2012 (5) TMI 480 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Advance against rent or security deposit - During the course of hearing it is submitted that the assessee company received the said amount not as advance rent but a security deposit through journal entry and there was no actual movement of cash from the bank account - According to the assessee, this security deposit does not come under the ambit of sec. 2(22)(e) of the Act, whereas according to the A.O. this security deposit was nothing but deemed dividend inasmuch as two of the beneficial shareholders of lessee-company were also shareholders and substantially interested in the assessee - It is a principle of interpretation of statutes that where once certain words in an Act have received a subsequent statute, the legislature must be taken to have used them according to the meaning which a Court of competent jurisdiction has given them - Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. The deeming provision as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance - the provisions are not applicable to the present facts of the case the nature of transactions has no effect. - Decided in favor of the assessee

Summary

Issues Involved:
1. Treatment of advance against rent as security deposit.
2. Deletion of addition made under Section 2(22)(e) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Treatment of Advance Against Rent as Security Deposit:
The primary issue was whether the amount of Rs. 3.8 crores received by the assessee from M/s. M.L. Dalmiya and Co. Ltd. should be treated as an advance against rent or a security deposit. The assessee argued that the amount was a security deposit as per the new agreement dated 31/3/2003, which superseded the earlier agreement dated 10/8/1998. The original agreement involved an advance rent of Rs. 3.20 crores, adjusted against the rent payable. Due to a dispute, a new agreement was made, stipulating a security deposit of Rs. 3.8 crores to be refunded at the end of the lease period. The Assessing Officer (A.O.) treated this amount as an advance rent and deemed it as a dividend under Section 2(22)(e) of the Income Tax Act, 1961, due to the substantial shareholding of Avishek Dalmiya and Chandralekha Dalmiya in both companies.

The Commissioner of Income Tax (Appeals) [C.I.T.(A)] held that the A.O. incorrectly considered the security deposit as deemed dividend. The C.I.T.(A) observed that the security deposit was distinct from the advance rent and was meant to secure the property, not as an advance payment. The C.I.T.(A) also noted that the security deposit remained constant throughout the lease period, unlike the diminishing advance rent. The Tribunal upheld this view, confirming that the nature of the transaction was a security deposit and not an advance rent.

2. Deletion of Addition Made Under Section 2(22)(e) of the Income Tax Act, 1961:
The second issue was the deletion of the addition of Rs. 3,66,31,403 made by the A.O. under Section 2(22)(e) of the Income Tax Act, 1961. The A.O. considered the security deposit as deemed dividend, citing the substantial shareholding of Avishek Dalmiya and Chandralekha Dalmiya in both companies. The assessee argued that the amount was a security deposit and not a loan or advance, and thus should not be treated as deemed dividend.

The C.I.T.(A) and the Tribunal both found that the provisions of Section 2(22)(e) were not applicable in this case. The Tribunal noted that for Section 2(22)(e) to apply, the payment must be made to a registered shareholder. In this case, the assessee was not a shareholder of M.L. Dalmiya and Co. Ltd., and thus the provisions could not be invoked. The Tribunal also observed that the intention behind Section 2(22)(e) was to tax dividends in the hands of shareholders, not in the hands of non-shareholders. The Tribunal cited various case laws, including the Special Bench decision in Asstt. CIT v. Bhaumik Colour (P.) Ltd. and the decision of the Hon'ble Rajasthan High Court in CIT v. Hotel Hilltop, supporting the view that deemed dividend can only be assessed in the hands of a shareholder.

The Tribunal concluded that the security deposit was a commercial transaction and not an advance or loan. Therefore, the addition made by the A.O. under Section 2(22)(e) was not justified, and the appeal of the department was dismissed.

Conclusion:
The Tribunal upheld the C.I.T.(A)'s decision, confirming that the amount of Rs. 3.8 crores was a security deposit and not an advance rent. It also ruled that the addition made under Section 2(22)(e) was incorrect, as the assessee was not a shareholder of M.L. Dalmiya and Co. Ltd., and the provisions of deemed dividend did not apply. The appeal of the department was dismissed.