excessive or unreasonable it cannot be disallowed. CIT(A) discussed the matter in detail and has deleted the addition after examining the records as well as legal position of disallowance u/s 40A(2)(b). We also find from the records that the interest @ 6% p.a was paid by the assessee to M/s Tanushaka Automobiles Pvt Ltd under a contractual obligation. AO has not doubted the correctness of agreement nor has found it to be frivolous. The rate of interest i.e. 6% p.a too is not found to be excessive comparing to fair market rates. No infirmity in the order of the CIT(Appeals) in deleting the addition made by the Assessing Officer U/s 40A(2)(b) - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made under Section 2(22)(e) of the Income Tax Act, 1961.
2. Deletion of addition made under the head "Income from House Property" as per Sections 22 and 23 of the Income Tax Act, 1961.
3. Deletion of disallowance made under Section 40A(2)(b) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

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

The CIT(A) deleted the addition of ?3,79,12,500/- made by the Assessing Officer (AO) under Section 2(22)(e) of the Income Tax Act, 1961, on the grounds that the amounts/advances received by the assessee from M/s Tanushka Automobiles Pvt Ltd. (TAPL) and M/s Vinayaka Farms and Resorts (India) Pvt Ltd. (VFARPL) could not be treated as deemed dividends. The AO had noted that Charanjeet Nagpal, a common shareholder, held substantial shares in all the companies involved. However, the CIT(A) observed that the assessee was neither a registered nor a beneficial shareholder in the lending companies, and thus, the provisions of Section 2(22)(e) were not applicable. The CIT(A) relied on various judicial precedents, including the decisions of the Special Bench of the ITAT in the case of Commissioner of Income Tax v. Bhaumik Colour (P) Ltd, and other High Court decisions, which held that deemed dividend can only be taxed in the hands of the shareholder. The ITAT upheld the CIT(A)'s decision, noting that the assessee company was not a shareholder in the lending companies, and thus, the loan/advance received could not be taxed as deemed dividend under Section 2(22)(e).

2. Deletion of Addition under "Income from House Property":

The AO had made an addition of ?39,12,696/- under the head "Income from House Property," noting a disparity in the rent received from two tenants, Axis Bank and TAPL. The AO adopted the higher rent received from Axis Bank as the fair rent for the portion let out to TAPL. The CIT(A) deleted the addition, observing that the rent received from TAPL was based on different terms and conditions, including a substantial security deposit at a low-interest rate, which adequately compensated for the lower rent. The CIT(A) also noted that the total rent received was higher than the municipal valuation, which should be treated as the fair rent under Section 23 of the Act. The ITAT upheld the CIT(A)'s decision, emphasizing that the "reasonable rent" should align with the "standard rent" or municipal valuation, and the rent received from different tenants under different terms could not be directly compared.

3. Deletion of Disallowance under Section 40A(2)(b):

The AO had disallowed ?13,75,355/- under Section 40A(2)(b), including ?12,00,000/- interest paid on a security deposit to TAPL and ?1,75,355/- interest on other loans/advances from TAPL, treating the latter as deemed dividend. The CIT(A) deleted the disallowance, noting that the interest payment was under a formal agreement and the rate of 6% was not excessive compared to market rates. The CIT(A) also rejected the AO's contention that interest on deemed dividend could not be allowed, as the amount was not treated as deemed dividend. The ITAT upheld the CIT(A)'s decision, finding no evidence that the interest rate was excessive or unreasonable and noting that the AO had not doubted the correctness of the agreement or found it frivolous.

Conclusion:

The ITAT dismissed the appeals of the department, upholding the CIT(A)'s decisions on all grounds. The judgments emphasized the importance of adhering to the legal definitions and precedents regarding deemed dividends, fair rental value, and reasonable interest payments under the Income Tax Act, 1961.