2005 (10) TMI 225 - AT - Income Tax

Deemed Dividend u/s 2(22)(e) - Share capital - accumulated reserves and surplus shown in the company's balance-sheet - HELD THAT - As per the facts of the case, the construction of the commercial-cum-residential complex was entrusted to the company as per the agreement between the parties. As per the terms of the contract, the assessee retained the basement floor, ground floor, first floor, and the constructions which had been completed before 1-4-1995. The assessee let out the ground floor of the building and offered the rental income for taxation from the assessment year 1996-97 onwards. The ld. Chartered Accountant of the assessee has filed copies of the ledger accounts of the assessee in the books of M/s. Seethal Apartments (P.) Ltd. which show that by way of journal entry on 30-3-1996, a sum is debited. As per the argument of the ld. CA, there is another journal entry on the credit side in the name of the assessee amount, which was said to be in the business and not due to any loan or advance. The CIT(A) has deleted the addition by concluding that there was no cash flow or any payment to the assessee during the previous year and hence, the provisions of section 2(22)(e) are not attracted. It is not disputed that there was no transaction of any nature whatsoever during the previous year relevant to the assessment year 199697. Whatever book entries were passed, those were relating to the earlier years and that was also in respect of the agreement between the assessee and the company. The agreement is not disputed as a device used by the assessee for circumventing the provisions of section 2(22)(e) of the IT Act as was the issue in the case of M.D. Jindal. In this case also, it is not the contention of the Assessing Officer that some benefit was given to the assessee by the company. We, therefore, find no infirmity in the order of the CIT (Appeals). The CIT (Appeals) has rightly deleted the said addition. We, therefore, confirm his order. In the result, the appeal filed by the revenue stands dismissed.

Issues Involved:
1. Whether the CIT (Appeals) was justified in deleting the addition of Rs. 9,02,892 made by the Assessing Officer as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.

Detailed Analysis:

1. Background and Facts:
The appeal by the revenue is against the order of the CIT(A)-V, Cochin, dated 25-2-2003, relevant to the assessment year 1996-97. The primary issue is the deletion of an addition of Rs. 9,02,892 by the CIT (Appeals) that was made by the Assessing Officer as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.

The assessee, a director of M/s. Seethal Apartments Pvt. Ltd., held 20% of the share capital. During re-assessment, the Assessing Officer noted that the company had a surplus of Rs. 9,02,892 and had advanced loans and advances to the assessee amounting to Rs. 53,93,192. The Assessing Officer invoked section 2(22)(e) and added Rs. 9,02,892 to the assessee's income as deemed dividend.

2. Assessee's Contentions:
The assessee argued before the CIT(A) that no money was received from the company. The construction of a commercial-cum-residential complex was entrusted to the company, and the assessee retained certain floors, with construction completed before 1-4-1995. The rental income from the ground floor was offered for taxation from the assessment year 1995-96 onwards. The journal entry debiting the assessee's account was passed in the financial year 1995-96. The assessee and her husband had advanced money to the company, and the transaction was for construction purposes, not a loan or advance. The CIT(A) accepted these contentions and deleted the addition, stating there was no accumulated profit from earlier years and no cash flow to the assessee.

3. Revenue's Contentions:
The departmental representative argued that the CIT(A) erred in holding that cash transfer was necessary to attract section 2(22)(e). The representative contended that any payment by way of advance or loan to a shareholder should be taxed as deemed dividend to the extent of accumulated profits. The journal entry on 30-3-1996, representing a part of the company's assets, was sufficient to invoke section 2(22)(e). The representative relied on several judicial decisions to support the contention that the addition was justified.

4. Tribunal's Analysis:
The Tribunal examined the provisions of section 2(22)(e) and the facts of the case. It noted that the assessee was a shareholder holding more than 10% of the voting power in a closely held company. The Tribunal highlighted that for section 2(22)(e) to apply, there must be an advance or loan to the shareholder, and the company must have accumulated profits.

The Tribunal considered the decisions cited by both parties, including the Calcutta High Court's decision in M.D. Jindal's case, which held that the value of materials supplied by a company to a shareholder could be treated as deemed dividend. However, the Tribunal distinguished this case, noting that there was no actual transfer of money or benefit to the assessee during the relevant assessment year.

5. Conclusion:
The Tribunal concluded that there was no transaction during the previous year relevant to the assessment year 1996-97 that would attract section 2(22)(e). The journal entries related to earlier years and were part of a legitimate business agreement. There was no evidence of any device to circumvent the provisions of section 2(22)(e). The Tribunal found no infirmity in the CIT(A)'s order and confirmed the deletion of the addition.

6. Final Judgment:
The appeal filed by the revenue was dismissed, and the order of the CIT(A) was upheld.

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