2017 (11) TMI 326 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - receipt of advance against agreement to sale the property to the company - subsequently agreement was cancelled due to fall in market price - Held that - We find that the assessee had himself signed on behalf of NIPL (purchaser) and for himself (seller). The authenticity of the so called MOU cannot also be cross verified as it was not registered with the registering authority. Thus, the AO s observation that the explanation of the assessee is a self serving argument . Para 5 of the asst. order cannot be brushed aside. The assessee s argument that due to fall in market value of property and subsequent change in circumstances, the sale process fell through etc., cannot be taken its face value as no documentary evidence was adduced to substantiate its claim. The salient feature in the issue was that the subject property was owned by the assessee the seller who himself was holding 55.05% share in NIPL the purchaser and, thus, in our view, the so called fall in market value of property and subsequent change in circumstances would not have come in the way of alleged sale transaction of the subject property. We have with due respects perused the case laws on which the assessee had placed strong reliance and of the view that those case laws will not come to the rescue of the assessee. The case laws relied on by the assessee are for the proposition that when amounts are advanced for business transaction / out commercial expediency, the same would not come within the purview of deemed dividend u/s 2(22)(e). In the instant case, as mentioned earlier, the amounts received by assessee is nothing but loan / advance from NIPL and assessee is camouflaging the same as a commercial transaction relating to sale of property in order to get over the provisions of Section 2(22)(e). AO was within his realm to invoke the provisions of s. 2 (22)(e) of the Act.- Decided against assessee.

Summary

Issues Involved:
1. Whether the addition of ?1,00,50,743 as deemed dividend under Section 2(22)(e) of the Income Tax Act by the Assessing Officer (AO) was justified.

Issue-wise Detailed Analysis:

1. Addition of ?1,00,50,743 as Deemed Dividend:

Background:
The assessee, an individual, reported income from various sources including a new unsecured loan creditor amounting to ?1.53 crores from M/s. Nokha Investments Pvt. Ltd. (NIPL). The AO scrutinized the details and found that the assessee held a 55.05% shareholding in NIPL, a private limited company with accumulated profits of ?1,00,50,743 as of 31.03.2012. The AO concluded that the advance received from NIPL was liable to be taxed as deemed dividend under Section 2(22)(e) of the Income Tax Act.

Assessee's Contention:
The assessee argued that the amount received was an advance for the sale of property, not a loan. A Memorandum of Understanding (MOU) was entered into with NIPL for selling the property for ?3 crores. The advance of ?1.53 crores was intended to clear a housing loan with HDFC Bank. Due to a fall in the market value of the property, the sale did not materialize, and the advance was returned to NIPL.

Assessing Officer's Findings:
The AO rejected the assessee's explanation, stating that the property was never transferred to NIPL, and the transaction was merely a loan disguised as an advance for purchase. The AO emphasized that the assessee held more than 10% shares in NIPL, which had sufficient accumulated profits, thereby attracting the provisions of Section 2(22)(e).

First Appellate Authority's Decision:
The CIT (A) upheld the AO's decision, citing that the basic criteria for invoking Section 2(22)(e) were met:
- NIPL was a private company with accumulated profits.
- The assessee held more than 10% shares in NIPL.
- The payment to the assessee constituted deemed dividend restricted to the accumulated profits.

The CIT (A) dismissed the assessee's argument that the money was not a loan, stating that the paperwork was an attempt to camouflage the real intention of the assessee.

Tribunal's Analysis:
The Tribunal considered the rival submissions, additional evidence, and relevant case laws. It noted that the MOU was signed by the assessee on behalf of both parties and was not registered with any authority, raising questions about its authenticity. The Tribunal found no substantial evidence to support the assessee's claim that the transaction was a commercial one. It concluded that the amounts received were indeed loans/advances from NIPL, camouflaged as a commercial transaction to evade the provisions of Section 2(22)(e).

Conclusion:
The Tribunal upheld the AO's decision to treat ?1,00,50,743 as deemed dividend under Section 2(22)(e), dismissing the assessee's appeal. The Tribunal found that the AO was justified in invoking the provisions of Section 2(22)(e) as the transaction did not qualify as a commercial transaction and was a straightforward loan.

Final Judgment:
The appeal by the assessee was dismissed, and the addition of ?1,00,50,743 as deemed dividend was upheld. The order was pronounced on November 03, 2017.