Advance for Sale of Property Cannot be Treated as Deemed Dividend
When on examination of nature and scope of the transactions it is found that the impugned transactions are towards business and commercial purpose and there is no benefit accruing to the assessee from such transaction it was held that the transactions are not following within the scope of section 2(22)(e).
IN THE INCOME TAX APPELLATE TRIBUNAL
The Relevant Text of the Order as follows :
5. We considered the rival submissions. The relevant portion of the order of the Ld. CIT(A) is extracted as under:
“At this juncture, attention is drawn to Section 2(22)(e) of the Income tax act 1961 as follows.
The section 2(22)(e) is read as follows:
Any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance
or
Loan to a shareholder , being a person who is beneficial owner of Shares , holding not less than 10% of voting powers
or
To any concern in which such shareholder is a member or a partner and in which he has a substantial interest,
or
Any payment by any such company on behalf,
or
Any payment for the individual benefit of any such shareholder to the extent to which the company in either case possesses accumulated profits. If we carefully go through the section it is clear that any payment made by the company to a shareholder having more than 10% of Voting rights for the individual benefit of the share holder then such payments are to be treated as deemed dividend. However in the assessee’s case the company M/s BNT Connections lmpex limited has substantially benefited by payment of property purchase advance of a sum of Rs.2,31,00,000/- in the asst year 2014-15. After the takeover of the possession of the premises by the company, the company has invested in additional plant and machinery and consequently the manufacturing base has expanded of the company substantially, which resulted in overall increase in turnover of the company from Rs 38.00 crores to Rs 50.00 crores and the operating profit of the company also substantially increased from Rs 2.6 crores to Rs 4.54 crores This is evident from the statement of Turnover and Profit or loss submitted by the assessee in the written submission. Therefore it is proved beyond reasonable doubt that the property advance of Rs 2.31 crores paid by the company to the appellant is purely business and commercial transaction and hence the provisions of section 2(22)(e) cannot be invoked for such business and commercial transaction as per CBDT Board Circular No 19/2017. Even otherwise this particular Business and commercial transaction is beyond the scope of section 2(22)(e) as per the Income tax Act, 1961. As a result of such transaction substantial benefit has only accrued to the company and not to the Individual benefit of the shareholder ( appellant).
The appellant also drew my attention to the fact that the appellant has right from the inception of the company always funded the company by way of unsecured loan without interest thereon, whenever the company required funds for its business operations. A statement of unsecured loan given by the appellant to the company was enclosed for perusal to this effect.
The appellant also enclosed the letter received from the Federal Bank on 07/05/2014 wherein the bank has clearly stated that working capital funds should not be used by the company for the property purchase but must be paid out of other accruals i.e. rental income and the company should not pay rent to the assessee for using the factory premises. Further the property to be purchased should be used for manufacture and export of readymade garments. In this regard, copies of bank statement were submitted wherein the amount paid by the company to the appellant has gone out of rental income account operated in IDBI bank. Hence even from the above letter it is very clear that the transaction is for Business and Commercial purpose and there is no benefit accruing to the assessee from such transaction.
My attention was also drawn to the Jurisdictional Tribunal’s decision in the case of G. Sreevidya, Chennai vs Department of Income-tax dated 23.05.2015, the relevant extracts of which is reproduced below:
“The case of the assessee is squarely covered by Division Bench judgment of the Hon’ble Calcutta High Court in the case of Pradip Kumar Ma/hotra (Supra), wherein the facts were similar to the facts of the instant case. In Pradip Kumar’s case assessee had substantial holding in a private company. The assessee permitted his immovable property to be mortgaged to the bank for enabling the company to take the benefit of loan. The Board of Directors of the company passed a resolution to obtain interest free deposit upto 50 lakhs as and when required. The assessee obtained from the company a sum of 20,75,000/- by way of security deposit. Out of this amount, a sum of 20 lakhs was returned by the assessee to the company. The Assessing Officer added the sum of 20,75,000/- as deemed dividend. The Hon’ble High Court while allowing the appeal of assessee held that for retaining the benefit of loan availed of from the bank, if decision was taken to give advance to the asessee such decision was not to give gratuitous advance to its shareholder but to protect the business interest of the company. The sum of 20,75,000/- could not be treated as deemed dividend. The Division Bench of the Hon’ble Calcutta High Court followed the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Creative Dyeing & Printing P. Ltd. Reported as 318 ITR 476(Del). In the instant case also the assessee was allowed to withdraw funds from the company as per requirement for personal purposes against the personal guarantee and the collateral security given by her to facilitate her availing of credit facility of the company.
It is a well settled law that loan or advance given to a shareholder by a company in which public is not substantially interested and which had accumulated profits, the amount advanced as loan to such shareholder is deemed to be dividend as per the provisions of section 2(22)(e) of the Act. However, the facts and circumstances of each case have to be scrutinized before applying the ratio of the cases holding above well settled law. In the facts and circumstances of the instant case, judgements relied upon by the DR in the cases of Sarada P.(supra), P.K.Abubucker (supra) and Trarulata Shyam (supra) are not applicable.
The Commissioner of Income Tax (Appeals) vide order dated 6.4.2011 has rightly deleted the addition made on account of “deemed dividend” by the Assessing Officer. We do not find any infirmity in the order passed by the Commissioner of Income-tax(Appeals). In view of aforesaid findings, the appeal of the Revenue falls and the same is dismissed being devoid of any merit.” Therefore the assessing officer’s rejection of the submission of the appellant that the property sale advance was for purchase of property for the use of the company for its business was on an incorrect footing.
Therefore, it is held that such advances falls within the meaning of Commercial and Business purposes and cannot be treated as deemed dividend u/s 2(22)(e) of the Act.
The Assessing Officer is directed the delete the addition of Rs.2,31,00,000/- made under this head. This ground is allowed.”
From the above, it is clear that the Ld. 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, on the above facts and circumstances , the assessee has clearly established that the impugned transactions are not following within the scope of section 2(22)(e). The 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.
6. With regard to the addition made under the head house property, it is clear that the assessee is owner of the land and building. It was used by the company towards its business purposes. Therefore, the 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. Therefore, we uphold the order of the AO. To this extent, the Revenue’s appeal is allowed. In the result, the Revenue’s appeal is partly allowed.
7. In the result, the Revenue’s appeal is partly allowed.
Order pronounced on 25th February, 2020 at Chennai.
Tags: Judgement, Appellant Tribunal
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