2017 (11) TMI 1840 - AT - Income Tax

Deemed dividend u/s 2(22) (e) - assessee has taken an advance from M/s. Competent Holding ltd wherein the assessee is a Director and holding beneficial ownership of more than 10% - assessee submitted that the above sum was received by assessee for advance against sale of property therefore, it is a business transaction - whether it is a trade advance or not ? - AY 2008-09 - HELD THAT - Before us assessee has not furnished the Ledger account of the above company in books of the assessee or the Ledger account of the assessee from the books of the company, hence, we are unable to determine the exact amount of trade advances on account of these transaction. Even otherwise if it is accepted that balance of ₹ 70 lakhs paid by the company to the assessee is also part of these transaction, even then a sum of ₹ 23 lakhs is required to be explained by the assessee that they are forming part of the consideration of these sale agreement between the assessee and the competent Holdings private limited. Furthermore, the confusion has also arisen because assessee has submitted the copy of the memorandum of understanding dated 1/9/2008 between the assessee and the competent Holdings Ltd wherein in the last paragraph of page No. 1 it has been mentioned that the competent Holdings Ltd has entered into an agreement to sell dated 09/01/2008 with the 1st party to purchase entire basement floor, for a sum of ₹ 1.25 crores and advanced the sum of ₹ 98 lakhs to the 1st party. However, in absence of the Ledger account it cannot be verified that on that particular date i.e. on 1/9/2008 the competent holding Ltd has paid a sum of ₹ 98 lakhs to the assessee or not. We set aside the issue for verification of the amount received by the assessee in pursuance of this agreement as trade advance to the file of the Ld. assessing officer with a direction that if the assessee has received the above sum after 09/01/2008 up to 31/03/2008 in pursuance of this agreement then such amount cannot be treated as deemed dividend under section 2 (22) (e) of the act. In view of this ground No. 1 and 2 of the appeal of the revenue are set aside to the file of the Ld. Assessing officer with above direction. In the result ground No. 1 and 2 of the appeal of the revenue is partly allowed . AY 2009-10 - sums of ₹ 60 lakhs are also advance against rent or security deposit for rent. If the amount of ₹ 37 lakhs is clubbed with the transaction of the above commercial transaction of the sale of property between the assessee and the M/s. Competent Holding Ltd than as on 30/03/2009 the assessee is having only loan of ₹ 60.75 Lacs. The assessee has paid back the sum of ₹ 75,000/- to the company on 31/03/2009 leaving deposit of ₹ 60 lakhs as per agreement. Therefore, it is apparent that the whole transaction was the transaction of security deposit with the assessee for use of the property of the assessee on rent as well as to facilitate the mortgage of the assessee s property for the purpose of loan to the company for purchase of new property. Therefore it cannot be denied that above transactions are transactions of commercial nature between the assessee and the company which are beyond the scope of loans and advances as per provisions of section 2 (22) (e) of the act. In view of the above facts the addition in the hands of the assessee of ₹ 37 lakhs which is less than ₹ 60 lakhs required to be retained by the assessee as security deposit, cannot be made under section 2 (22) (e) of the act. In view of this, the solitary ground in appeal of the assessee is allowed.

Issues Involved:
1. Deletion of addition of ?98 lakhs treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
2. Addition of ?37 lakhs as deemed dividend under Section 2(22)(e) for the Assessment Year 2009-10.

Issue-wise Detailed Analysis:

1. Deletion of addition of ?98 lakhs treated as deemed dividend under Section 2(22)(e):

The appeal was filed by the Assessing Officer against the order of CIT(A) which deleted the addition of ?98 lakhs. The Assessing Officer had treated this amount as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The assessee argued that the amount was an advance against the sale of property and thus a business transaction, not falling under deemed dividend provisions.

The CIT(A) accepted the assessee's contention, noting that both the assessee and the company, M/s Competent Holdings Ltd., were engaged in real estate business and had entered into an "Agreement to Sale" for the property. The CIT(A) relied on the Delhi High Court’s decision in CIT vs. Ambassador Travels Pvt Ltd., which held that business transactions between a shareholder and a company do not attract Section 2(22)(e).

The Tribunal examined the facts, including the agreement dated 09.01.2008 and the payments made. It was noted that the company paid ?98 lakhs as an advance for the property, which was later canceled through a "Memorandum of Understanding". The Tribunal agreed with the CIT(A) that the transaction was a business advance and thus outside the scope of deemed dividend under Section 2(22)(e). The Tribunal also referenced CBDT Circular No. 19/2017, which clarified that trade advances in the nature of commercial transactions do not fall within the ambit of Section 2(22)(e).

However, the Tribunal remanded the matter to the Assessing Officer for verification of the exact amounts received by the assessee as trade advances. The Tribunal directed that if the amounts were received pursuant to the agreement, they should not be treated as deemed dividend.

2. Addition of ?37 lakhs as deemed dividend under Section 2(22)(e) for the Assessment Year 2009-10:

For the Assessment Year 2009-10, the assessee appealed against the addition of ?37 lakhs as deemed dividend. The assessee contended that these were commercial transactions and not loans or advances covered under Section 2(22)(e).

The Tribunal noted that the assessee had an opening balance of ?98 lakhs and received an additional ?37 lakhs during the year. The assessee also repaid ?75 lakhs. The Tribunal examined the transactions and found that the company had retained ?60 lakhs as a security deposit for the use of the assessee's property.

The Tribunal concluded that the transactions were of a commercial nature, involving security deposits and rent, and thus did not fall under the scope of deemed dividend under Section 2(22)(e). The Tribunal allowed the assessee's appeal, holding that the addition of ?37 lakhs could not be made under Section 2(22)(e).

Conclusion:

The Tribunal partially allowed the Revenue's appeal for the Assessment Year 2008-09, remanding the matter for verification of the amounts received as trade advances. For the Assessment Year 2009-10, the Tribunal allowed the assessee's appeal, concluding that the transactions were commercial in nature and not deemed dividends under Section 2(22)(e).

← Previous Next →