2019 (8) TMI 43 - AT - Income Tax

Deemed dividend u/s 2(2)(e) - purchase of property in the name of shareholder-director - concept of beneficial owner vis- -vis a registered owner - HELD THAT - Board Resolution is the most crucial and clinching evidence to show that it is the Company that is the beneficial owner of this properly and not the assessee, who merely holds the same in her name for and on behalf of the Company, being a Director of the Company. The Board Resolution coupled with the entries in the books of account and Balance Sheets as at 31.3.2012 and 31.03.2013 constitute the clinching evidence to show that the said property really belongs to the Company and the assessee merely held the same for and on behalf of the Company. In view of the above facts clearly spell out that the property does not belong to the assessee and where the property does not belong to the assessee, then where is the question of the company making payment on behalf of the assessee so as to attract the provision of section 2(22)(e). Hence, we are of the view that the AO and CIT(A) clearly erred in holding that the moneys paid by the Company to Godrej was for the benefit of the assessee and hence, to be treated as deemed dividend u/s.2(22)(e). As in case of ACIT vs. Harshad V. Doshi 2010 (4) TMI 677 - ITAT, CHENNAI wherein the Tribunal held that provisions of section 2(22)(e) of the Act did not apply to advances made by the company to the assessee, who was the Managing Director thereof and also holding substantial interest therein, to acquire land in his name for the purpose of development by the company so as to reduce the incidence of stamp duty on the ultimate sale of flats to the customers. Tribunal held that the company advanced money to the MD out of commercial expediency to reduce the cost and be more competitive, and therefore it was clearly motivated by business exigencies, and that did not amount to loan' or 'advance' within the meaning of section 2(22)(e). This addition cannot be sustained hence, we delete the addition made by AO and confirmed by CIT (A). Appeal of the assessee is allowed.

Summary

Issues:
- Interpretation of section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividend.
- Determination of ownership of property purchased by a company on behalf of a director.
- Application of legal principles on beneficial ownership in tax assessments.

Analysis:
1. Interpretation of section 2(22)(e): The appeal concerns the addition of deemed dividend under section 2(22)(e) of the Act. The Assessing Officer (AO) added an amount as deemed dividend related to a property transaction where payments were made by a company on behalf of the appellant, who is a director in the company. The issue was whether these payments constituted deemed dividend. The appellant contested the addition before the Commissioner of Income Tax (Appeals) (CIT(A)) and subsequently before the Tribunal.

2. Ownership of Property: The Tribunal analyzed the facts and circumstances of the case. It was established that the property was jointly purchased by the company and the appellant, but a Board resolution clarified that the appellant held the property in her name for and on behalf of the company. The company made direct payments for the property, which were reflected as investments in its books. The intention was clear that the property belonged to the company, as evidenced by accounting entries and conduct.

3. Beneficial Ownership Principles: The Tribunal considered legal principles on beneficial ownership. Citing the case law of CIT vs. Podar Cement (P.) Ltd, the Tribunal emphasized that the beneficial owner is entitled to receive income from the property in their own right. Referring to another case, the Tribunal held that provisions of section 2(22)(e) did not apply to advances made by a company for business expediency. Based on these precedents, the Tribunal concluded that the addition of deemed dividend was not sustainable.

4. Judgment: Ultimately, the Tribunal allowed the appeal of the assessee, ruling in favor of the appellant. The Tribunal held that the moneys paid by the company for the property did not benefit the appellant and, therefore, did not qualify as deemed dividend under section 2(22)(e) of the Act. The Tribunal also highlighted discrepancies in the AO's interpretation and upheld the appellant's position based on legal principles and precedents cited during the proceedings.