Income Tax Appellate Tribunal - Bangalore
Smt. Vaishnavi Tekumalla , Bangalore vs Department Of Income Tax on 13 June, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH : BANGALORE
BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER
AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER
ITA No.493/Bang/2011
Assessment year : 2007-08
The Deputy Commissioner Vs. Smt. Vaishnavi Tekumalla,
of No.795, 12th B Cross,
Income-tax, 23rd Main,
Circle 12(1), J.P. Nagar 2nd Phase,
Bangalore. Bangalore - 560 071.
PAN: ABPPV 3746C
APPELLANT RESPONDENT
Appellant by : Shri Etwa Munda, CIT-II(DR)
Respondent by : Shri C. Ramesh, C.A.
Date of hearing : 13.06.2012
Date of Pronouncement : 13.06.2012
ORDER
Per N.K. Saini, Accountant Member
This appeal by the department is against the order dated 22.12.2010 of the CIT(Appeals)-III, Bangalore.
2. Following grounds have been raised in this appeal:
ITA No.493/Bang2011/ Page 2 of 12 "1. The order of the learned CIT(A) is opposed to law and facts of the case.
2. The learned CIT(A) erred in deleting addition of Rs. 1 crore u/s 2(22)(e) having not considered the facts and circumstances of the case and deficiencies in the agreement purported to be entered by the assessee and the company for purchase of property from the assessee which prove that the agreement is not genuine. The CIT(A) ought to have appreciated that the agreement made on an unstamped paper without complying with the provisions of Indian Contract Act/Indian Registration Act produced by the assessee was only to circumvent the provisions of section 2(22)(e).
3. The CIT(A) also failed to appreciate the applicability of the decision of Hon'ble Calcutta High Court in the case of M D Jindal Vs. CIT (1987) 164 ITR 28, to the facts of the present case in support of the stand taken by the AO that the so called agreement was not genuine and was an ostensible device to circumvent the provisions of section 2(22)(e) of the l.T.Act, 1961.
4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.
5. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above."
3. From the above grounds, it would be clear that the only grievance of the department relates to the deletion of addition of Q 1 crore made by the AO u/s. 2(22)(e) of the Income-tax Act, 1961 [hereinafter referred to as "the Act" in short"].
ITA No.493/Bang2011/ Page 3 of 12
4. The facts of the case in brief are that the assessee derived income from salary, house property and other sources.
She filed her return of income on 31.07.2007 declaring an income of Q 1,21,571 which was processed u/s. 143(1) of the Act on 02.07.2008. Later on, the case was selected for scrutiny.
During the course of assessment proceedings, the AO noticed that the assessee possessed 97.83% of shares of the company, M/s. Mc Creade Software (Asia) Pvt. Ltd. and had received Q 1 crore by way of cheque dated 06.01.2007. He also observed that the said company was having accumulated profits of Q 12,47,07,765 and Q 17,18,54,720 as on 31.03.2006 & 31.03.2007 respectively. The Assessing Officer asked the assessee to explain as to why the amount of Q 1 crore received from the company should not be treated as deemed dividend u/s. 2(22)(e) of the Act in the hands of the assessee.
5. In response, the assessee produced a copy of agreement of sale entered into with the company dated 06.01.2007 for the property at No.795, 12 'B' Cross, 23rd Main, J.P. Nagar 2nd Phase, Bangalore and contended that the amount was received as advance from the company for the sale of property owned by her as per the agreement of sale and hence the above amount could not be treated as deemed dividend. The AO after considering the submissions of the assessee observed that the agreement was not executed on a stamp paper and the details of acquisition of the property to ascertain that the property was ITA No.493/Bang2011/ Page 4 of 12 owned by the assessee has not been mentioned in the agreement. He further observed that the value of the property as per the records of Sub-Registrar was Q 50,25,000 and that the above property was not available in the balance sheet of the assessee as on 31.03.2007. He also observed that the advance paid by the company was in addition to the dividend of Q 1,12,88,845 and that the purported sale agreement of the property was not executed nor registered, so it was to be presumed that the intention of the company was to benefit the shareholder. The AO was of the view that the provisions of section 2(22)(e) of the Act were applicable. Reliance was placed on the following case laws:-
(i) M.D. Jindal v. CIT (1987) 164 ITR 28 (Cal)
(ii) Smt. Tarulata Shyam v. CIT (1977) 108 ITR 345.
