Income Tax Appellate Tribunal - Cochin
Asstt. Commissioner Of Income-Tax vs Smt. Lakshmikutty Narayanan on 24 October, 2005
Equivalent citations: [2007]105ITD558(COCH), [2008]303ITR212(COCH), (2007)112TTJ(COCH)396
ORDER
R.S. Padvekar, Judicial Member
1. This appeal by the revenue is directed against the order of the CIT(Appeals)-V, Cochin dated 25-2-03 relevant to the assessment year 1996-97.
2. The revenue has urged in this appeal, in all, four grounds, but the only issue for our adjudication is whether on the facts and circumstances of the case, the CIT(Appeals) is justified in deleting the addition of Rs. 9,02,892/- made by the assessing officer in the hands of the assessee as deemed dividend under Section 2(22)(e) of the IT Act, 1961.
3. The facts Of this case are in a narrow compass. The assessee was a director of M/s Seethal Apartments Pvt. Ltd., Trichur, which was a closely held domestic company. The assessee was issued notice under Section 148 and the assessee filed the return disclosing income at Rs. 2,46,330/-. During the course of re-assessment proceedings, the assessing officer noted that the assessee was a director in M/s Seethal Apartments Pvt. Ltd. holding 20% of the share 'capital at Rs. 1,00,000/- and the total share capital of the company was Rs. 5 lakhs. It was further noted by the assessing officer that in the balance- sheet of the company for the year 1996-97 the company had a surplus to the tune of Rs. 9,02,892/-. It was further seen by the assessing officer that the said company had advanced loans and advances to the assessee amounting to Rs. 53,93,192/-. The assessing officer invoked the provisions of Section 2(22)(e) of the IT Act and to the extent of the accumulated reserves and surplus shown in the company's balance-sheet of Rs. 9,02,892/-, he made addition in the income of the assessee as deemed dividend. Being aggrieved by the order of the assessing officer, the assessee preferred appeal to the CIT(Appeals).
4. It was the case of the assessee before the CIT(A) that the assessee had not received any money from the company namely, M/s Seethal apartments Pvt. Ltd. It was contended by the assessee that the construction of commercial-cum-residential complex was entrusted to the company as per the agreement between the assessee and the company. It was further contended that the assessee retained the basement floor, ground floor and the first floor, the construction of which had been completed before 1-4-95, The ground-floor of the building was fully let out in 1994 itself and that the rental income was offered for taxation by the assessee from the assessment year 1995-96 onwards. It was contended that there was no construction on behalf the assessee or any advance or loan given to the assessee during the previous year relevant to the assessment year 1996-97. It was the case of the assessee that though the construction of the portion retained by the assessee was finished before 1-4-95, the requisite journal entry was passed in the company's books debiting the assessee's account only during the financial year 1995-96 relevant to the assessment year under appeal. It was also the case of the assessee that M/s Seethal Apartments P. Ltd. was a company in which the assessee and her husband were shareholders. The assessee has also given the details showing that the assessee and her husband had advanced money to the company from the assessment year 1993-94 onwards and the total advance made by the assessee and her husband upto the assessment year 1996-97 was Rs. 68,26,468/- It was also contended that the total value of the area retained by the assessee was Rs. 80,49,000/- which included the profit of Rs. 6,12,000/- at the rate of 7.60%. It was the further contention of the assessee that after excluding the profit, the debit due to the construction was, Rs. 74,37,000/- as against Rs. 66,98,000/- advanced by the assessee and her husband. The transaction between the assessee and the said company was for the construction of a commercial premises and apartments. The debit balance of Rs. 53,93,000/- was said to be due to the business transaction in the normal course of the business of the company and not due to any loan or advance. It was contended that as per the proviso to Section 2(22)(e), a loan given by a Limited Company to a share-holder would not be considered as a deemed dividend if the business of the company is money lending. On the same analogy, it was contended that any advance in the nature of construction expenditure made to a share-holder would not be a deemed dividend in the case of a construction company. It was further contended that there was no accumulated profit in the earlier year when the relevant construction was made. The CIT (Appeals) accepted the contentions of the assessee and deleted the addition of Rs. 9,02892/- and held that there was no accumulated profit of the earlier years and no cash flow to the assessee. Hence, it cannot be said that there is payment of deemed dividend to the assessee. Being aggrieved by the said deletion, the revenue is in appeal before the Tribunal.
