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TMI Blog2017 (11) TMI 1761X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of or for the benefit of its alleged shareholder i.e. Sh Charanjeet Nagpal. No error in the order of the CIT(Appeals) in deleting the addition made by the AO u/s 2(22)(e) of the Act. Therefore, appeal this ground of appeal of revenue is dismissed. Addition under the head “Income from House Property” - reasonable rent for which the property may be let out - Held that:- Where a property is fully let out, its Annual Value is to be taken at higher of the actual rent received / receivable from the said property or the sum for which the said property might reasonably be expected to let out from year to year. In the present case, municipal valuation of the concerned property was made on 27/06/2009 by the Municipal Corporation fixing the annual value of the property at 7,22,640/- relevant for the Assessment Year under appeal. In view of the decision in the case of John Tipson 22,25,200/- which is much higher than the municipal valuation. Thus, same is to be treated as “standard rent” for the property in question. So far as different rent fetched from different tenants is concerned it is suffice to say that area as well as terms of both the tenants were different and distinguishabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds of appeal: - 1. "Whether on the facts and in the circumstances of the case, the CIT(A) was right in law and on facts in deleting the addition of ₹ 3,79,12,500/- made by the Assessing Officer u/s 2(22)(e) of the Income Tax Act, 1961 on account of the amounts / advances received by the assessee from M/s Tanushka Automobiles Pvt Ltd. and M/s Vinayaka Farms and Resorts (India) Pvt Ltd. (VFARPL), despite the fact that ShCharanjeet Nagpal was a shareholder holding 55.92% shares in the assessee company, 30% shares in TAPL and 49.50% shares in VFARPL i.e. was having substantial interest in the payee as well as payer companies ?". 2. "Whether on the facts and in the circumstances of the case, the CIT(A) was right in law and on facts in deleting the addition of ₹ 39,12,696/- made by the Assessing Officer on account of income from house property as per provisions of section 22 read with 23 of the Income Tax Act, 1961?" 3. Whether on the facts and in the circumstances of the case, the CIT(A) was right in law and on facts in deleting the addition of ₹ 13,75,355/- made by the Assessing Officer u/s 40A(2)(b) of the Income Tax Act, 1961?" 3.0 Apropos ground No. 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also explained that the assessee company was neither a registered nor a beneficial share holder in any of the lending companies. The assessee therefore contended that provisions of Sec 2(22)(e) were not applicable to the amounts received from any of these two companies. He also relied on various case laws which are quoted by the AO in his order on page 4 under para 2.2. However, the AO was not satisfied with the explanation of the assessee. He was of the opinion that if loan or advance is given to a concern (ie. HUF, a Firm, Association of person, Body of individual or a company) in which a share holder (being a person who is the beneficial owner of shares holding not less than 10% of the voting power) of the payer company (giving loan or advance) has substantial interest, then the provisions of section 2(22)(e) applicable to the concern receiving the loan/advance. Accordingly, the AO, vide 2.12 treated ₹ 3,69, 12,500/- and ₹ 10,00,000/- being advance/loan received by the assessee company from TAPL and VFARPL respectively (to the extent of their accumulated profits) as deemed dividend in the hands of the assessee company as per provisions of section 2(22)(e). 3.2 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant company is neither a registered nor a beneficial owner of shares of Tanushaka Automobiles Pvt Ltd. Here also the facts and circumstances are the same. As the appellant is neither a beneficial nor a registered shareholder of Tanushaka Automobiles Pvt Ltd. and thus any advance received by the appellant from such a concern does not qualify the test of deemed dividend as discussed and elaborated in the preceding paragraphs. Thus, the same is not liable to be taxed in the hands of the appellant u/s 2(22)(e). In view of the above addition u/s 2(22)(e) made by the AO for an amount of ₹ 3,69,12,500/- being the amount received by the appellant from Tanushaka Automobiles Pvt Ltd is hereby deleted. 5.3.5 Thus, the appellant gets a relief of ₹ 3,79,12,500/- (Rs. 10,00,000/- plus 3,69,12,500/-) on grounds 1 to 4." 