6. Accordingly the AO considered the amount of Q 1 crore received by the assessee from the company M/s. Mc Creade Software (Asia) Pvt. Ltd., Bangalore, as deemed dividend and added the same to the income of the assessee.
7. The assessee carried the matter to the ld. CIT(Appeals).
The submissions made by the assessee are reproduced by the ld. CIT(A) in paras 4.1 to 4.9 of the impugned order and read as under:-
"4.1 As per the agreement dated 06.01.2007 the property intended to be purchased by the company from the appellant is a residential property located at No.795, 12th B Cross, 23rd Main, J.P. Nagar 2nd ITA No.493/Bang2011/ Page 5 of 12 Phase, Bangalore measuring 134.20 sq mtrs. The built up area is 1700 sq ft.
The Assessing Officer has stated that the market value of the property is Rs.50,25,00,000/-. There is no basis for this estimation made by the Assessing Officer.
The property measures 134.20 sq mtrs only. The built up area is 1700 sq ft and the property is residential in nature. In view of this the agreed price of Rs. 1,20,00,000/- is reasonable.
The conclusion of the Assessing Officer, that the agreement is a device to advance funds on the basis of an estimated market value of Rs.50,25,00,000/- is factually not correct.
4.2 The Assessing Officer states that the agreement is not on stamp paper. The Assessing Officer also brings out the fact that the sale is not yet registered.
It is a fact that the agreement is not on stamp paper. The agreement is also not registered and the sale is not complete. But it is also a fact that the appellant after having agreed to sell the property to the company has also agreed to hand over possession of the same on registration of the property. For concluding the registration the appellant was required to obtain the following documents.
a. Allotment letter from BDA b. Absolute sale deed from BDA Up to date encumbrance certificate c. Receipts for payment of property taxes payable on the schedule property up to the date of delivery of possession of the schedule property to the purchaser d. Updated khatha certificate in the name of the vendor e. Any other documents required by registering authority.
The appellant was in the process of obtaining the above documents and there has been delay in getting the same.
ITA No.493/Bang2011/ Page 6 of 12 In view of the above facts we submit that the transaction not being complete be not held against the appellant.
4.3 The Assessing Officer has relied on the following decisions in support of the stand that the advances are assessable as dividend.
i) M.D. Jindal Vs. CIT (1987) 164 ITR 28 (Cal)
ii) Smt. Tarulata Shyam Vs. CIT (1977) 108 ITR 345 (SC) Both the cases are not applicable to the facts of the appellant.
As brought out by the Assessing Officer in para 6.2 of his order, in the case of M.D. Jindal Vs. CIT (1987) 164 ITR 28 (Cal) the facts were that the company had made advances to the assessee by way of transfer of goods. It was held that since the assessee was benefited, the same was to be treated as dividends. As could be seen, the facts were that instead of advance of money, advance of goods were made. The Hon'ble high court has held that irrespective of the fact that there is advance of goods, since the share holder has been benefited, such benefit is taxable as dividend. This is not a case in respect of transaction of the appellant. In the case of the appellant the advance is made for purchase of the property. The appellant is required to transfer the property. The transaction is in lieu of an immovable property owned by the appellant and to be transferred and therefore there is no benefit accruing to the appellant. The decision is not applicable to the facts of the appellant.
In para 6.3 of the order the facts of the decision of the case of Smt. Tharulatha Shyam Vs. CIT (1977) 108 ITR 345 (SC) has been discussed. In the said decision it is held that the provisions of section 2(22) (e) of the act are attracted if all the conditions set out in the provision are satisfied at the time of making the advance. This decision is relevant in a case where an advance is made and as on the last day of the accounting year such advance may not be outstanding. The decision squarely applies to cases where loan or advance is made without the assessee requiring to transfer any asset or render services in return. The case is not applicable to the appellant, since the ITA No.493/Bang2011/ Page 7 of 12 appellant is required to transfer the immovable property in lieu of the advance received.
