9911796707
TMI Blog2010 (11) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... n the appellant’s case during the relevant accounting year. - No deemed dividend Interest under the head income from other sources - An amount of Rs. 10 lakhs was adjusted during the previous year 2005-06 on account of interest - it was stated by the assessee that this transaction was notional in nature and the assessee had not received any amount in cash or through cheque - There is no supporting evidence for treating Rs. 10 lakhs as interest income of the assessee particularly when the transaction has clearly not resulted pre-receipt of money or any benefit by the assessee – Decided in the favour of the assessee Payment of Rs. 1.5 crores - The appellant who is a director in both the companies holds 4.99 per cent of the share capital of MMPPL at the time of this transaction. - The issue to be decided is whether the payment of the amount of Rs. 1.5 crores by MMPPL to the appellant (even without going into the merits of whether the amount was paid as purchase consideration or was spent by the appellant for undisclosed purposes) would attract the provisions of section 2(22)(e) of the Act. Since the shareholding of the appellant in MMPPL is less than 10 per cent, - the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under section 153C/143(3) on 28-12-2007 at a total income of Rs. 8,01,203, as a result of which an additional demand of Rs. 4,68,244was raised including interest under section 234A and 234B of the Act and surcharge was also levied at the prevalent rate(s). The following additions were made by the Assessing Officer: ( a ) A sum of Rs. 7,54,098 representing rental advance/deposit received by the appellant from its sister concern M/s Millennium Software Productions(I) Pvt. Ltd. (MSPIPL) was treated by the Assessing Officer as deemed dividend under section 2(22)( e ) of the Act. ( b ) A sum of Rs. 27,200 representing ROC fees borne by the group concern M/s MSPIPL on behalf of the appellant company was also treated by the Assessing Officer as deemed dividend under section 2(22)( e ) of the Act. 4. Against these additions, first appeal was filed before the ld. CIT(A), who agreed and allowed the claim of the assessee. By a detailed order, he has deleted the entire additions. Now, the Revenue is aggrieved and has raised following grounds: 1. The order of the learned CIT(A) Is contrary to law and facts of the case. 2.1 The ld. CIT(A) erred in deleting the addition made under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this very property at a monthly rent of Rs. 1,20,000, inclusive of charges for amenities. This agreement was to be in operation for 18 months and the assessee company also received a rent deposit of Rs. 9 lakhs. It was noticed by the Assessing Officer that the assessee during the relevant accounting year and subsequent to the aforesaid lease agreement, had received a sum of Rs. 7,54,098 from M/s MSPIPL as the rental advance. Undoubtedly, both Shri V.Ayyadurai and Shri V.A Shiva were Directors in the assessee-company as well as in its group company holding more than 10 per cent and 20 per cent beneficial shares in the assessee company and in M/s MSPIPL respectively. It was also found that m/s MSPIPL had huge accumulated profits during the relevant accounting year and also at the time of paying the rental advance to the assessee-company. From this, the Assessing Officer inferred that the payment of Rs. 7,54,098 attracted the provisions of section 2(22)( e ) of the Act. The case of the assessee is that this amount does not constitute an advance, but a security deposit received from the group concern to whom the property was leased out and this was usual business practice which was in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the legal powers conferred therein. In that lease agreement monthly rent was fixed at Rs. 40,000 and lease period was determined at 51 months with no requirement for payment of any lease deposit The appellant company entered into an agreement dated 14-12-2001 (copy of which is also enclosed for ready reference) with M/s. MSPIPL for giving the above-referred property on lease to the latter, as per which the lease period was fixed at 18 months, lease rent at Rs. ,20,000 p.m. inclusive of amenities charges and lease deposit at Rs. 9 lakhs. After taking the impugned property on lease from the directors, the appellant company had spent a sum of Rs. 3,40,000 during the relevant financial year towards maintenance of the property. The copies of the relevant balance sheet and profit loss account are submitted herewith by way of evidence in support of the said expenditure. After the lease agreement with the directors became operational w.e.f.1-1-2002, the appellant had proceeded to furnish the leased premises with air conditioners, electrical fittings, furnitures and fixtures, etc. The total investment in this regard stood at Rs. 70 lakhs, the details of which are also furnished herewith. