2014 (1) TMI 1241 - AT - Income Tax

Income from sale of land - Income from business or capital gains - Held that - The sum was received by the assessee on account of sale of small portion of 0.18 Bigas of land, which was earlier sold in the financial year 2000-01 - The entire land was sold in such earlier year and the amount of gain resulting from such transfer was declared and accepted as Capital gains - Now the income from sale of smaller portion of land cannot be said to be income from business - Decided against Revenue. Disallowance of prior period expenses - Held that - The payment made to the party on 19.01.2006 was simply in the nature of advance for which the services were rendered and the bill was raised in the previous year relevant to the assessment year under consideration - Since the assessee is a company following mercantile system of account, the expenditure would call for deduction at the time when the liability is finally settled and not when the amount was paid in advance - The reason for deduction of tax at source at the time of payment is the applicability of provisions of section 194J which provide for deduction of tax at source either at the time of credit of the sum to the account of the payee or at the time of payment there of, whichever is earlier - Decided against Revenue. Deemed dividend u/s 2(22)(e) - Held that - The assessee company is not a shareholder in the companies advancing loans to it - The shareholders of the assessee are shareholders of such companies - There is no question of assessing deemed dividend in the hands of the assessee - Following CIT vs. Navyug Promoters (P) Ltd. 2011 (11) TMI 318 - Delhi High Court - An assessee who is not a shareholder of the company, from which he received a loan or an advance cannot be treated as being covered by the definition of the word dividend as provided in s. 2(22)(e) - Decided against Revenue.

Summary

Issues:
1. Treatment of income from sale of land as 'Long term capital gain' or 'Income from other sources'.
2. Disallowance of prior period expenses.
3. Deletion of addition as deemed dividend u/s 2(22)(e) of the Act.

Issue 1: Treatment of income from sale of land
The appeal concerned the treatment of income from the sale of land as 'Long term capital gain' instead of 'Income from other sources'. The assessee, engaged in real estate business, declared capital gain of Rs.20 lac from the sale of a small portion of land. The AO treated it as 'Income from other sources', while the CIT (A) allowed it to be taxed as 'Long term capital gain'. The Tribunal upheld the CIT (A)'s decision, noting that the income arose from the sale of a part of land previously treated as 'Capital gains'. The Tribunal agreed that the income should be treated consistently as 'Long term capital gain'.

Issue 2: Disallowance of prior period expenses
The second ground of appeal was against the disallowance of Rs.1 lac out of prior period expenses. The AO disallowed the amount paid towards architectural services as prior period expense, as it was paid in the preceding assessment year. However, the CIT (A) deleted the disallowance, considering the nature of the payment and the timing of the bill raised. The Tribunal agreed with the CIT (A), stating that the expenditure should be deducted when the liability is settled, not when the amount was paid in advance. The Tribunal upheld the deletion of the disallowance.

Issue 3: Deletion of addition as deemed dividend
The last ground of appeal was against the deletion of addition as deemed dividend u/s 2(22)(e) of the Act. The AO added Rs.15,64,778/- as deemed dividend, but the CIT (A) ordered for its deletion. The Tribunal referred to precedents and held that the borrower must hold shares in the lending company for deemed dividend to apply. Since the assessee company was not a shareholder in the companies advancing loans, the provisions of section 2(22)(e) did not apply. The Tribunal also noted that the shareholders of the assessee were shareholders of such companies, further supporting the deletion of the addition. The Tribunal upheld the CIT (A)'s decision and dismissed the appeal.

In conclusion, the Tribunal dismissed the appeal, upholding the decisions of the CIT (A) on all three issues raised in the case. The judgment provided detailed analysis and legal reasoning for each issue, ensuring consistency and clarity in the application of tax laws.