Under the above circumstances the decisions relied upon by the Assessing Officer are not applicable to the appellant.
4.4 The appellant submits that the provisions of section 2(22)(e) of the Act has brought in only a legal fiction. It is a decided position of law that in construing the fiction it is not to be extended beyond the purpose for which it was created. Reliance is placed on the following decisions
i) Mancheri Puthusseri Ahmed Vs. Kuthiravattam Estate Receiver, AIR 1997 SC 208, 214
ii) CIT Vs. Shakuntala (1961) 43 ITR 352, 357 (SC)
iii) CIT Vs. Moon Mills Ltd (1966) 59 ITR 574, 579 (SC) The concept of deemed dividend is in situation where a share holder having substantial interest in the company is benefited by way of loan or advance made out of accumulated profits, so that such funds are available for his use. In the case of the appellant the advance is made for the purchase of property. No benefit accrues to the appellant since the appellant is transferring the property. This is purely a business transaction. Under the circumstances the legal fiction created under law cannot be e tended to cover the transaction.
4.5 The appellant further relies on the decision of supreme court in the case of Navanithlal C. Javeri Vs. K.K.Sain. (1965) 56 ITR 198, 207 - 208 (SC) which discusses in detail the mischief sought to be cured by section 2(22)(e) of the Act. In the said decision it has been clearly stated that where the voting power lies in the hands of few persons other than public and such persons substantially control the company, instead of distributing dividends on which the share holder other wise should have paid taxes, the company may choose to advance monies to them out of accumulated profits and there is tax evasion in the hands of the share holder despite the profits being available to him for utility. This is the circumstance which is sought to be cured by the provisions of section 2(22) (e) of the Act. Primarily the purpose of payment should be to make ITA No.493/Bang2011/ Page 8 of 12 funds available out of accumulated profits to the utility of the share holders, who in fact take decisions on behalf of the company by virtue of holding shares representing substantial voting power and avoid payment of taxes by not considering the funds drawn as dividend. Though there has been an amendment to the provisions of section 2(22)(e) of the Act in 1987 the principle laid down by the Supreme Court in regard to the intention of the legislation does not change. The ratio laid down in this decision coupled with the fact that the deemed fiction cannot be extended beyond the intention of the legislation, the provisions of section 2(22)(e) of the Act will not apply to the facts of the case, since the advances are made against purchase of property. The intention is not to benefit the share holder.
4.6 The appellant further submits that the word loan means a lending. It is the delivery by one party and receipt by another party of a sum of money upon an agreement either expressed or implied to repay it with or without interest. This view in regard to the definition of loans or advance has been expressed in the decision of Madras high court in the case of G.R.Govindarajulu Naidu Vs. CIT (1973) 90 ITR 13 (Mad). Even in the decision of Supreme Court in the case of Bombay Steam Navigation Company (1953) Pvt Ltd Vs. CIT (1965) 56 ITR 52 (SC) the same view has been upheld. In the case of the appellant what is agreed upon is transfer of immovable property and the advance is a part payment of the proceeds. The advance received is not intended to be repaid. Under the circumstances the advance made for purchase of property cannot be considered as dividend within the meaning of section 2(22)(e) of the Act.
4.7 The appellant relies on the decision of Delhi ITAT in the case of Sunil Sethi Vs DCIT in lTA No.2131/Delhi/2007. In the said decision it has been held that where there is documentary evidence on record to substantiate the fact that advances were made during the course of business activity of the assessee the same cannot be considered as dividends. In the case of the appellant the company has advanced to the share holder for purchase of property and therefore cannot be held as dividends.
ITA No.493/Bang2011/ Page 9 of 12 4.8 The appellant also relies on the decision of Chennai high court in the case of CIT Vs. F. Praveen, 220 ITR 639. In the said case the assessee had received advance from the company for sale of property belonging to him. For some reason the deal did not materialize and the assessee returned the advance. The Hon'ble high court considering the facts and circumstances has held that the transaction cannot be brought under the provisions of section 2(22) (e) of the Act.
