2016 (10) TMI 221 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - whether the amounts received by the assessee was neither advances or the loan, but was mere advances in the nature of deposit made by the three companies for their business requirement? - Held that - In the instant case, sum advanced to the assessee by the three companies were purely on commercial consideration and was business advance as such, same cannot be treated as deemed dividend u/s 2(22)(e) of the Act, hence we hold that authorities below are not right in treating the aforesaid sums as deemed dividend. The AO is accordingly directed to delete the addition. - Decided in favour of assessee Disallowance of business loss on sale of land - holding the loss to be as short term capital loss - Held that - admittedly assessee is in the business of real estate and infact it has also entered into M/s Selene Constructions Pvt. Ltd. And M/s Juventus Estates Pvt. Ltd. for acquiring land on their behalf. As such, one thing is more than apparent that the assessee is in the business of sale and purchase of land. Further, the aforesaid land was acquired by the assessee for the purpose of its business and it had not acquired such land for the purpose of investment, hence evenif it is assumed that land in this sector was not part of the deal with such companies, it would not alter the nature of transaction from business to investment. It is settled law that nature of transaction has to be seen at the time of purchase and if at the time of purchase, intention was to earn profit then it would be business transaction and if the property is purchased for the purpose of holding the same then the same would be investment. In the instant case, intention of the asseesse at the time of purchase was clearly to earn profit and hence loss arising from the sale of the land was clearly business loss and not short term capital loss and hence the AO is accordingly directed to delete the addition - Decided in favour of assessee

Summary

Issues Involved:
1. Addition of ?40,61,517 as deemed income under Section 2(22)(e) of the Income Tax Act.
2. Disallowance of ?4,08,800 as business loss, treated as capital loss.
3. Imposition of penalty of ?14,75,850 under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Addition of ?40,61,517 as Deemed Income under Section 2(22)(e):
The primary issue was whether the amounts received by the assessee from three companies should be treated as deemed dividends under Section 2(22)(e) of the Income Tax Act. The assessee contended that the amounts were advances for business purposes, supported by MOUs with the companies. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this claim, stating the MOUs were not legally binding as they were neither registered nor notarized, and there were no other business transactions between the assessee and the companies.

The Tribunal found that the advances were indeed for business purposes, as evidenced by the MOUs and the nature of the transactions. The Tribunal held that the advances were not loans and therefore could not be treated as deemed dividends. The Tribunal cited several judgments, including CIT vs. Raj Kumar and CIT vs. Ambassador Travels (P.) Ltd., to support its decision that business advances do not fall within the ambit of Section 2(22)(e). Consequently, the Tribunal directed the AO to delete the addition of ?40,61,517.

2. Disallowance of ?4,08,800 as Business Loss:
The second issue was the disallowance of ?4,08,800 as a business loss, which the AO and CIT(A) treated as a capital loss. The assessee argued that the land was purchased for business purposes and sold at a loss, which should be considered a business loss. The Tribunal noted that the assessee was engaged in the real estate business and had purchased the land for business purposes. The Tribunal held that the loss was indeed a business loss and directed the AO to delete the addition.

3. Imposition of Penalty of ?14,75,850 under Section 271(1)(c):
The penalty was imposed based on the additions made in the assessment order. Since the Tribunal deleted the additions in the quantum appeal, it held that the penalty under Section 271(1)(c) could not survive. The Tribunal set aside the orders of the authorities below and deleted the penalty of ?14,75,850.

Conclusion:
The Tribunal allowed both appeals filed by the assessee, deleting the addition of ?40,61,517 as deemed income under Section 2(22)(e), recognizing ?4,08,800 as a business loss, and deleting the penalty of ?14,75,850 under Section 271(1)(c). The Tribunal's decision was based on the interpretation of business advances and the nature of the transactions, supported by relevant case law.