2017 (10) TMI 1477 - HC - Income Tax

Deemed dividend under Section 2(22) (e) - Addition on account of advance given to Gulam Farroq Ansari which was accepted by the assessee during the search that the amount was paid out of books - - HELD THAT - Trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word 'advance' in section 2(22)( e) of the Act As per clause 10 the purchaser was free to do the development work on the land and was also free to sell the same to any third-party for which the assessee had no objection. In view of these facts, it cannot be said that it was a loan or an advance to the assessee. The contents of the sale agreements are very much clear that it was a clear cut agreement of sale. No contrary facts or decision was brought to our notice by either side and more specifically the Revenue. In view of these facts, we are not in agreement with the conclusion drawn in the assessment order and affirm the stand of the learned CIT (A ) in accepting the claim of the assessee, resultantly, there is no merit in the appeal of the Revenue.

Summary

Issues Involved:
1. Deletion of addition of ?1,50,00,000/- on account of an advance given to Gulam Farooq Ansari.
2. Deletion of addition of ?50,26,604/- on account of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?1,50,00,000/- on Account of Advance Given to Gulam Farooq Ansari:

The appellant challenged the Tribunal's decision to delete the addition of ?1,50,00,000/- made by the Assessing Officer (AO) on the grounds that the amount was paid out of books. During the search proceedings, the assessee admitted to making a payment of ?1.50 Crores to Gulam Farooq Ansari for purchasing land, which was not recorded in the books of accounts. The AO noted that this payment was not included in the assessee's income in the return filed, despite the assessee admitting it during the search and post-search proceedings.

The assessee later retracted this admission, claiming the books of accounts were incomplete at the time of the search and that the payment was subsequently recorded. The AO rejected this explanation, citing inconsistencies and lack of documentary evidence proving the return of the money. The AO held that the payment was made from unaccounted income and added ?1.50 Crores to the assessee's income.

The CIT(A) and the Tribunal, however, found that the assessee had sufficient cash balance in the books of various group members to cover the payment. The Tribunal noted that the assessee successfully demonstrated through recasted books of accounts that the statement made during the search was incorrect due to incomplete entries. The Tribunal upheld the CIT(A)'s decision to delete the addition, as the Revenue did not provide any substantial evidence to counter the assessee's claims.

2. Deletion of Addition of ?50,26,604/- on Account of Deemed Dividend under Section 2(22)(e):

The AO treated an advance of ?50,26,604/- received by the assessee from a company as deemed dividend under Section 2(22)(e) of the Income Tax Act. The assessee argued that the amount was received against an agreement to sell land to the company, which was a normal business transaction and not a loan or advance.

The CIT(A) accepted the assessee's explanation, noting that the amount was a repayment of old advances taken by the company from the assessee and an advance for a business transaction. The Tribunal upheld this view, stating that the provisions of Section 2(22)(e) were not applicable as the transactions were in the nature of business advances and not gratuitous loans or advances.

The Tribunal relied on several judicial precedents, including the Supreme Court's decision in Gopal and Sons (HUF) vs. Commissioner of Income Tax Kolkata-XI, which emphasized that deemed dividend provisions should be given strict interpretation and only apply when all conditions are fulfilled. The Tribunal also considered CBDT Circular No. 19 of 2017, which clarified that trade advances in the nature of commercial transactions do not fall within the ambit of Section 2(22)(e).

Conclusion:

The High Court upheld the Tribunal's decision, agreeing that the addition of ?1,50,00,000/- was rightly deleted as the assessee demonstrated sufficient cash balance and proper recording of the transaction in the books of accounts. The deletion of ?50,26,604/- was also upheld, as the transactions were found to be business advances and not deemed dividends under Section 2(22)(e). The appeal was dismissed in favor of the assessee.