4.9 The appellant also relies on the following decisions wherein it has been held that the concept of loan or advance contemplated under the provisions of the Act is in the nature of lending money. If the advances are not in the nature of lending money and made during the course of business, the same cannot be held as dividends.
i) DCIT Vs. Lakra Bros. 162 Taxman 170
(Chandigarh)
ii) CIT Vs Rajkumar (2010) 228 CTR 506 (Delhi)
iii) Bharat C. Gandhi Vs. ACIT (2009) 178 Taxman 83 (Mum)
iv) ITO Vs. Usha Commercial (P) Ltd (2009) 120 TTJ 925 (Mum)
v) CIT Vs. Creative Dying & Printing (P) Ltd (2009) 318 ITR 476 In the case of the appellant since the advances made are not with a requirement to be returned but for transferring the immovable property, the ratios laid down in the above decisions are applicable."
8. The ld. CIT(Appeals) after considering the submissions of the assessee and the ratio laid down in the cases relied by the assessee, held that the advance of Q 1 crore made to the assessee by the company was for the purpose of purchase of property during the course of business activity of the company, therefore it was not hit by the provisions of section 2(22)(e) of ITA No.493/Bang2011/ Page 10 of 12 the Act. Accordingly the addition made by the AO was deleted.
Now the department is in appeal.
9. The ld. DR strongly supported the order of the Assessing Officer and reiterated the observations made by the AO in paras 6 to 8 of the assessment order dated 22.12.2009. He further submitted that the ld. CIT(A) was not justified in deleting the addition made by the AO.
10. In his rival submissions, the ld. counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee received advance against the property which was to be sold to M/s. Mc Creade Software (Asia) Pvt. Ltd. it was further stated that the advance was taken against the sale of property which could not be transferred to the company due to certain formalities which were to be fulfilled, so there was no question of invoking the provisions of section 2(22)(e) of the Act and making the addition by considering the advance amount as deemed dividend, therefore the ld. CIT(A) was fully justified in deleting the addition made by the AO.
11. We have considered the submissions of both the parties and carefully gone through the material available on record. In the present case, it is not in dispute that the assessee held 97.83% shares in the company from which advance of Q 1 crore was received by the assessee against the sale of property belonging to her. The assessee furnished a copy of the ITA No.493/Bang2011/ Page 11 of 12 agreement to sell before the AO, who did not accept that agreement as genuine for the reason that it was not registered and was also not on the stamp paper, however, nothing was brought on record to substantiate that there was not an agreement between the assessee and the company M/s. Mc Creade Software (Asia) Pvt. Ltd. for the sale of property belonging to the assessee. When there was an agreement between the assessee and the company for sale of property belonging to the assessee, it cannot be said that the agreement was not genuine only for the reason that it was not registered, particularly when the AO did not bring any material on record to substantiate that the said agreement was not a genuine agreement. In the instant case, the assessee received the advance against the sale of property located at No.795, 12th B Cross, 23rd Main, J.P. Nagar 2nd Phase, Bangalore and the agreed price for sale was Q 1,20,00,000 against which the assessee received an advance of Q 1 crore. In our opinion, when the advance received by the assessee from the company in which she is a substantial shareholder, was for a transaction relating to sale of property, the deeming provisions of section 2(22)(e) of the Act were not applicable. If the advance was not in the nature of lending money, it cannot be held as dividend. In the present case, the assessee received the advance against sale of property belonging to her, therefore the transaction could not be brought under the provisions of section 2(22)(e) of the ITA No.493/Bang2011/ Page 12 of 12 Act. We therefore do not see any infirmity in the order of the ld.
CIT(A) on this issue. Accordingly we do not see any merit in the appeal by the department.
12. In the result, the appeal by the department is dismissed.
Pronounced in the open court on this 13th day of June, 2012.
Sd/- Sd/-
( N.V. VASUDEVAN ) ( N.K. SAINI )
Judicial Member Accountant Member
Bangalore,
Dated, the 13th June, 2012.
Ds/-
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Senior Private Secretary
ITAT, Bangalore.