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TMI Blog2014 (7) TMI 1197X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be excluded and proportionate addition has to be made on the balance amount. However, considering the fact that this argument was not made before the departmental authorities, we consider it appropriate to remit the matter back to the file of the assessing officer for considering the same afresh after verifying the facts and materials on record. - Decided partly in favour of assessee - ITA No. 624/Vizag/2013 - - - Dated:- 4-7-2014 - SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER For the Appellant: Shri G.V.N. Hari, Advocate For the Respondent: Shri K.V.N. Charya, CIT(DR) ORDER Per Bench:- This appeal of the assessee is directed against the order dated 20.9.2013 of the CIT(A), Visakhapatnam pertaining to the assessment year 2009-10. The effective grounds of the assessee read as under: 1. The Ld. CIT (A) is not justified in upholding the addition of ₹ 4,21,48,280/- made by the assessing officer u/s 2(22)(e) of the Act. 2. The Ld. CIT(A) ought to have appreciated that the amounts given to the appellant were for consideration and not in lieu of distribution of accumulated profits. 2. As can be seen b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated to Mahathi Software Private Limited for which she has submitted statement of account in the financial year 2009-10 and accounted in the books of Mahathi Software Pvt. Ltd., as investment in shares of Indian Institute of Cancer Research ₹ 3,55,00,000/-, cost of steel and other related materials used for construction of building relates to Mahathi Software Pvt. Ltd., ₹ 2,60,00,000/- the total amount during the year 2008-09 is shown as advance and capitalized during the financial year 2009-10. Dr. C.S. Padmavathi ₹ 3,63,21,635/- the company has entered an agreement to purchase land of 4.5 acres from Dr. C.S. Padmavathi in the Particulars Debit Credit financial year 2007-08 with an understanding to pay the cost of land in various instalments as per the convenient cash flows of the company and within a period of 3 years. As the said land belongs to the directors of the company and offered as security to the company to raise loan to utilize the funds for the purpose of business of the company. On this agreement the company has paid an amount of ₹ 3.63 crores as on 31.3.2009 and an amount of ₹ 84.00 lakhs during the financial year 2009-10. The co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the light of the discussions made by the assessing officer and other materials on record held that the agreement of sale was not signed by all the vendors. It was noted that in the agreement of sale, though the assessee and her two sons have entered into an agreement as vendors with the company M/s. Mahathi Software Pvt. Ltd. as vendee to sell their landed property at Rushikonda for a total consideration of ₹ 18,65,00,000/- to be paid in deferred instalments over a period of 3 years. However, the said sale agreement was not signed by any of the vendors and so far as vendee is concerned, the assessee has signed the sale deed in the capacity of Managing Director. He was therefore of the view that in absence of signature in agreement of sale by any of the vendors, the sale agreement do not have any legal sanctity and cannot be treated as an agreement. Hence, the assessing officer has rightly not taken cognizance of the said agreement. The CIT(A) opined that it is not believable that the company would make such a huge advance without proper agreement or documentation. The CIT(A) further noted that the property was mortgaged to the UCO bank by the owners towards security f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 48 of the paper book. It was submitted by the Ld. A.R. that many a times the agreement of sale are executed on stamp paper of ₹ 100/- value and not registered to save the cost of stamp duty. In the present case, the transaction was between the company and the Directors of the company and therefore there is no possibility of this agreement being placed as evidence in any court of law. Hence, to avoid payment of huge stamp duty, it was decided not to go for registration of the sale agreement. The Ld. A.R. submitted that the departmental authorities have treated the transaction as sham one only on the basis that the agreement of sale is not registered and secondly it is not signed by the vendors. Contesting aforesaid finding of the department, the Ld. A.R. submitted that the property in question is owned by the assessee and her two sons who are residing abroad. The assessee is the power of attorney holder for her two sons. The assessee is also representing the company as the Managing Director. Thus, in effect all the parties to the agreement are incidentally represented by one single person that is the reason why only the assessee has signed the agreement of sale. Since th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtended by the assessee, then the amount advanced by the company to the assessee towards advance sale consideration cannot be considered as gratuitous payment and the advance given is to be treated as for consideration. In