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TMI Blog2011 (10) TMI 252X X X X Extracts X X X X X X X X Extracts X X X X ..... Rao, JJ. A.K. Singh for the Appellant. S.K. Tulsiyan for the Respondent. C.D. Rao, Accountant Member This appeal by the department is directed against the order of ld. C.I.T.(A), Central-II, Kolkata dated 25/5/2010 for assessment year 2003-04. The grounds raised in this appeal by the department read as under :- "(1) That under the facts circumstances of the case the Ld. CIT(A) has erred in law and on fact in treating the advance against Rent amounting to Rs. 3.8 crore by M/s. M. K. Dalmiya Co. to the assessee company as Security Deposit whereas the same was shown under the head of "Advance against Rent" within the broad head of "Current Liabilities" as per Schedule-6 of the Audited Accounts of the assessee company for the F.Y. 2002-03. (2) That under the facts circumstances of the case the Ld. CIT(A) has erred in law and on fact in deleting the addition of Rs. 3,66,31,403 made by the A.O. u/s. 2(22)(e) of the Income Tax Act, 1962." 2. The facts of the case in brief are that the original assessment in the case of the assessee for the assessment year under consideration was made u/s. 143(3) determining the total income as returned by the assessee at Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly interested in the assessee-company. It was further stated that no money was actually received by the assessee-company from M.L. Dalmiya Co. Ltd. during the relevant year. The entire amount of security deposit was received by virtue of a journal entry and there was no actual movement of cash from the bank account of M.L. Dalmiya Co. Ltd. to the bank account of the assessee. M/s. M.L. Dalmiya Co. Ltd. had an outstanding balance of Rs. 3.80 crores with Inspiration Clothes U which was transferred in favour of the assessee-company in lieu of security deposit payable to it and the assessee-company was to recover the said amount from Inspiration Clothes U Transfer of balance in favour of a person by virtue of journal entry in the books of account without any actual payment of the amount and the same does not fall within the purview of sec. 2(22)(e) of the Act. 2.1 The A.O., however, was not convinced/satisfied with the submissions of the assessee and passed revised assessment order u/s. 143(3)/263 of the Act dated 26/12/2008 adding therein Rs. 3,66,31,403/- as deemed dividend u/s. 2(22)(e) of the Act by observing as under :- "I have examined the above submission of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee before the ld. C.I.T.(A) are as under :- (a) That the assessee-company vide earlier agreement dated 10/8/1998 gave on lease its premises to its sister concern M/s. M.L. Dalmiya Co. on an advance of Rs. 3.20 crores to be adjusted against rent payable. This agreement was required to be annulled due to dispute between the parties and on an amicable settlement as a result of several correspondences, the new agreement dated 31/3/2003 in supersession of earlier agreement was entered into, by virtue of which M/s. M.L. Dalmiya Co. Ltd. shall pay as security deposit of Rs. 3.80 crores to the assessee-company in lieu of lease of its premises to be refunded at the end of the lease period and after handing over the leased out property. The assessee-company neither holds any share in M.L. Dalmiya Co. Ltd. nor has any beneficial interest in the said company. The assessee-company only derives rental and supervision charges from the said company for leasing out its said property. He submitted that deemed dividend in terms of sec. 2(22)(e) of the Act can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellate order is reproduced below :- "6. I have gone through the assessment order, submissions of appellant and Assessing Officer. The facts of the case show that appellant had given its property at Shakespeare Sarani, Kolkata on 22 years lease to M.L. Dalmiya Co. Ltd. vide agreement, dated 10.08.1998. The annual rent is about Rs. 31-32 lakh as per assessment order and after claiming deduction u/s 24 of the I.T. Act, appellant has returned the income from house property at Rs. 22,09,788/- which the Assessing Officer has not disputed. M.L. Dalmiya Co. Ltd., the lessee, vide agreement, dated 10.08.1998 had paid Rs. 3,20,00,400/- to the appellant, out of which Appellant has adjusted about Rs. 15-16 lakh of such annual rent from the Advance Rent every year which is evident from the reconciliation figures of "Advance, against rent received from M.L. Dalmiya Co Ltd" submitted during the appellate proceedings by the appellant as under: Advance against Rent received from M L Dalmiya Co. Ltd. Advance received on 10.08.1998 32,000,400 Adjusted till 31.03.2002 5,728,537 Balance on 31.03.2002 26,271,863 Adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in the balance sheet of the appellant might have led the Assessing Officer to believe that the amount of Rs. 3.8 crore received on 31.3.2003 is also of the same nature as the amount of Rs. 3,20,00,400/ received on 10.08.1998. In remand report Assessing Officer has taken a stand that the amount of Rs. 3.8 crore received on 31.03.2003 is same in nature as amount of Rs. 3,20,00,400/- received on 10.08.1998 and the name of "Security deposit" is only a change of nomenclature. I do not find merit in the argument of Assessing Officer because the facts, as apparent from the lease agreements, clearly show that both the amounts are different in nature. Where Rs. 3,20,00,400/- received on 10.08.1998 was clearly an "Advance", Rs. 3.8 crore received on 31.03.2003 is a "Security deposit". The para 6.5 of the lease agreement date 31.03.2003 clearly says that the security deposit of Rs. 3.8 crore is to be returned