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following: ( a ) There should be a payment ( b ) by a closely-held company ( c ) by way of advance or loan ( d ) to a shareholder who is the beneficial owner of shares holding not less than 10 per cent of voting power ( e ) to any concern (which includes companies) in which such shareholder holds more than 20 per cent beneficial interest ( f ) any payment by the closely-held company on behalf of or for the individual benefit of such shareholder. The Section 2(22), however, excludes any advance or loan made in the ordinary course of business. The provisions of section 2 ( 22 )( e ) are attracted only when the payment is in the nature of an advance or loan to a shareholder. In the instant case, the amount paid by M/s. MSPIPL to the appellant company is not a loan or advance nor the appellant company is a shareholder in M/s. MSPIPL. There was also no advance or loan given by M/s. MSPIPL or the appellant company to Shri V. Ayyadurai or his son who are the beneficial owners of shares having more than 10 per cent of voting power in both the companies. In the instant case further there was no payment by M/s. MSPIPL on behalf of or for the individual benefit of Shri V. Ayy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are proved by its characteristics as other than loans and advances, the question of invoking the provisions of section 2(22)( e ) does not arise. The nature and the character of the payments made by the company is very important in examining whether a particular payment made by it falls under the mischief of section 2(22)( e ) or not. It is to be seen whether the payments are made by the company through a running account in discharge of its existing debts or against purchases or for availing services. Such payments being made in the ordinary course of business carried on by both the parties cannot be treated as deemed dividend for the purpose of section 2(22)( e ) . ( d ) The Hon ble Delhi ITAT in the case of M/s. Nulon India Ltd. v. ITO Ward 13(3) [2007] 12 SOT 260 (Del.) has held that deemed dividend provision cannot be applied when the recipient of a payment is not a shareholder in the payer company. The Hon ble ITAT was of the opinion that when the recipient is not a shareholder, the question of treating the advances as deemed dividend did not arise. The scope of the deemed dividend is only to tax a shareholder. Since the appellant company is not a shareholder in M/s MSP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eserves to be deleted. 6. After considering the above written submission, he held that the Assessing Officer was not legally justified in treating the security deposit received by the assessee during the year as an advance within the meaning of section 2(22)( e ) of the Act and thereby erroneously applied the ratio laid down by the Hon ble Madras High Court in the case of CIT v. Shri P.K. Abubucker, 259 ITR 507, and deleted the addition. 7. It was also noticed by the Assessing Officer during the relevant year that the assessee-company had incurred an expenditure of Rs. 27,200 by way of ROC fees. At the time of its incorporation which was borne by M/s MSPIPL on behalf of the assessee company. This payment was also found to be covered by the Assessing Officer under the provisions of section 2(22)( e ) of the Act on the same reasonsing. The assessee agreed with this view of the Assessing Officer but before the ld. CIT(A) it was pleaded that this amount of Rs. 27,200 is included in the sum of Rs. 7,54,098 which was received as security deposit by the assessee from its sister concern. Consequently to avoid double addition, by treating it as security deposit, this addition w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid ; [( iva ) the value of any benefit or perquisite, whether convertible into money or not, obtained by any representative assessee mentioned in clause ( iii ) or clause ( iv ) of sub-section (1) of section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee (such person being hereafter in this sub-clause referred to as the beneficiary ) and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary ;] ( v ) any sum chargeable to income-tax under clauses ( ii ) and ( iii ) of section 28 or section 41 or section 59 ; [( va ) any sum chargeable to income-tax under clause ( iiia ) of section 28;] [( vb ) any sum chargeable to income-tax under clause ( iiib ) of section 28;] [( vc ) any sum chargeable to income-tax under clause ( iiic ) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (2) of section 56;] 9. The Income-tax become chargeable for any assessment year at any rate or rates, Income-tax at that rate or those rates applicable for that year in accordance with and subject to the provisions, beneficial provisions for the levy of additional income-tax , in respect of the total income of the previous year of every person. The expression person is again defined in section 2(31) but it is also an inclusive defines which reads as under: person includes ( i ) an individual, ( ii ) a Hindu undivided family, ( iii ) a company, ( iv ) a firm, ( v ) an association of persons or a body of individuals, whether incorporated or not, ( vi ) a local authority, and ( vii ) every artificial juridical person, not falling within any of the preceding sub-clauses. [ Explanation. For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains;] 10. Subject to the provisions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but dividend does not include ( i ) a distribution made in accordance with sub-clause ( c ) or sub-clause ( d ) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ; [( ia ) a distribution made in accordance with sub-clause ( c ) or sub-clause ( d ) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, [and