this context, the Ld. A.R. referred to the balance sheet of the company at page 5 of the paper book, wherein the entries clearly indicate that the loans availed from SBI UCO banks were on the personal guarantees of the Director. The Ld. A.R. also referred to the copies of the sanction letters of banks at page 52 to 69 of the paper book to show the extent of collateral security and personal guarantee given by the assessee. The Ld. A.R. submitted that when all personal properties of the assessee are given as guarantee for loans availed by the company, then it cannot be said that the advance is gratuitous in nature. In support of such contention, the Ld. A.R. relied on the following decisions: a. Pradip Kumar Malhotra Vs. CIT 338 ITR 538 b. Order of ITAT Chennai Bench in case of G. Sreevidya in ITA No.1270/Mad/2011 dated 28.6.2012. 8. So far as the second and third amount of ₹ 29,26,600/- and ₹ 29,00,045/- are concerned, the Ld. A.R. submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny, the Ld. D.R. submitted that the entries made in the ledger account does not speak of any advance being given towards purchase of property. Referring to the specific entries in the ledger account towards money advanced for purchase of jewellery, etc. of the assessee, the Ld. D.R. submitted that when such details have been mentioned against each of the advance made to the assessee, it is surprising that there is no narration pertaining to the land purchase. It was submitted that the ledger extract clearly shows that it is in the nature of a running account with the Managing Director. It was submitted that there is no clarification by auditor and no balance sheet entry, which could prove that the amount advanced is towards purchase of the property which is further proved from the fact that till date no development activity on the land has taken place. In the aforesaid context, it is important to bear in mind whether there is an intention to buy, an intention to sell and whether such intention was actually followed up. It was submitted that the entire transaction is an afterthought to avoid section 2(22)(e) of the Act. Referring to the decision relied upon by the Ld. A.R., the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allegation of the Ld. D.R. that there is no minutes for the aforesaid transaction is not correct. Further, the Ld. A.R. submitted that as the minutes referred to by Ld. D.R. are subsequent to the transaction, they have no relevance. 11. We have considered the submissions of the parties and perused the materials on record as well as the orders of the revenue authority. We have also carefully applied our mind to the decisions relied upon by the parties. There is no dispute to the fact that an amount of ₹ 4,21,48,280/- has been added as deemed dividend u/s 2(22)(e) of the Act to the income of the assessee for the impugned assessment year. It is the claim of the assessee that out of the said amount, an amount of ₹ 3,63,21,635/- was towards advance received for sale of property. In this context, the Ld. A.R. referred to the agreement of sale dated 2.4.2008, a copy of which is placed at page 48 of the paper book. On a perusal of the assessment order, it is evident that the assessing officer has refused to accept the agreement of sale as a valid one, firstly because it is not registered before the SRO and secondly because it only bears the signature of the assessee in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any sum previously paid by it and treated as a dividend within the meaning of subclause (e), to the extent to which it is so set off; (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956; (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company) Explanation 1: The expression accumulated profits , wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956; Explanation 2 : The expression accumulated profits in sub-clauses (a), (b), (d) and (e) shall include all profits of the company upto the date of distribution or payment referred to in those sub-clauses, and in subclause (c) shall include all profits of the company upto the date of liquidation [but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their property. In this context it has to be seen whether only on the basis of the fact that the agreement of sale is not registered or it has not been signed by all the parties, the transaction can be treated as a sham transaction. It is the contention of the assessee that since she is the power of attorney holder of the other co-owners as well as she is representing the company as Managing Director she was acting in more than one capacity, hence, only her signature is required to be put in the document. To substantiate such claim, the Ld. A.R. has referred to the sanction letter of the bank at page 60 of the paper book. On a perusal of the said sanction letter of State Bank of India Overseas Branch, it appears that the assessee has signed on behalf of all the parties. Therefore, considered in the aforesaid context, we are of the view that there is force in the contention of the assessee that with a bonafide belief that only her signature is required, no other party has signed the document. Another