2020 (4) TMI 851 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Payment of advances to the assessee against purchase of land - assessee and his brother owned 85% of the stake in the company - Instead of payment rent to the promoters, company decided to purchase property from the promoters, as adviced by the banks - HELD THAT - CIT(A) has examined the nature and scope of the transactions and found that the impugned transactions are towards business and commercial purpose and there is no benefit accruing to the assessee from such transaction. Thus assessee has clearly established that the impugned transactions are not following within the scope of section 2(22)(e). Revenue is not able to dislodge such findings recorded by the Ld. CIT(A) by relevant material. Therefore, the case laws relied on by the Ld DR is not of any help to the revenue on the above facts and circumstances of this case. Hence, we do not find any reason to interfere with the order of the Ld. CIT(A). Therefore, we dismiss the Revenue s corresponding grounds of appeal. Addition under the head house property - assessee is owner of the land and building used by the company towards its business purposes - HELD THAT - Annual value of property, i.e. the income arising from the house property, has to be assessed to tax u/s.s 22 to 27 of the Income Tax Act. The AO has based the rental income received by the assessee in the immediately succeeding year, as the sum for which the property might reasonably be expected to let from year to year and particularly for this assessment year. On which, the assessee has not placed any material to hold that the amount assessed by the AO is unreasonable. - Decided in favour of revenue

Summary

Issues Involved:
1. Deemed Dividend under Section 2(22)(e) of the Income Tax Act.
2. Addition of Rental Income under the head "Income from House Property".

Issue-wise Detailed Analysis:

1. Deemed Dividend under Section 2(22)(e) of the Income Tax Act:

The primary contention revolves around the addition of ?2.31 crores as deemed dividend under Section 2(22)(e). The Revenue argued that the advance received by the assessee for the sale of property should be treated as deemed dividend. The CIT(A) deleted this addition, holding that the advance was for a commercial and business purpose. The Revenue contended that the CIT(A) failed to consider the true nature of the transaction and relied on distinguishable case laws.

The assessee argued that the transaction was a commercial one, aimed at consolidating the operations of M/s. BNT Connections Impex Ltd. The company had entered into a sale agreement to purchase the factory land and building from the assessee to enhance its manufacturing capabilities. The company paid advances over several financial years, which were recorded as "Property Advance" in the assessee's books and as "Loans and Advances" in the company's books. The agreement was extended, and further payments were made, but eventually, the sale agreement was canceled, and the advance was repaid.

The CIT(A) found that the transaction was for the company's benefit, leading to increased turnover and profits. The CIT(A) also referred to CBDT Circular No. 19/2017, which clarifies that trade advances for commercial transactions do not fall within the ambit of deemed dividend under Section 2(22)(e). The Tribunal upheld the CIT(A)'s decision, noting that the transaction was commercial and did not benefit the assessee personally. Consequently, the addition of ?2.31 crores as deemed dividend was deleted.

2. Addition of Rental Income under the head "Income from House Property":

The second issue pertains to the addition of ?42 lakhs as rental income from the property in Perambur. The Revenue argued that the assessee had not received any rental income from the property since 2005 and only started collecting rent from April 2015. The AO assessed ?60 lakhs as rental income for the year 2014-15 and, after allowing deductions, assessed ?42 lakhs as income from house property.

The assessee contended that the property was not let out during the assessment year 2014-15 and that the company was using the premises under a sale agreement without paying rent. The CIT(A) agreed with the assessee, noting that the company was using the property as an intended buyer and not as a tenant. Therefore, no rent was payable by the company during the sale agreement period.

The Tribunal, however, found that the assessee was the owner of the property, which was used by the company for business purposes. The AO's assessment of rental income based on the subsequent year's rental receipts was deemed reasonable. The Tribunal upheld the AO's addition of ?42 lakhs as rental income under the head "Income from House Property."

Conclusion:

The Tribunal dismissed the Revenue's appeal regarding the deemed dividend addition, upholding the CIT(A)'s decision that the transaction was commercial and not for the assessee's personal benefit. However, the Tribunal upheld the AO's addition of ?42 lakhs as rental income, finding it reasonable based on the property's use and subsequent rental receipts. Thus, the Revenue's appeal was partly allowed.