before the 1st day of April, 1965];] ( ii ) any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; ( iii ) any dividend paid by a company whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the definition of word dividend is enumerative and not exhaustive. Every amount received by a shareholder cannot be treated as a dividend. The expression uses two parts - ( i ) accumulated profits; and ( ii ) distribution thereof. Accumulation does not mean the mere existence of profits, even for a lengthened period, however, they are employed, but it connotes the affirmative gathering of these profits, or as may be selected into a measured or measurable heap and allocated to a named reserve fund, whatever its nature may be. Generally, accumulated profits , signifies that firstly, there must have been profits in earlier years and secondly, that amounts out of such profits have been accumulated from time to time, with the result that there is some amount of accumulated profits in possession of the company just before the commencement of the accounting year. So, in a way, accumulated profits means commercial profits and not assessee s income. We need not to go in detail in this aspect because in the cases in hand, there is no dispute with regard to the fact that assessee company had accumulated profits in its hands. 12. The scope of deemed dividend has been widened with effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areholder or to a concern in which such shareholder has substantial interest and the company itself has accumulate profits, it is deemed as a dividend. To attract this provision, the payment is to be made by way of an advance or loan. Such an advance or loan has to be made as the case may be, either to a shareholder, being the beneficial owner of shares not less than 10 per cent of the voting power or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest. This section defines the ambit of expression dividend . All payments by way of dividend have to be taxed in the hands of recipient of the dividend namely, the shareholder. According to us the Assessing Officer has misdirected himself in treating the rental advance as an advance in the manner in which it is used in the definition of section for deemed dividend . Actually this amount does not constitute such an advance but is only a security deposit received from the group concern to whom the property was leased out. Any security deposit taken from a tenant is definitely a current liability of the concerned person. The contention of the ld.DR that when taking an advance rent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the inference of the Assessing Officer. A loan or advance given for individual benefits of shareholders only has to be treated as deemed dividend . There are numerous decisions in this connection which have been listed by the ld. CIT(A) in the above extracted portion of his order, therefore, there is no need to repeat them. The gist of the above decisions is that payments made in the ordinary course of business are not liable to be treated as a deemed dividend . There is a difference between a deposit, loan and an advance. Any advance received as deposit by an assessee in connection with the leasing out of the property cannot partake the character of a loan or advance within the meaning of section 2(22)( e ) of the Act and thus cannot be treated as deemed dividend . Therefore, we are fully in agreement with the finding of the ld. CIT(A) in this regard. 15. Likewise, when there is no dispute with regard to the facts of the remaining amount of expenditure incurred to the extent of Rs. 27,200 by the assessee towards ROC fees, at the time of its incorporation which was borne by M/s MSPIPL, on behalf of the assessee-company, that too cannot be taxed in the hands of the company an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me from loans and advances when the security deposit to the tune of Rs. 3.30 crores was received by the assessee in connection with leasing out of a building. After discussing section 2(22)( e ) of the Act in the context of the provisions of RBI Act, 1934 and Companies Act, 1956, finally held that security deposit received in such circumstances does not fall in the category of deemed dividend . The Legislature has not used in its wisdom the word deposit in this section alongwith loans and advances. Thus, this provision is not attracted for security deposits received by an assessee in the normal course of its business activity. Consequently, we do not find any reason to interfere with the impugned finding of the ld. CIT(A) and cannot allow this appeal of the Revenue. I.T.A. No. 1948/Mds/2008 (A.Y 2005-06) 17. This appeal of the Revenue is directed against the order of the ld. CIT(A) dated23-7-2008. In this appeal, following grounds have been raised: 1. The order of the learned CIT(A) Is contrary to law and facts of the case. 2.1 The Ld. CIT(A) erred In deleting the addition made under section 222)( e ) of the Act by the Assessing Officer on the ground that Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,00,000 ii. Addition on account of further advance received from sister concern Rs. 7,24,164 iii. Addition on account of advance rent Rs. 12,00,000 iv. Addition on account of unrecorded cash payment Rs. 1,50,00,000 v. Addition on account of payment made to Shri Ayyadurai towards purchase of land Rs. 84,10,500 vi. Addition on account of payment made towards purchase of land Rs. 6,00,04,931 2.2 The ld. CIT(A) failed to appreciate the fact that In the lease agreement entered into by the assessee it was clearly mentioned that M/s Millennium Software Productions India Pvt. Ltd. (M/s MSPIPL) has to pay rent In addition to the advance of Rs. 12 lakhs. 