2019 (10) TMI 442 - AT - Income Tax

Validity of rectification order passed by the AO u/s 154 - AO mentioned in the notice that the development expenses is capital in nature and hence the same is proposed to be disallowed - HELD THAT - There is no dispute with regard to the fact that the assessee was not the owner of land on which the impugned amount of ₹ 8.50 lakhs was spent. Hence the question of treating the same as Capital expenditure does not arise. The assessee has undertaken to sell the land belonging to other person and accordingly he has entered into an agreement to sell the land with a person named Shri D.K.Sharma, admittedly, as representative of the owner of the land. In our view, the above said activities carried on by the assessee can only considered as real estate activity carried on by the assessee. There is also no dispute with regard to the fact that the assessee has incurred the expenses of ₹ 8.50 lakhs on the development and maintaining the land and the gross receipts of ₹ 100 lakhs, being the advance amount forfeited, was also arisen in respect of the very same land - there is merit in the contentions of the assessee that the development/maintenance of land is related to the real estate activity carried on by the assessee and the above said amount of ₹ 100 lakhs was also received out of the said activity only - the assessee is entitled to claim deduction of ₹ 8.50 lakhs against the gross receipts of ₹ 100 lakhs. Hence we are of the view that the Ld CIT(A) was not justified in confirming the disallowance of ₹ 8.50 lakhs. We also find merit in the alternative contentions of the assessee that the issue relating to deduction of ₹ 8.50 lakhs against the gross receipts of ₹ 100 lakhs is a debatable issue and hence the same is outside the scope of rectification proceedings. Accordingly the impugned orders are liable to be quashed on this ground also. Deemed dividend u/s 2(22)(e) - HELD THAT - The assessee has maintained a current account/running account with the above said company and the outstanding balances were fluctuating during the course of hearing. We notice that, most of the time, the assessee s money was lying with the above said company and only for a short period of about two months, the company s money was available with the assessee. Hence the ratio of above said decisions can also be conveniently applied to the facts of the present case. Hence there is merit in the alternative contention of the assessee. The amount of ₹ 100 lakhs given to the assessee by the above said company cannot be considered as loan or advance within the meaning of provisions of sec. 2(22)(e) of the Act. Accordingly we set aside the order passed by the ld CIT(A) on this issue and direct the AO to delete the addition made u/s 2(22)(e) of the Act.

Summary

Issues Involved:
1. Validity of rectification order under Section 154 of the Income Tax Act for AY 2007-08.
2. Deductibility of development expenses of ?8.50 lakhs against forfeited advance income of ?100 lakhs for AY 2007-08.
3. Taxability of ?100 lakhs as deemed dividend under Section 2(22)(e) of the Income Tax Act for AY 2011-12.

Detailed Analysis:

1. Validity of Rectification Order under Section 154 for AY 2007-08:
The assessee challenged the rectification order passed by the Assessing Officer (AO) under Section 154 of the Income Tax Act, which disallowed the development expenses of ?8.50 lakhs. The AO had initially accepted these expenses in assessments under Sections 148 and 153C. The Tribunal found that the AO's view that the expenses were capital in nature was debatable and not a mistake apparent from the record. As per the Supreme Court's ruling in T.S. Balaram ITO vs. Volkart Brothers, debatable issues are outside the scope of rectification proceedings. Therefore, the Tribunal quashed the rectification order on these grounds.

2. Deductibility of Development Expenses for AY 2007-08:
The assessee incurred ?8.50 lakhs in expenses to develop and maintain land he did not own but was responsible for selling as a broker. The AO disallowed these expenses, treating them as capital expenditure. However, the Tribunal observed that the assessee was not the landowner and had incurred these expenses in his capacity as a broker. The Tribunal concluded that the expenses were directly related to the real estate activity and the forfeited advance of ?100 lakhs, making them deductible. Consequently, the Tribunal allowed the deduction of ?8.50 lakhs against the gross receipts of ?100 lakhs.

3. Taxability of ?100 Lakhs as Deemed Dividend for AY 2011-12:
The AO treated ?100 lakhs received by the assessee from M/s B & B Infrastructure Ltd as deemed dividend under Section 2(22)(e) of the Income Tax Act. The assessee argued that this amount was a business transaction and not a loan or advance. The Tribunal considered the fact that the assessee had provided a personal guarantee for a loan taken by the company and maintained a running current account with fluctuating balances. Citing precedents from various High Courts, the Tribunal held that the provisions of Section 2(22)(e) do not apply to current account transactions or loans given in return for an advantage conferred upon the company. Therefore, the Tribunal directed the AO to delete the addition of ?100 lakhs as deemed dividend.

Conclusion:
The Tribunal allowed both appeals filed by the assessee. It quashed the rectification order under Section 154 for AY 2007-08, allowed the deduction of ?8.50 lakhs in development expenses, and directed the deletion of ?100 lakhs added as deemed dividend for AY 2011-12.