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2021 (8) TMI 636 - AT - Income TaxDeemed dividend u/s 2(22)(e) - whether loans and advances given to a shareholder holding beneficial interest is coming within the ambit of provisions of section 2(22)(e) of the Act or not? - HELD THAT - In this case, there is no dispute with regard to fact that two transactions between the assessee Shri Naren Rajan and Company are normal trade advances / commercial transactions. In fact, the AO has categorically accepted that two transactions are normal commercial transactions. Therefore, we are of the considered view that once a particular transaction is considered as normal commercial transaction, then the question of application of provisions of section 2(22)(e) of the Act does not arise. The CIT(A) without appreciating the facts, has confirmed additions made by the AO. Hence, we set aside the order of the ld.CIT(A) and direct the AO to delete additions made towards deemed dividend u/s.2(22)(e) of the Act towards advance received from M/s Tristar Accommodation Limited for purchase of villas and payment made as security deposit for Joint Development Agreement. Disallowance of provision made for construction cost of balance flats not handed over to land owner - assessee had entered into a Joint Development Agreement (JDA) dated 18.01.2006 with his sister Smt. Seshu Rajan for development of land measuring 19.65 acres - HELD THAT - Following various judicial precedents including decision of the Hon ble Supreme Court in the case of M/s. Bharat Earth Movers vs. CIT, 2000 (8) TMI 4 - SUPREME COURT we are of the considered view that provision made for cost of construction of 17 villas amounting to ₹ 4,76,00,000/- is ascertained liability which accrued for relevant assessment year.Hence, we direct the AO to allow provisions created in the books of accounts for assessment year 2012-13. Disallowance of bad debts - HELD THAT - We find that the conditions for claim of bad debts as stipulated u/s.36(1)(vii) r.w.s. 36(2) of the Act has been complied with and hence, it is irrelevant whether debt pertains to business which was closed in earlier year or it pertains to business in continuation during the year in which said debt was written off. As long as debt was written off in the books of accounts of the assessee, the same needs to be allowed as deduction. This proposition is supported by the decision of Hon ble High Court of Madras in the case of CIT v. M/s. Rajini Investment Private Limited, 2009 (10) TMI 33 - MADRAS HIGH COURT , where it was clearly held that merely because the money lending business was subsequently discontinued, that is in the subsequent accounting year relating to assessment year, it cannot be held that the assessee was disentitled to claim such deduction. Therefore, we are of the considered view that there is no error in the findings recorded by the ld.CIT(A) to delete addition made towards disallowance of bad debts and hence, we are inclined to uphold findings of the ld.CIT(A) and reject ground taken by the Revenue. Capitalization of land for project expenses - HELD THAT - We have heard both the parties, perused materials available on record and gone through orders of the authorities below. Admittedly, lands on which 48 row houses have been built were in pursuance of Joint Development Agreement with Smt. Seshu Rajan. The lands on which row houses have been built were never purchased from the land owner. Further, the assessee has incurred cost of construction of 48 row houses and debited under the head direct project expenses into profit loss account. Since the row houses are retained to earn rental income, cost of building of 48 row houses was capitalized in his books of accounts as fixed assets. Since, land was in pursuant to JDA and assessee has not paid any consideration for land, the question of capitalization of cost of land of 48 row houses does not arise. Therefore, under these facts and circumstances, we are of the considered view that since the lands were never purchased by the assessee nor any consideration was paid with respect to sale, the question of capitalization of said cost does not arise. Notwithstanding to the above, it is also noteworthy to observe that cost of land was never claimed in profit loss account as expenses and thus, capitalization of such cost of land to the fixed asset is a revenue neutral expenses, because no evidence was brought on record to establish the fact that the assessee has paid consideration for purchase of land. CIT(A) after considering relevant facts, has rightly deleted addition made by the AO. Hence, we are inclined to uphold the findings of CIT(A) and reject ground taken by the Revenue.
Issues Involved:
1. Deemed dividend under section 2(22)(e) of the Income Tax Act. 2. Disallowance of provision for construction cost of balance flats. 3. Addition of unexplained cash credits. 4. Disallowance of bad debts. 5. Capitalization of land for project expenses. Detailed Analysis: 1. Deemed Dividend under Section 2(22)(e) of the Income Tax Act: - The assessee, a director holding 77% shares in M/s. Tristar Accommodation Ltd., received ?2.5 crores from the company. The AO treated ?69,56,522 and ?90 lakhs as deemed dividends under section 2(22)(e), arguing these were loans and advances. - The CIT(A) upheld the AO's decision, stating the transactions were not normal business transactions. - The Tribunal disagreed, noting the transactions were commercial and supported by agreements. It referenced CBDT Circular No. 19 of 2017 and various judicial precedents, concluding that normal business transactions do not attract section 2(22)(e). - Hence, the Tribunal directed the deletion of the additions made by the AO. 2. Disallowance of Provision for Construction Cost of Balance Flats: - The assessee made a provision of ?4.76 crores for construction costs of 17 villas as per a supplementary agreement with the landowner. - The AO disallowed this, considering it an unascertained liability. - The CIT(A) upheld the AO's decision. - The Tribunal found the provision to be an ascertained liability, citing the supplementary agreement and judicial precedents like Bharat Earth Movers vs. CIT. - The Tribunal directed the AO to allow the provision. 3. Addition of Unexplained Cash Credits: - The AO added ?2,92,84,500 as unexplained cash credits, questioning the source of cash deposits in the assessee's bank accounts. - The CIT(A) partly accepted the assessee's explanation, reducing the addition to ?1,76,85,645. - The Tribunal upheld the CIT(A)'s decision, accepting cash withdrawals and drawings from proprietary concerns as valid sources but rejecting land advance receipts due to lack of evidence. 4. Disallowance of Bad Debts: - The assessee claimed a bad debt of ?37,40,415 from M/s. Paramount Airways Pvt. Ltd. - The AO disallowed it, arguing the business was closed three years ago. - The CIT(A) allowed the claim, noting the debt was written off in the books. - The Tribunal upheld the CIT(A)'s decision, referencing section 36(1)(vii) and 36(2) of the Act and the decision of the Hon’ble Madras High Court in CIT v. Rajini Investment Private Limited. 5. Capitalization of Land for Project Expenses: - The AO added ?75 lakhs as the cost of land related to 48 row houses, arguing the assessee should have capitalized it. - The CIT(A) deleted the addition, stating the land was not purchased by the assessee. - The Tribunal upheld the CIT(A)'s decision, noting the land was under a Joint Development Agreement and not purchased by the assessee. Conclusion: - The Tribunal allowed the assessee's appeal for the assessment year 2011-12, partly allowed the appeal for 2012-13, and dismissed the Revenue's appeal for 2012-13.
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