2.3 The ld. CIT(A) failed to appreciate the fact that M/s MSPIPL was a closely held company in which public were not substantially interested and that it possessed huge accumulated profit at the time when the rental advance was given by M/s MSPIPL to the assessee and thereby the conditions laid down in section 2(22)( e ) were satisfied in the assessee s case. 2.4 The ld. CIT(A) failed to appreciate the fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of share of the assessee company from Shri V.Ayyadurai and Shri V.A.Shiva to their relatives w.e.f. 01/04/2005 was treated as a fictitious transaction, the A.O. observed that the advance of Rs 6,00,04,931 came within the ambit of the provisions of section 2(22)( e ) and taxed it as deemed dividend. 3. For these and other grounds that may be adduced at the time of hearing it is prayed that the order of the learned CITA) may be set aside and that of the Assessing Officer be restored. 20. The facts of this year are almost identical to the facts of earlier years and the payments are also of the same nature as has been held in earlier years, Therefore, we cannot allow this appeal of the Revenue as well. For further clarification, we would narrate the reasons for arriving at the above conclusion. For the year ending 31-3-2006, the assessee company filed return of income on 30-11-2006 admitting NIL income. On perusal of books of account and bank account statement of MSPIPL, it was found that Rs. 12 lakhs were advanced to the assessee on 26-10-2005 as both the directors of MSPIPL as stated above held more than 20 per cent of beneficial shares in both the companies and MSPI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more than 20 per cent beneficial shares of both the companies, so this amount was treated as deemed dividend under section 2(22)( e ) of the Act in the hands of the assessee company. Against these additions, appeal was filed before the ld. CIT(A), who deleted all these deletions and allowed the appeal of the assessee. Now, the Revenue is in appeal. 25. We have considered the rival submissions and have perused the entire record. In the given case, there is no dispute with regard to the facts and the assessee company had enough accumulated profits. There is no dispute regarding the quantum of deemed dividend but the dispute is regarding the fact that assessee claims that it does not fall in the mischief of provisions of section 2(22)( e ) of the Act. The main thrust of the assessee is on the nature of the money received or advanced to it. In so far as addition of Rs. 12,00,000 on account of payment received from the sister concern by rent deposit/advance is concerned, in view of our above discussion, this rend advance cannot be added in this assessee-company s hands and has correctly been deleted by the ld. CIT(A). 26. Likewise, addition of Rs. 7,24,164 as deemed dividend i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hearing both sides, we have found that the directors held less than 10 per cent beneficial shares in the assessee-company during the year and hence, provisions of section 2(22)( e ) of the Act cannot be applied as stated and discussed in earlier part of this order. Therefore, this addition has also been legally deleted by the ld. CIT(A). 31. The Revenue has also challenged the deletion of addition of Rs. 84,10,500 added as deemed dividend on the basis of seized document marked ANN/MPB/DOCS/S reflecting agreement entered into between one Shri W. Rajesh of M/s JSR Real Estate and Shri V. Ayyadurai for the purchase of 37.38 acres of land at Kottaiyur Village, Sriperumbudur. This advance was also found to have been received from MSPIPL in which Shri V.Ayyadurai was holding more than 20 per cent of beneficial shares in the assessee company and its sister concern. This was done only because the transfer of shares to the relatives of the directors was found to be fictitious by the Assessing Officer. This amount was brought to tax on protective basis under this section. As held above, there is no evidence to hold these transactions of transfer of shares to relatives by directors as f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fund by him has no bearing on the addition made by the Assessing Officer However, the Assessing Officer is found to have erred in law while resorting to this addition because there is no cogent evidence brought on record by him to prove that the transfer of shares from Shri V. Ayyadurai/ Shri V.A. Shiva to their relatives was executed with the sole intention of defrauding the revenue. Since in the previous grounds I have already held that the share transfers are amply evidenced by legal documents, I am of the considered opinion that the conditions stipulated in Section 2(22)( e ) were not at all satisfied in the appellant s case during the relevant accounting year. I, therefore, find no justification in sustaining the addition of Rs. 6,00,04,931 which is, accordingly, deleted. The ground of the appellant in this regard thus succeeds. 