2019 (7) TMI 666 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - security deposits received for lease of land - CBDT Circular No. 19 of 2017 dated 12.6.2017 - trade advances which are in the nature of commercial transactions - security was disproportionate in respect of land holding and not mentioned in Balance Sheet of company - HELD THAT - In the case in hand, the assessee have established that there is a contractual relationship of lessor and lessee with the company, the land rented out is a high value land , the rent paid by the company has been returned in the income tax returns of the lessors and duly accepted by the Department, there is no question to doubt the payment of security deposits also. The assessee, thus, have proved that it was commercial transaction between the assessee and the company, hence, the deeming fiction of deemed dividend as per the provisions of section 2(22(e) cannot be applied in this case. DR said that the amount paid as security deposits to different assessee is disproportionate vis-a vis to the share of the assessee in property in question, it is undisputed that the assessee herein are family members and the total security deposits paid by the company to the assessee never exceeded the limit as stipulated in the lease agreement. It is up to the assessee to settle between them as to in which assessment year what amount of the security deposit will be retained by either or any of them. This cannot be a ground to doubt or to reject the transaction in question. It is held that the assessee have established that the payments received by them as security deposits were paid by the company in the course of its business, hence, the deeming fiction of deemed dividend to section 2(22)(e) is not applicable to these transactions. This common ground taken by the assessee in all the appeals is allowed and additions made by the AO on this issue are hereby ordered to be deleted. Additions u/s 68 - cash deposit in bank account - contended that cash is available with the assessee to meet the deposits - cash flow statement show more withdrawals than the cash deposits in the bank account - HELD THAT - Assessee has invited our attention in this respect Reconciliation of the Cash Account / cash flow statement to show the date wise cash available with the assessee to meet the deposits made in the bank account. Assessee has submitted that each and every entry has been reflected in the consolidated cash flow chart. The aforesaid cash flow statement furnished by the assessee could not be rebutted by the DR. A perusal of the cash flow statement as well as opening and closing balance of the year proves that the assessee had funds available on the relevant dates to make the deposits in the bank account of the assessee. The source of the deposits in the bank account of the assessee, thus, stands explained by the assessee. In view of this, the addition made by the lower authorities on this issue is also held to be not justified and the same is accordingly ordered to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of addition under Section 2(22)(e) of the Income Tax Act, 1961.
2. Addition under Section 68 of the Income Tax Act, 1961.

Issue 1: Validity of Addition under Section 2(22)(e) of the Income Tax Act, 1961

The common issue in all the appeals relates to the validity of the addition made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] under Section 2(22)(e) of the Income Tax Act, 1961, treating the amount received by the individual assessees from the company 'VTC Limited' as deemed dividend. The assessees, substantial shareholders in VTC Limited, were subjected to search and seizure operations. The AO observed that the assessees had taken hefty loans and advances from VTC Limited, which had substantial accumulated profits. The AO treated these amounts as deemed dividends under Section 2(22)(e) of the Act, rejecting the assessees' explanation that these were interest-free security deposits for leased land. The CIT(A) restricted the addition to the total accumulated profits of the relevant year or the amount advanced, whichever was lower.

Upon appeal, the Tribunal considered the submissions and material on record. The Tribunal noted that the assessees had substantial interest in VTC Limited, which had sufficient reserves and surpluses. However, the Tribunal found that the amounts received were in lieu of security deposits as per a lease agreement dated 1.4.2004, which was duly notarized and acted upon by the parties. The Tribunal observed that the lease agreement was not found during the search but was notarized and supported by a certificate from the Notary. The Tribunal also considered the validity of using old stamp papers for the agreement, relying on the Supreme Court's decision in 'Thiruvengada Pillai vs Navaneethammal & Anr', which held that old stamp papers could be used for execution of documents.

The Tribunal addressed the issue of the lease agreement not being registered, noting that the Supreme Court in 'Anthony v KC Ittoop and Sons and Others' held that an unregistered lease deed could create a month-to-month lease based on the conduct of the parties. The Tribunal concluded that the relationship between the assessees and VTC Limited as lessor and lessee was established, and the security deposits were part of a commercial transaction, not loans or advances. Therefore, the deeming fiction of deemed dividend under Section 2(22)(e) was not applicable, and the additions were ordered to be deleted.

Issue 2: Addition under Section 68 of the Income Tax Act, 1961

In the appeal of one of the assessees for the assessment year 2009-10, an additional ground was raised regarding the confirmation of an addition of ?64,25,000 under Section 68 of the Income Tax Act. The AO noted cash deposits in the assessee's bank account and show caused the assessee to explain the source. The assessee provided a consolidated cash flow statement, which the AO rejected for not being date-wise. The CIT(A) confirmed the addition.

Before the Tribunal, the assessee argued that she was not required to maintain regular books of account and had provided a detailed cash flow statement showing the availability of cash to meet the deposits. The Tribunal examined the cash flow statement and found that the assessee had sufficient funds available on the relevant dates. The Tribunal held that the source of the deposits was explained, and the addition under Section 68 was not justified. The addition was ordered to be deleted.

Conclusion

The Tribunal allowed all the appeals, deleting the additions made under Section 2(22)(e) and Section 68 of the Income Tax Act, 1961. The order was pronounced in the Open Court on 10.07.2019.