fact to be considered is, the aforesaid sale agreement was filed by the assessee before the departmental authority. Apart from treating the sale agreement as invalid on assumption and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the theory of advance given for purchase of property is not to be believed. So far as the allegation of the department that it is a gratuitous payment, the same is also contrary to the facts on record and unacceptable. The balance sheet of the company as well as the sanction letter of the bank clearly reveal that the entire loan availed by the company was against the collateral security of personal properties of the assessee as well as her personal guarantee. Therefore, it is not a fact that assessee has derived benefit on account of the company. On the contrary, it is the company which has availed huge loans to the extent of ₹ 20 crores by keeping the personal properties of the assessee as collateral security. In the aforesaid facts and circumstances, it cannot be said that the payment made of ₹ 3,63,21,635/- by the company to the assessee is a gratuitous payment, even assuming department s stand that it is not against purchase of property. Considering the fact that the assessee has put all his properties as collateral security as well as extended personal guarantee towards loan availed by the company, the amount paid certainly cannot be treated as gratuitous b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction would not come under the provisions of section 2(22)(e) of the Income-tax Act, 1961. Learned senior counsel for the appellant has submitted that the order dated January 3, 2012, passed by the Income-tax Appellate Tribunal in respect of the assessment year 2005-06 the same has attained finality and, therefore, relying on the same the learned Tribunal passed the impugned order. The relevant paragraph of the impugned order reads as under: We have perused the agreement to sale (pages 28 to 32 of the paper book). As per clause 2 of the said agreement (page 39 of paper book), the amount of ₹ 2,53,60,000 was agreed to be given to the assessee by the purchaser and part of the payment was received through cheque. The assessee was also supposed to get conversion of the land within two months. As per clause 10 (page 31 of the paper book), the purchaser was free to do the development work on the land and was also free to sell the same to any third party for which the assessee had no objection. In view of these facts, it cannot be said that it was a loan or an advance to the assessee. The contents of the sale agreements are very much clear that it was a clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of section 2(22)(e), the important consideration is that there should be loan/advance by a company to its shareholder. Every amount paid must make the company a creditor of the shareholder of that amount. At the same time, it is to be borne in mind that every payment by a company to its shareholders may not be loan/advance. In the present case, the amount was withdrawn by the assessee from the company only to meet her short term cash requirements. By virtue of offering personal guarantee and collateral security for the benefit of the company, the liquidity position of the assessee had gone down. In the strict sense if it is to be construed the amount forwarded by the company to the assessee was not in the shape of advances or loans. The arrangement between the assessee and the company was merely for the sake of convenience arising out of business expediency. In the facts and circumstances of the case, it is not appropriate to hold that the amount withdrawn by the assessee partakes the character of deemed dividend under the provisions of section 2(22)(e) of the Act. The case of the assessee is squarely covered by the Division Bench judgement of the Hon ble Cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind any infirmity in the order passed by the Commissioner of Income Tax (Appeals). In view of our aforesaid findings, the appeal of the Revenue fails and the same is dismissed being devoid of any merit. 16. Another pertinent fact which needs to be mentioned here is, the aforesaid decision of the Madras Bench is after considering the decisions relied upon by the department, which are also relied upon by the Ld. D.R. before us Therefore, considering the facts of the present case in the light of the judicial precedents referred to herein above, we are of the view that the payment of ₹ 3,63,21,635/- cannot be treated as deemed dividend u/s 2(22)(e) of the Act. Accordingly, we direct the assessing officer to delete the addition made of the said amount. So far as the other additions are concerned, it is the contention of the Ld. A.R. that if at all they are to be treated as deemed dividend, then opening balance as appearing at the beginning of the year has to be excluded and proportionate addition has to be made on the balance amount. However, considering the fact that this argument was not made before the departmental authorities, we consider it appropriate to remit the matte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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