33. We do not find any infirmity in this finding of the ld. CIT(A) and hence, uphold the same. 34. In the result, the appeal of the Revenue stands dismissed. I.T.A. No. 469/Mds/09 (A.Y 2006-07) 35. This appeal of the Revenue for assessment year 2006-07 is directed against the order of the ld. CIT(A) dated30-1-2009. In this case, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailed to observe that the shares of MMPPL were transferred to relatives of the assessee w.e.f. 1-4-2005, which shows the intention of the assessee to circumvent the provisions of section 2(22)( e ) of the IT Act, 1961. 4.1 The Ld. CIT(A) erred in deleting an amount of Rs. 24,10,500 (transaction with Mr. Rajesh of JSR Real Estate) treated by the Assessing Officer as deemed dividend under section 2(22)( e ) of the Act. 4.2 The Ld. CIT(A) ought to have appreciated the fact that both the companies M/s Madras Madurai Properties Pvt. Ltd. (MMPPL) and M/s Millennium Software Private Limited (MSPL) are controlled by the assessee and his son and the payment of Rs. 84,10,500 was routed through MMPPL from MPSL was to by pass the provisions of section 2(22)( e ) of the IT Act, 1961. 4.3 The Ld. CIT(A) failed to consider that the agreement was entered into between the assessee and the JSR Real Estate, hence the transaction clearly hits the provisions of section 2(22)( e ) of the IT Act, 1961. 4.4 The Ld. CIT(A) failed to observe that the shares of MMPPL were transferred to relatives of the assessee w.e.f. 1-4-2005, which shows the intention of the assessee to circumvent the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05-06 on account of interest. The Assessing Officer proposed to add this as interest received for the advances given to Shri Jayakar. Vide order sheet entry dated 20-12-2007, it was stated by the assessee that this transaction was notional in nature and the assessee had not received any amount in cash or through cheque. The assessee follows cash system of accounting and does not maintain any books of account. We have found that the assessee has paid advance of Rs. 60 lakhs to Shri Jaykar Henry which was transferred to MSPL wherein the assessee is a creditor to the tune of Rs. 60 lakhs. M/s MSPL has paid the balance and registered the property in its name. But there is no supporting evidence for treating Rs. 10 lakhs as interest income of the assessee particularly when the transaction has clearly not resulted pre-receipt of money or any benefit by the assessee. Therefore, this amount cannot be added under the head income from other sources in the hands of the assessee and has been correctly deleted by the ld. CIT(A). 38. The following payments were made by MSPIPL for purchase of 70 acres of land at Sriperumbudur from two persons viz. Smt S. Rukmani and Shri R.M Govindan: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a partner and in which he has a substantial interest. 18. MMPPL claims that this amount was withdrawn and paid as part consideration for purchase of the land for MSPL. The appellant who is a director in both the companies holds 4.99 per cent of the share capital of MMPPL at the time of this transaction. The issue to be decided is whether the payment of the amount of Rs. 1.5 crores by MMPPL to the appellant (even without going into the merits of whether the amount was paid as purchase consideration or was spent by the appellant for undisclosed purposes) would attract the provisions of section 2(22)( e ) of the Act. Since the shareholding of the appellant in MMPPL is less than 10 per cent, I agree with the Ld. A.R. that the provisions of section 2(22)( e ) are not attracted in the instant case. Therefore the addition of Rs. 1.5 crores as deemed dividend under section 2(22)( e ) is not warranted and is deleted. 40. After considering the rival submissions in the light of the reasons given by the Assessing Officer as well as the ld. CIT(A), we do not find any valid reason to interfere with the finding of the ld. CIT(A) and hence, cannot allow this ground in favour of the Revenue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 B. money Rs. 55,00,000 45. The assessee explained that he had advanced to MSPL Rs. 60 lakhs on 31-3-2005 which was shown as liability as on 31-3-2006. Rs. 45 was paid to Shri Jayakar Henry through bearer cheques and encashment of the bearer cheques was done and the assessee obtained confirmatory letter from MSPL. After hearing both sides, we find that this addition is not justified. The addition on account of deemed dividend of Rs. 24,10,500 based on the transaction with Shri Rajesh of M/s Real Estate, were credit balance of the assessee of Rs. 60 lakhs in MSPL was adjusted by the Assessing Officer has already been deleted, consequently, a credit balance of Rs. 60 lakhs would be available for adjustment against the debit balance. Hence, Rs. 45 lakhs even if it is considered as debit balance, the assessee will have net profit with MSPL. So provisions of section 2(22)( e ) of the Act would not be attracted in any case in view of the above stated legal position. This amount has been correctly deleted by the ld. CIT(A). 46. The other issue relates to an amount of Rs. 3,74,000 added as deemed dividend which has been deleted by the ld. CIT(A). On examanti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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