2024 (9) TMI 1511 - AT - Income Tax

Reopening of assessment u/s 147 - deemed dividends addition u/s 2(22)(e) - HELD THAT - Merely alleging that the entire story made up by the assessee is clearly an afterthought would be of no help to revenue unless the factual evidence brought on record and contention of the appellant are disproved. CIT(A) has been justified in relying on the judgement delivered on similar fact in the case of Pradip Kumar Malhotra 2011 (8) TMI 16 - CALCUTTA HIGH COURT Therefore, no interference is called for in the decision of the Ld. CIT(A) in holding that the payment of Rs. 3.00 crores on account of security does not fall within the definition of deemed dividends as per the provisions of section 2(22)(e). In view of that matter we find no infirmity or perversity in the decision of the Ld. CIT(A) to the facts on record in quashing the reopening of the assessment u/s 147 of the Act and that payment of Rs. 3.00 crores on account of security does not fall within the definition of deemed dividends as per the provisions of section 2(22)(e) of the Act. Thus, the ground no. 1 and 2 of the department are rejected. Advancement paid by the company to the appellant assessee hit by section 2(22)(e) - In the present case the assessee has leased prime properties at Chandigarh and received an advance rent in respect of the said premises leased out to the company, and such advance was to be later adjusted towards rent payable by the company. In our view, the amount of advance rent received by the assessee from the company would be a commercial transaction and it would certainly fall outside the purview of section 2(22)(e) - The assessee being having substantial interest in the company would not change the character of the transaction. In the present case where we have a situation of contrary views having been expressed by the non-jurisdictional High Courts and there is no decision of M/s Vegetables Products Ltd 1973 (1) TMI 1 - SUPREME COURT where it was held that where the provision is capable of more than one reasonable interpretation and different High Courts have taken different view on the matter, the view which is favourable to the assessee should be adopted. In view of the same, we are inclined to follow the views expressed by Hon ble Karnataka High Court in the case of Smt. Jamuna Vernekar 2021 (2) TMI 757 - KARNATAKA HIGH COURT where it was observed that such loan or advance is given to a shareholder as a consequence of any further consideration which is beneficial to the company received from such a shareholder is a commercial transaction and it is outside the purview of section 2(22)(e) of the Act. In the present case, advance rent or even security was given in lieu of the use of rented premises in terms of lease agreement and therefore, such an advance rent and not even loan cannot be said to be deemed dividend within the meaning of the provision of section 2(22)(e) of the Act. Thus, we hold that advancement paid by the company to the appellant assessee amounting to Rs. 86,01,836/-is not hit by section 2(22)(e) and as such, the said addition is deleted. Thus, the ground. No.1 of the CO. of the assessee is allowed.

Summary

Issues Involved:
1. Legality and justification of reopening the assessment under Section 147 of the Income Tax Act.
2. Applicability of Section 2(22)(e) regarding deemed dividends for payments made by M/s Orbit Resorts Pvt. Ltd. to the assessee.

Issue-wise Detailed Analysis:

1. Legality and Justification of Reopening the Assessment under Section 147:
The appellate tribunal examined whether the reopening of the assessment under Section 147 was legally valid and justified. The assessee initially filed a return showing an income of Rs. 1,31,68,060/- and agricultural income of Rs. 27,76,000/-. The assessment was completed at a total income of Rs. 1,34,69,680/- with agricultural income of Rs. 24,98,380/-. The assessment was reopened based on information that the assessee had received Rs. 4,66,08,911/- from M/s Orbit Resorts Pvt. Ltd., which was not disclosed in the original return.

The CIT(A) and the tribunal found that all material facts were disclosed during the original assessment proceedings, including the copy of the account of the assessee as appearing in the books of M/s Orbit Resorts Pvt. Ltd. The tribunal relied on several judgments, including Dr. Habicht vs. Makhija (1985) 154 ITR 552 (Bom.), Lokendra Singh vs. ITO (1981) 128 ITR 450 (MP), and Atma Ram Properties Private Limited vs. DCIT (2012) SITC 237 (Del.), to conclude that the reopening of the assessment was neither legal nor justified. The tribunal held that the initiation of proceedings under Section 147 was not warranted as the assessee had disclosed all primary facts truthfully, and the AO's failure to apply the law correctly during the original assessment did not justify reopening the case.

2. Applicability of Section 2(22)(e) Regarding Deemed Dividends:
The tribunal also examined whether the payments made by M/s Orbit Resorts Pvt. Ltd. to the assessee fell within the ambit of Section 2(22)(e) of the Income Tax Act, which pertains to deemed dividends.

Security Payment:
The CIT(A) and the tribunal found that the payment of Rs. 3.00 crores by the company to the assessee on account of 'security' was for business considerations. The company, in order to safeguard its business interest, wanted to occupy the premises for the long term and agreed to make the payment as per the lease agreement. Citing the case of Pradip Kumar Malhotra vs. CIT, the tribunal held that such payments did not fall within the definition of 'deemed dividends' under Section 2(22)(e).

Advance Rent:
The tribunal also addressed the issue of advance rent amounting to Rs. 86,01,836/-. The CIT(A) had initially upheld this amount as deemed dividend based on the judgment in CIT vs. P.K. Abubucker (2003) 259 ITR 507 (Mad.), which held that advance rent could be treated as deemed dividend. However, the tribunal considered a contrary view expressed by the Karnataka High Court in Smt. Jamuna Vernekar vs. Deputy Commissioner of Income-tax, which held that such commercial transactions fall outside the purview of Section 2(22)(e).

The tribunal concluded that the advance rent paid by the company was a commercial transaction and did not constitute a loan. Therefore, it did not fall within the ambit of Section 2(22)(e). The tribunal also noted that in the absence of a jurisdictional High Court ruling, the view favorable to the assessee should be adopted, citing the Supreme Court's decision in Commissioner of Income-tax vs. M/s Vegetables Products Ltd.

Conclusion:
The tribunal dismissed the revenue's appeal and allowed the cross-objection of the assessee. It held that the reopening of the assessment under Section 147 was not justified and that the payments made by M/s Orbit Resorts Pvt. Ltd. to the assessee, including the advance rent, did not fall within the definition of deemed dividends under Section 2(22)(e) of the Income Tax Act. The order was pronounced in the open court on 28.08.2024.