5. The Id. departmental representative submitted that there was a serious error made by the CIT (Appeals) in holding that for attracting the provisions of Section 2(22)(e), there must be cash transfer from the company to the assessee. She submitted that as per the provisions of Section 2(22)(e) of the IT Act, any payment by a company not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise)made by way of advance origans has to be brought to tax as deemed dividend to the extent of the accumulated profit. She further contended that as per the statement of accounts of the company an amount of Rs. 53,93,192/- due from the assessee to the company was in pursuance of a journal entry passed on 30-3-96 which represented a part of the asset of the company viz. building constructed by it. She further submitted that the expression "accumulated profit" in Sub-clauses (a),(b), (d) and (e) would include all profits of the company upto the date of distribution or payment referred to in these sub-clauses. As such, the amount of Rs. 9,02,890/- transferred to Reserve and Surplus Account is rightly assessable under the provisions of Section 2(22)(e) of the IT Act. The Id. departmental representative relied on the following decisions in support of her contentions:
i) 164 ITR 28 CIT v. M.D. Jindal
ii) 49 ITR 287 T. Sundaram Chettiar v. CIT She, therefore, submitted that the addition made by the assessing officer Under Section 2(22)(e) of the IT Act was as per the provisions of the Act and the order of the CIT(Appeals) be set aside and that of the assessing officer restored.
6. The, Id. Representative for the assessee submitted that though the journal entry was passed in respect of the business transaction between the assessee and the company on 30-3-96, there was no advance or transfer of money made to the assessee during the previous year relevant to the assessment year 1996-97. He further submitted that the company, M/s Seethal Apartments P.Ltd. passed journal entry debiting an amount of Rs. 53,93,192/- which showed that certain amount was due from the assessee for transfer of certain apartments. He further contended that the company had constructed the commercial area of 19,261 sq.ft. and also the residential area of 32200 sq. ft.(5 floors from the second floor to the 6th floor, each having 4 flats) in the year ending on 31-3-96. Since the said company followed the completed contract method, the income from the sale of the flats was accounted in the assessment year 1996-97, and for the same reason the journal entry in the name of the assessee was also passed in the previous year relevant to the assessment year 1996-97. He further submitted that it is the requirement of Section 2(22)(e) of the IT Act that there should be transfer of any money to the assessee from the company. Section 2(22)(e) is a deeming provision and it should be strictly interpreted. He further contended that in the case of assessee there was no transfer of any money to the assessee but there was only journal entry that an amount of Rs. 53,93,192/- was due by the assessee to the company in the previous year relevant to the assessment year under appeal. In support of his contention, the Id. representative relied on the following decisions:
i) CIT v. Mrs. Maya B. Ramchand 162 ITR 460
ii)M.D. Zindal v. CIT 164 ITR 28
iii)G.R. Govindarajulu Naidu and Anr. v. CIT 90 ITR 13
iv)CIT v. Smt. Savithri Sam 144 CTR 17(Mad.)
7. We have carefully considered the rival submissions and the facts of this case as per records before us. It is not disputed that the assessee was a director in M/s. Seethal Apartments P.Ltd. which was a closely held company in which the assessee was holding 20% of the share capital. We will have to examine the provisions of Section 2(22)(e) of the IT Act which defines the term "dividend". The operative part of Section 2(22)(e) is as under:
Section 2...
(22) "dividend" includes-
(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) (made after the 31st day of May, 1987, or any payment by any such company on behalf by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten 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 (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 posses accumulated profits.
This clause also contains six sub-clauses which exclude certain receipts from the definition of "dividend" but Sub-clause (ii) is important as far as the issue before us is concerned. Now, we will have to examine the facts of the case in the light of Section 2(22)(e) of the IT Act in the case of a closely held company if any payment is made by the company by way of advance or loan to a shareholder who is holding not less than ten per cent of the voting power or to any concern in which such shareholder is a member or partner or in which he has substantial interest or any payment by any such company on behalf of or for the individual benefit of such shareholder, such advance or loan or any payment on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. Sub-clause (ii) of the definition which is relevant for our purpose excludes certain transactions between the closely held companies and the shareholders if any advance or loan is made in the ordinary course of its business, where the lending of money is a substantial part of the business of the company. Explanation 2 to the section defines the meaning of the expression "accumulated profits" appearing in Clauses (a), (b), (d) and (e) of the IT Act to include all profits of the company upto the date of distribution or payment referred to in those sub-clauses.
8. In the present case, the assessing officer has invoked the provisions of Section 2(22)(e) and has made the addition of Rs. 9,02,892/-. As per the facts of the case, the construction of the commercial-cum- residential complex was entrusted to the company as per the agreement between the parties. As per the terms of the contract, the assessee retained the basement floor, ground floor, first floor and the constructions which had been completed before 1-4-95. The assessee let out the ground floor of the building and offered the rental income for taxation from the assessment year 1996-97 onwards. To attract the provisions of Section 2(22)(e), the following four conditions are sine qua non:
i)The assessee should be the shareholder of the company.
(ii)The said company should be a closely held company in which the public are not substantially interested.
(iii) There must be advance or loans by the company to the shareholder or any payment by any such company on behalf of or for the individual benefits of the shareholders.
iv)There must be accumulated profits in the hands of the company upto the date of payment referred to in Clause (e).