3.3 The Ld DR supported the assessment order. His submission was that the assessee company is a concern in which Shri Charanjeet Nagpal holds substantial shareholding and he is also a substantial shareholder in the lender companies M/s Vinayaka Farms & Resorts (I) Pvt Ltd and M/s Tanushaka Automobiles Pvt Ltd. As such, the assessee company is a concern in which one o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record at length and considered the case laws cited in support. 3.6 It is undisputed fact the assesseee company is not a share holder in any of the lender companies ie TAPL and VFARPL though Shri Charanjeet Nagpal is a common shareholder having substantial shareholding in all the companies. Therefore the question before us to consider is whether, when the assessee company is neither a registered nor a beneficial shareholder of the lender companies, the loan/advance received by the assessee company from these group companies could be taxed in its hand as "deemed dividend" within the provisions of section 2(22)(e). 3.6.1 The provisions of section 2(22)(e) came up for consideration before the Hon'ble Rajasthan High Court in the case of Hotel Hilltop (2009) 313 ITR 116. In this case the AO had added ₹ 10.00 Lac in the hands of Hotel Hilltop, a partnership firm, treating the amount received from Hiltop Palace Hotels (P) Ltd as deemed dividend being a "payment to a concern" which satisfied the condition of shareholding level as envisaged u/s 2(22)(e). The assessee objected to the addition in first appeal on the ground that he was not a registered shareholder of the lender company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of s. 2(22)(e) of the Act. 35. The intention behind enacting provisions of s. 2(22)(e) are 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 in which its shareholder has substantial interest is based on the presumption that the loan or advances would ultimately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the ordinary and natural meaning of the word "dividend" is taken away. In the light of the intention behind the provisions of s. 2(22)(e) and in the absence of indication in s. 2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of a non-shareholder. ………………. ………………. ………………. 41.In the light of the above discussion, the questions referred to the Special Bench are answered as follows : On the first question: Deemed dividend 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 than a shareholder. On the second question: The expression 'shareholder' referred to in s. 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of s. 2(22)(e) will not apply. Similarly, if a person is a beneficial shareholder but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to nonmembers. The second category specified under s. 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the legislature was to tax such loan or advance as deemed dividend at the hands of "deeming shareholder", then the legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsel for the Revenue would stand answered, once we look into the matter from this perspective. 26. In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the Revenue to argue that if this position is taken, then the income "is not taxed at the hands of the recipient& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the judgment is a detailed judgment going into Section 2(22)(e) of the Income Tax Act which arises at the correct construction of the said Section. We do not wish to add anything to the judgment except to say that we agree therewith. These appeals are disposed of accordingly. 3.6.6 The issue in dispute as to applicability of section 2(22)(e) to a non shareholder recipient of loan / advance, thus, now stands settled. As far case laws, cited by the Ld DR, are concerned it would be suffice to say that they do not address the specific issue of treating receipt of an advance/loan as deemed dividend in the hands of the non shareholder recipient which is the core dispute in the present appeal. 3.6.7 In the present case, the assessee company is neither a registered nor a beneficial shareholder of the lender companies and the loan / advance is also not alleged to have been received by the assessee company on behalf of or for the benefit of its alleged shareholder i.e. ShCharanjeet Nagpal. 3.6.8 In view of the aforesaid discussion and the judicial precedents, we do not find any error in the order of the CIT(Appeals) in deleting the addition of ₹ 3,79,12,500/- made by the AO u/s 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompensated adequately and added to the profitability of the assessee. It was also stressed that total rent received for the property was much higher than the annual value fixed by the municipal corporation and therefore there was no under valuation of fair rent. The assessee also relied on various decisions as discussed by the CIT(A) in his order. 