to the M.L Dalmiya Co. as and when they vacate the premises. This shows that Rs. 3.8 crore is a security for the appellant against any loss of the premises. The security deposit of Rs. 3.8 crore remains the same throughout the lease period unlike the advance rent of Rs. 3,20,00,400/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment of rent with the passage of time and there was no security against the loss of property which the appellant had given to the lessee for 22 years with a tacit understanding of vacating it earlier and therefore revising the lease agreement with a security deposit when the lessee is allowed to further keep and sublet the property may be a normal business transaction in absence of any contradictory evidence and argument. The material available in records should be authentic and arguments cannot be based on presumptions because notional or artificial income is being assessed through a fiction under section 2(22)(e). Therefore, the Security Deposit of Rs. 3.8 crore, received by appellant by virtue of agreement dated 31.03.2003, is a security against the loss of appellant's property at Shakespeare Sarani, to be returned to the lessee after the property is received back from the lessee, and as the agreement is not proved to be a design, such security deposit cannot be considered an advance or loan. In any case, the facts stated in the assessment order show that Shri Avishek Dalmiya and Smt. Chandralekha Dalmiya had beneficial shareholding of 60% and 15.48% respectively in the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that both the parties are closely related to each other and two of the shareholders held considerable shares in both the companies. Therefore, it does not make much logical sense as to guess a dispute between the parties, which has resulted in introduction of new agreement for giving security deposit by the lessor company to the assessee-company. He submitted that the fresh agreement was drawn just to give the colour of advance paid as security deposit to circumvent the rigours of sec. 2(22)(e) of the Act. The ld. Departmental Representative also relied on the decision of Hon'ble Supreme Court in the case of L. Alagusundaram Chettiar v. CIT [2001] 252 ITR 893/[2002] 121 Taxman 587. 5. The ld. counsel for the assessee, on the other hand, supported the order of ld. C.I.T.(A) and reiterated the arguments made before him. A paper book containing 54 pages has also been filed by the assessee. He further submitted that the A.O. erred in treating the security deposit as deemed dividend u/s. 2(22)(e) of the Act and thus misconceived the facts and wrongly the above section. That the A.O. failed to consider the fact that the sum was on account of security deposit and not advance for ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 3.20 crores to be adjusted against the rent payable by the lessee (M.L. Dalmiya Co. Ltd.). A dispute arose between these two companies and for amicable settlement, a new agreement was entered into between them on 31/3/2003 agreeing thereby that M.L. Dalmiya Co. Ltd. shall pay as security deposit Rs. 3,80,00,000/- to the assessee-company to be refunded to them at the end of the lease period and after handing over of the possession of the property to the assessee. According to the assessee, this security deposit does not come under the ambit of sec. 2(22)(e) of the Act, whereas according to the A.O. this security deposit was nothing but deemed dividend inasmuch as two of the beneficial shareholders of lessee-company were also shareholders and substantially interested in the assessee-company. According to the A.O., this was advance. From the assessment order we observe that as on 31.03.2003 out of total issued and subscribed shares, two share holders namely, Avishek Dalmiya and Smt. Chandralekha Dalmiya were having share holding of 40% and 12.27% respectively in the assessee company and these two persons were also having share holding of 60% and 15.48% respectively in M.L. Dalm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Court of competent jurisdiction has given them. In the 1961 Act, the word "shareholder" is followed by the following words "being a person who is the beneficial owner of shares". This expression used in s.2(22)(e), both in the 1961 Act and in the amended provisions w.e.f. 1st April, 1988 only qualifies the word "shareholder" and does not in any way alter the position that the shareholder has to be a registered shareholder. These provisions also do not substitute the aforesaid requirement to a requirement of merely holding a beneficial interest in the shares without being a registered holder of shares. The expression "shareholder being a person who is the beneficial owner of shares" referred to in the first limb of s.2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial then the provision of s.2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the first limb of provisions of s.2(22)(e) will not apply. The new category of payment which was considered as dividend introduced by the Finance Act, 1987 w.e.f. 1st April, 1988 by the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot spell out as to whether the income has to be taxed in the hands of the shareholder or the concern (non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of s.2(22)(e). The intention behind enacting provisions of s.2(22)(e) is that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions, such payment by the company is treated as dividend. The intention behind the provisions of s.2(22)(e) is to tax dividend in the hands of shareholder. The deeming provision as it applies to the case of loans or advances by a company to a concern i ..... 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