2016 (3) TMI 284 - HC - Income Tax

Deemed dividend addition made u/s 2(22)(e) - Held that - The effect of clause (e) of section 2(22) is to broaden the ambit of the expression dividend by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder. The definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. Consequently in the present case the payment even assuming that it was a dividend would have to be taxed not in the hands of the assessee but in the hands of the shareholder. The payment could not be taxed in the hands of the assessee. See Universal Medicare Pvt.Ltd 2010 (3) TMI 323 - BOMBAY HIGH COURT - Decided in favour of assessee Addition on Business income on security deposit received by the Respondent - transfer of rights of ownership by way of irrevocable covenant - Held that - when the possession of land by way of license was given to M/s. Skyline Mansion Pvt. Ltd. The Tribunal has in the impugned order rendered a finding of fact that when the security deposit was received under the joint development agreement dated 4th April 2008 no sale took place as no conveyance was executed. Further the land and rights in respect thereof being stock in trade and not capital assets of the Respondent Assessee no sale under the Transfer of Property Act also took place in the subject Assessment Year. The impugned order holds that in terms of the joint development agreement dated 4th April 2008 only after all the requisite permissions are obtained would the obligation to issue a license to M/s. Skyline Mansions Pvt. Ltd. to enter upon the Respondent Assessee s land would be granted. It is on the above date 25th April 2011 i.e. the date when the license was granted to M/s. Skyline Mansion Pvt. Ltd. that income can be said to have accrued. Therefore on the date when the security deposit was received in view of the findings of fact rendered by the Tribunal there is no income earned by the Respondent Assessee in respect of its security deposit of 54.68 crores. - Decided in favour of assessee

Summary

Issues:
1. Interpretation of section 2(22)(e) of the Income Tax Act 1961 regarding deemed dividend.
2. Treatment of security deposit received by the Respondent Assessee as business income.

Issue 1: Interpretation of section 2(22)(e) of the Income Tax Act 1961 regarding deemed dividend:
- The Respondent Assessee, a partnership firm in the real estate business, received a security deposit from another company. The Assessing Officer invoked section 2(22)(e) to treat the deposit as deemed dividend due to common shareholders.
- The CIT(A) upheld the invocation partially, considering a portion of the deposit as business consideration and the rest as non-business consideration.
- The Tribunal, however, held that section 2(22)(e) did not apply since the Assessee firm was not a registered shareholder of the company depositing the amount. Citing precedents, the Tribunal ruled that the dividend should be taxed in the hands of the shareholder, not the Assessee firm.
- The Court dismissed the Revenue's argument that the Assessee firm should be liable for the deemed dividend, as there was no evidence to support this claim. The Court also referred to previous judgments to support its decision.

Issue 2: Treatment of security deposit received by the Respondent Assessee as business income:
- The Respondent Assessee entered into a joint development agreement and received a security deposit. The Assessing Officer treated the entire deposit as deemed dividend.
- The CIT(A) enhanced the income by considering a portion of the deposit as business income, leading to an addition of Rs. 28.41 crores to the total income.
- The Tribunal disagreed with this assessment, stating that the income would accrue when possession of land was given, which happened in a later assessment year. The Tribunal also noted that the income had been offered for tax in the subsequent year.
- The Court supported the Tribunal's decision, emphasizing that no income accrued to the Assessee in the subject assessment year based on factual findings. The Court found the Tribunal's view reasonable and not arbitrary, thus dismissing the Revenue's appeal.

In conclusion, the High Court of Bombay dismissed the appeal challenging the Tribunal's order, addressing issues related to the interpretation of deemed dividend under section 2(22)(e) and the treatment of a security deposit as business income. The Court upheld the Tribunal's decisions based on factual findings and legal precedents, emphasizing the proper taxation of income in the hands of the relevant parties.