4.3 The CIT (Appeals) deleted the addition holding in para 7.3 of his order as under - "I have gone through the various arguments of the AR and the written submissions given before me. The fact remains that the rent was received from Axis Bank at a much higher rate but also there is another fact that Tanushaka Automobiles Pvt Ltd had totally different terms and conditions of rental agreement. They were older tenant and the space given to Axis Bank was the prime space of the property. Further, the appellant had taken a security deposit of ₹ 2 Cr. from Tanushaka Automobiles Pvt Ltd. as against no security deposit received from Axis Bank Ltd. Thus arrival of fair rental value on rent received from Tanushaka Automobiles Pvt Ltd on the basis of rent received from Axis Bank Ltd would not be a correct position as the terms and circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear to year; or (b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or (c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable : Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him. Explanation. -For the purposes of clause (b) or clause (c) of this subsection, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghubir Saran Charitable Trust (1990) 183 ITR 297 (Del), that the Tribunal was justified in holding that the market rent of the property could not be more than the standard rent. In Raghubir Saran Charitable Trust (supra) the AO had incorrectly computed the market rent of the house and had added the difference between the market rent so calculated and rent which was being actually paid. The same result was reached in L. Bansidhar& Sons vs. CIT (1993) 109 CTR (Del) 62 : (1993) 201 ITR 655 (Del) where however it was clarified that the position stood changed with effect from the 1976 amendment, after which the actual rent would be relevant only if it is higher than the standard rent. Once again the decision of this Court in CIT vs. Vinay Bharat Ram & Sons (HUF) (2003) 179 CTR (Del) 31 : (2003) 261 ITR 632 (Del) is topical. The Department had assailed the following remand order of the CIT(A)- "The AO is directed to redetermine the annual value of the property in accordance with my findings, he will limit the same to the higher of the following (a) the municipal valuation, (b) the fair rent determinable under the Rent Control Act, and (c) the actual rent paid by the assessee. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty did not consist of different units. It was a compact property some part of which was let out to one tenant and some part to other. Thus, the annual value of the said property was to be considered as a single unit as is done by the Municipal Corporation. In our opinion there is considerable force in the arguments of the Ld AR. 4.8 In view of the aforesaid discussion and considering all the aspects, we are of the considered opinion that the AO was not justified to make the impugned addition. Therefore, we find no reason to interfere in the order of ld CIT(A) on this issue. Ground No. 2 of the Revenue is accordingly dismissed. 5. In Ground No. 3, the revenue challenged the deletion by the CIT(A) of ₹ 13,75,355/- made by the Assessing Officer u/s 40A(2)(b) of the Income Tax Act, 1961. 5.1 Brief facts are that the assessee had paid interest @ 6% per annum on the security deposit of ₹ 2.00 Cr to M/s Tanushaka Automobiles Pvt. Ltd amounting to ₹ 12,00,000/-. The AO also noted that assessee had received security deposit from other tenant and had given security deposits to others for the premises taken on rent. However, no interest was either received or paid on su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant to Tanushka Automobiles Pvt Ltd was 6%. The AO has also not doubted and has allowed interest paid to other depositors @ 12% per annum by the appellant. Merely because no interest was paid on certain security deposit would not be a factor for determining the allowability of interest and applicability of section 40A(2)(b). The test thus would be whether the interest @ 6% paid by the appellant to Tanushak Automobiles Pvt Ltd was reasonable and fair as compared to the market rates. The AO has himself allowed interest paid to various depositors @ 12%. Further, the rate at which the appellant has borrowed funds from the banks is still higher. The rate of 6% paid by the appellant to Tanushka Automobiles Pvt Ltd cannot be considered as higher at all. Further as regards contention of the AO that once the same is considered as deemed dividend the interest would not be allowed, it has been held by me that above that the amount is not to be treated as deemed dividend. Furthermore, even if it would have been considered as the same the nature of amount received by the appellant from Tanushka Automobiles Pvt Ltd does not change. For the purpose of taxation a deeming fiction has been added but ..... X X X X Extracts X X X X X X X X Extracts X X X X
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