2021 (2) TMI 757 - HC - Income Tax

Deemed dividend addition u/s 2(22)(e) - amount received in lieu of Security Deposit and Lease Rentals - ITAT treated it as loans or advances within the meaning of Section 2(22)(e) - HELD THAT - The word 'loan' means anything lent specially money on interest whereas, deposit means a sum of money paid to secure an article at service etc. Therefore deposit is not covered by the decision of Section 2(22)(e) of the Act. In the instant case, the assessee received certain sum from the company which was subsequently adjusted with the security deposit. The company did not give loan to the assessee to construct a building but kept a deposit as any other commercial transaction. The sum so paid has been adjusted towards security deposit which is evident from the books of the company and therefore, the aforesaid deposit is outside the purview of Section 2(22)(e) amounts to trade advances which was recovered from rentals during the usual course of business. The trade advances arising during usual course of business and not for individual benefit of the assessee and the same amounts to advance payment of the rents adjusted monthly with the ledgers of the assessee. Commissioner of Income Tax (Appeals) has also held that under the commercial transactions, the assessee had given prime property and after construction to the company and the company was benefited as the building after construction was let out to the company at much lower rate than the market price and therefore, the transaction in question is commercial transaction and is outside the purview of Section 2(22)(e) of the Act.- 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 payments received in lieu of security deposit and lease rentals by a shareholder.

Analysis:

1. Interpretation of Section 2(22)(e) of the Income Tax Act:
The case involved a dispute over whether the amount received by a shareholder could be considered as deemed dividend under Section 2(22)(e) of the Act. The provision aims to tax accumulated profits distributed as loans to shareholders to avoid dividend distribution tax. The court clarified that for a loan to qualify as deemed dividend, it must be given to a shareholder as a result of beneficial consideration received from the shareholder. Notably, the term 'loan' refers to money lent on interest, while 'deposit' denotes a sum paid to secure an article or service. In this case, the company's payment to the shareholder, adjusted with the security deposit, was deemed a commercial transaction, not a loan. The court held that the transaction fell outside the purview of Section 2(22)(e) of the Act.

2. Treatment of Payments Received in Lieu of Security Deposit and Lease Rentals:
The court examined the nature of the payments made by the company to the shareholder in the form of security deposit and lease rentals. It was established that the payments were part of a business agreement for the construction of a building on the shareholder's property. The shareholder, in turn, adjusted the amounts received with the security deposit and rent payable by the company. The court noted that the trade advances arising during the regular course of business, not for the individual benefit of the shareholder, were considered advance payments of rent. The Commissioner of Income Tax (Appeals) also acknowledged the commercial nature of the transaction, as the company benefited from leasing the constructed building at a lower rate than the market price. Consequently, the court ruled that these transactions were commercial in nature and not subject to taxation under Section 2(22)(e) of the Act.

In conclusion, the court found the Tribunal's decision to be perverse, as it failed to appreciate the commercial nature of the transactions and the distinction between loans and deposits. The substantial question of law was answered in favor of the shareholder, and the appeal was allowed, quashing the tribunal's order against the appellant.