2022 (12) TMI 939 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - receipt of amount from the lender co. where the assessee holds substantial interest is in question - credibility of explanation offered by the assessee to support its claim of business transaction qua a loan transaction of ordinary nature - assessee has inter alia undertaken certain related party transactions - as found that the assessee has received loans from a company wherein the assessee holds 20% equity shares and thus a holds substantial interest - HELD THAT - The assessee claimed to have entered into an MOU dated 2nd April, 2012 with the lender company seeking to part with 50% right therein in favour of Landspace. As claimed, the MOU was acted upon and the money was transferred by the lender to the assessee in consideration of acquisition of rights in the property allotted in favour of the assessee by the builder. An Agreement to Sale (ATS) dated 13.07.2015 was thereafter was entered into jointly with Landspace (confirming party) as proposed sellers with the proposed buyer M/s. Garrison Developer. MOU was duly acted upon at a later point of time. The resultant profit were also claimed to have been shared equally as provided in MOU to support the inherent character of money received from Landspace. These facts clearly vindicates the claim of the assessee that the amount received was in consideration of transfer of rights in the property allotted and thus cannot be regarded as a loan transaction of ordinary nature. To support the nature of money received from Landspace, the assessee claims that such MOU has been acted upon. Where the rights in the property was sold and profits have been shared as business receipt by Landspace, the other considerations fades into insignificance. CIT(A), has examined the issue threadbare and has rightly concluded that the amount obtained from Landspace is in the nature of business transaction outside the purview of Section 2(22)(e). Mere declaration in the financial statement of amount received as inter corporate loan is neither here nor there. The nature of amount received is vouched by the subsequent actions. Thus, propriety of such explanation can hardly be questioned. Hence, without further delineation of factual matrix, we see no perceptible justification in the allegations made by the Revenue seeking to displace the character of transaction. We thus endorse the view taken by the CIT(A) and hence decline to interfere. Appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Justification of CIT(A) in holding Rs. 2,53,75,000/- as a business or commercial transaction by deleting the disallowance under Section 2(22)(e) of the Income Tax Act, 1961.
2. Ignoring the repayment of Rs. 92,27,713/- to M/s. Landspace Construction Pvt. Ltd. and the closing balance of Rs. 1,72,35,064/-.

Issue-wise Detailed Analysis:

1. Justification of CIT(A) in holding Rs. 2,53,75,000/- as a business or commercial transaction by deleting the disallowance under Section 2(22)(e) of the Income Tax Act, 1961:

The Revenue challenged the order of the CIT(A) which deleted the additions made by the Assessing Officer (AO) under Section 2(22)(e) of the Income Tax Act, 1961, treating the amount of Rs. 2,53,75,000/- received by the assessee as a business or commercial transaction rather than a loan. The AO had initially observed that the assessee, holding a 20% equity share in Landspace Construction Pvt. Ltd., received loans from Landspace, which were classified as loans and advances in the financial statements. The AO argued that the transactions were loans disguised as business transactions, invoking Section 2(22)(e) which deals with deemed dividends.

The assessee contended that the amount received was for sharing 50% rights in two real estate properties under construction, as per a Memorandum of Understanding (MOU) dated 2nd April 2012, with Landspace. The CIT(A) accepted the assessee's explanation, supported by the MOU and subsequent sale agreements, that the transaction was a business deal rather than a loan. The CIT(A) found that the amount received was in the nature of an advance/share towards the purchase of property, not a loan, and thus outside the purview of Section 2(22)(e).

The Tribunal upheld the CIT(A)'s decision, noting that the MOU was acted upon and the profits from the sale of the properties were shared equally between the assessee and Landspace, indicating a genuine business transaction. The Tribunal concluded that the nature of the amount received was corroborated by subsequent actions and was not merely an inter-corporate loan as initially recorded in the financial statements.

2. Ignoring the repayment of Rs. 92,27,713/- to M/s. Landspace Construction Pvt. Ltd. and the closing balance of Rs. 1,72,35,064/-:

The AO also raised concerns about the repayment of Rs. 92,27,713/- to Landspace and the resultant closing balance of Rs. 1,72,35,064/-, arguing that the transactions were indicative of loan repayments rather than business dealings. The AO questioned the authenticity of the MOU and the subsequent agreements, suggesting they were fabricated to present the transactions as business-related.

The CIT(A) dismissed these concerns, emphasizing that the repayments and the closing balance did not alter the fundamental nature of the transactions as business dealings. The Tribunal agreed with this assessment, stating that the repayments could be attributed to various business reasons and did not necessarily indicate a loan transaction. The Tribunal highlighted that the subsequent sale of the properties and the equal sharing of profits further validated the business nature of the transactions.

Conclusion:

The Tribunal concluded that the CIT(A) correctly interpreted the transactions as business dealings rather than loans, thereby justifying the deletion of the additions under Section 2(22)(e). The appeal by the Revenue was dismissed, affirming the CIT(A)'s decision. The detailed examination of the MOU, subsequent agreements, and the sharing of profits supported the assessee's stance, and the Tribunal found no justification to interfere with the CIT(A)'s findings. The order was pronounced on 20/12/2022.