As per the facts of this case, both the assessee and her husband are shareholders of M/s Seethal Apartments P.Ltd. The assessee had also made advances from 1996-97 to the company as per the figures available on record which work out to Rs. 26,56,019/- (excluding the advances made by her husband). As per the contract between the assessee and the company, the assessee had retained the area having total value of Rs. 80.49 lakhs. The Id. Chartered Accountant of the assessee has filed copies of the ledger accounts of the assessee in the books of M/s Seethal Apartments P.Ltd. which show that by way of journal entry on 30-3-96, a sum of Rs. 80,49,211/- is debited. As per the argument of the Id.CA, there is another journal entry on the credit side in the name of the assessee amounting to Rs. 53,93,191/- which was said to be in the business and not due to any loan or advance. The CIT(A) has deleted the addition by concluding that there was no cash flow or any payment to the assessee during the previous year and hence the provisions of Section 2(22)(e) are not attracted. Now we will have to examine the facts of this case in the backdrop of the legal principles laid down in the decisions cited by both the parties.
9. In the case of M.D. Zindal (supra), the issue before the Calcutta High Court was whether the value of iron materials supplied by the company to the assessee and his wife who were the only directors of the company can be treated as dividend within the meaning of Section 2(22)(e) of the IT Act. In this case the assessee purchased two adjacent plots of land, one in the joint name of himself and his wife and the other in the names of his two minor sons. The assessee constructed a multistoried building containing several flats, on the said plots. The assessee and his wife entered into an agreement with the company whereby they agreed to sell six flats to the company of which the assessee and wife were the only directors. After the agreement was executed with the company, the company supplied iron materials to the assessee. On the facts and circumstances of the said case, it was held by the Calcutta High Court that the value of the iron materials supplied to the assessee by the company was the; advance made to the assessee by transfer of the goods and benefits accrued to the assessee. Moreover, the Calcutta High Court has also examined the agreement entered into between the assessee and the company and it was held that the said agreement was a device to circumvent the provisions of Section 2(22)(e) and hence, it was held that the value of the iron materials supplied by the company to the assessee was dividend within the meaning of Section 2(22)(e) of the IT Act. Moreover, another aspect of the fact was that the company was also dealing in iron materials. In the case of T. Sundaram Chettiar (supra), the issue before the Madras High Court was whether the dividend received from the foreign company is assessable as dividend. The assessee was a merchant in Colombo and he held some shares in the company called Panchanayaki Ltd., which has its registered office in Colombo. During the previous year relevant to the assessment 1954-55, the assessee received some dividend and the said amount received by him was in the taxable territory. It was the contention of the assessee before the Income-tax Officer that the said amount was exempt because it was paid out of the capital profits of the company. In the case of Mrs. Maya B. Ramchand (supra), the issue before the Bombay High Court was whether the net amount of debit after setting off credit amount on the same day on which debit occurred could be treated as deemed dividend to the extent of accumulated profits of the company and for deemed dividend whether the accumulated profit of the company was to be determined on the day on which loan to the shareholder was made. The Hon'ble High Court, after examining the provisions of Section 2(6A)(e) of the Indian Income-tax Act, 1922, held that company's accumulated profits must be determined on the day on which the loan or advance to the. shareholder was made as the assessing officer had taken the financial year as the previous year for considering the accumulated profit of the company for invoking the provisions of Section 2(6A)(e) of the IT Act, 1922.
10. In the case of Savithry Sam (supra), the issue before the Hon'ble High Court was whether for the purpose of computation of deemed dividend under Section 2(22)(e) of the IT Act, 1961, there must be actual flow of cash from the company to the; shareholder and the transfer of money did not amount to a payment as envisaged in that section. On the facts and circumstances of the case, while applying the ratio in the case of G.R. Govindarajulu Naidu v. CIT 90 ITR 13, the High Court held that Section 2(22)(e) has introduced a fiction and by the fiction dividend is made to include any payment by a company etc. Therefore, it is difficult to introduce another fiction in respect of the words "payment by the company" by construing even a transfer entry as amounting to payment. It was further held that when Section 2(22)(e) introduces a fiction, it is improper to introduce another fiction and construe a payment as equivalent to a constructive payment. In the case of G.R. Govindarajulu Naidu and Anr. (supra), the issue before the Hon'ble High Court was whether the term "payment and loans & advances" also includes a notional payment by way of book entries. It was held that there should be an outgoing or flow of money from the company to the shareholder so as to attract the said provisions and that a notional payment by way of book entry would not ,be included.
11. As far as the facts of the present case are concerned, it is not disputed that there was no transaction of any nature whatsoever during the previous year relevant to the assessment year 1996-97. Whatever book entries were passed, those were relating to the earlier years and that was also in respect of the agreement between the assessee and the company. The agreement is not disputed as a device used by the assessee for circumventing the provisions of Section 2(22)(e) of the IT Act as was the issue in the case of M.D. Zindal (supra). In this case also, it is not the contention of the assessing officer that some benefit was given to the assessee by the company. We, therefore, find no infirmity in the order of the CIT(Appeals). The CIT(Appeals) has rightly deleted the said addition. We, therefore, confirm his order.
12. In the result, the appeal filed by the revenue stands dismissed.