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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
ORDER PER GAGAN GOYAL, A.M: This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeal)-48, Mumbai (for short ‘CIT(A)’) dated 30.04.2019 under section 143(3) of the Income Tax Act, 1961 (for short ‘the Act’) for A.Y. 2012-13. The assessee has raised the following grounds of appeal:
S. No. Ground of appeal
Tax effect relating to each Ground of appeal (see note below)
1. Disallowance of the claim of long term Rs. 6,33,967/- capital loss of Rs. 10,88,610/- and in turn assessed the same as short term capital gain of Rs. 9,63,062/- instead.
2. The treatment of a sum of Rs. 6,91,312/- as Rs. 2,13,615/- Deemed Dividend under Section 2(22)(e) of the Income Tax Act, 1961 in respect of Your Appellants Debit Balance of the aforesaid sum in the Books of Account of Arabal Construction Pvt. Ltd., a company in which Your Appellants shareholding is more than 10%.
3. The treatment of a sum of Rs. 3,14,000/- as Rs. 97,026/- Deemed Dividend under Section 2(22)(e) of the Income Tax Act, 1961 in respect of Your Appellants Debit Balance of the aforesaid sum in the Books of Account of Asgard Prop Pvt. Ltd., a company in which Your Appellants shareholding is more than 10%. Total tax effect (see note below) Rs. 9,44,608/-
The assessee has raised the following additional grounds of appeal: “
1. On the facts and in the circumstances of the case & in law, the learned C.I.T. (A) erred in dismissing the appeal and that too without giving full and proper opportunity of being heard in the matter.
2. On the facts and in the circumstances of the case & in law, the learned C.I.T. (A) erred in dismissing the appeal and that too without appreciating the facts fully and properly.
3. On the facts and in the circumstances of the case & in law, the learned C.I.T. (A) failed to appreciate that the assessee assigned vide assignment agreements dated 14th March,2012, only those rights that were acquired vide construction agreement dated 4th November,2008 and agreement for sale dated 4th December,2008 and erred in upholding the action of the learned A.O. in treating the long term capital loss as short term capital gains by denying the benefits of indexation conferred by the provisions section 48 of the Act.”
Brief facts of the case are that the assessee filed his return of income on 27- 09-2012 declaring income at Rs 9,09,540/-. The case of the assessee was selected for scrutiny and assessed u/s 143(3) during the assessment proceedings two additions were made i.e. addition u/s 2(22)(e) amounting to Rs 10,05,312/-and short term capital gains of Rs 9,63,062/-(against long term capital loss of Rs 10,88,610/- claimed by assessee).
Assessee is an individual and during the year under consideration assessee declared income from house property, business and professions, capital gains and income from other sources. Against the assessment order mentioned supra- assessee preferred an appeal before the Ld.CIT(A)-48 Mumbai. Order of Ld.CIT(A) also confirmed the action of the AO and sustained the assessment order.
Being aggrieved with the order of Ld. CIT(A) assessee preferred this present appeal before ITAT. We have gone through the order of AO, order of Ld.CIT(A) and submissions of the assessee along with legal and factual paper-book
Before us assessee raised 3 grounds of appeal through form -36 and again 3 additional grounds of appeal vide letter dated 12-10-2021. Ground no. 1 along with additional Grounds of appeal pertains to the issue of short-term capital gain calculated by AO. Ground no. 2 and 3 pertain to addition u/s 2(22)(e) as deemed dividend.
7. Ground no. 1- during the year under consideration the assessee had sold property at Bangalore on 14-03-2012 vide sale assignment agreement (between the assessee, the buyer and the original seller) and construction assignment agreement (between the assessee, the buyer and the original developer) dated 14-03-2012. Vide page no. 40 to 47 and 48 to 55 of the paper-book filed on 18-10- 2021. We have gone through the contents of both the agreement describing the terms of sale amount of consideration and other covenants with reference to duties and obligations of all the parties concerned.
Assessee also submitted an agreement to sale and construction dated 04- 12-2008 vide page no. 8-19 and 20-39 respectively between original seller, assessee and developer.
9. Assessee received a consideration of Rs 74,00,000/- (minus Rs 179021- 92,500 in respect of transfer fee and brokerage respectively). So, the net consideration received was Rs 71, 28,479/- . per contra, assessee made payments for purchase starting from FY 2007-08 to 2011-12 in total payment of Rs 61,65,417/- as per para -3 of the assessment order. Assessee calculated long term capital loss of Rs. 10, 88,610/- assuming transfer in his favour right from beginning i.e. FY 2007-08 and applied provisions of sec. 48 for the purposes of indexation. Whereas the AO treated the completion of transaction in FY 2011-12 only and consequently worked out short term capital gain of Rs 9,63,062/-. Now the question before us to be decided is whether the property under consideration is of long term in nature or short term as assessed by AO. To adjudicate this issue in its right perspective we have referred clause 5 of para IX of agreement to sale document vide pg 14 of paper-book. Vide this clause purchaser can assign the rights in favour of anyone subject to prior consent of the vendors and subject to payment of transfer fee of Rs 100 per square feet. Although the exercise of this conditional right as well as completion of payment schedule by the assessee falls in the same FY. But he was entitled to transfer the same earlier also which he had not exercised. We further observed clause 18 of construction agreement vide page 27 of the paper -book wherein the same language as mentioned supra in the agreement to sale was used i.e. assessee can transfer/assign the rights in the property subject to prior consent of the vendors and subject to payment of transfer fee of Rs 100 per square feet.
10. In our observation although assessee did not have a clear right to transfer/assign the same to other party but a harmonious reading of all the agreements, it came out to our observation that assessee was entitled to transfer his rights in the property. Although possession and registration of the property was subject to complete payment and other obligations to be fulfilled by the assessee and other counterparts.
To substantiate its version assessee relied upon following case laws I. CIT Vs TATA Services Ltd 122 ITR 594 (Bomb) II. PCIT Vs Vembu Vaidyanathan 413 ITR 248(Bomb) III. CIT Vs City Bank N.A 261 ITR 570 (Bomb) IV. Chaturbhuj Dwarkadas Kapadia Vs CIT 260 ITR 491 (Bomb) V. CIT Vs Rajasthan Mirror Manufacturing Co
In view of the above factual matrix and the judicial pronouncement of honourable jurisdictional high court we set aside the orders of the authorities below and accept the contentions of the assessee in the result Ground no. 1 along with additional ground raised are allowed in favour of assessee.
13 Ground no. 2 and 3 Assessee is a director, share holder in two companies M/s Arabal Construction Pvt Ltd and M/s Asgard Properties Pvt Ltd. During the year under consideration assessee has debit balance of Rs 6,91,312/- and Rs 3,14,000/- in the respective companies. These two-amount assessing officer treated as deemed dividend u/s 2(22)(e). Assessee submitted copies of ledger account of both the companies in his books vide pages no 56 to 61 of the paper- book. We have gone through the ledger of both the companies and found that the transaction of the assessee are in the nature of a running account maintained with this two companies. Apparently all the conditions to apply 2(22) (e) are attracted in this case and over the period of time various courts including honourable apex court and ITAT had deliberated on this issue very extensively.
Facts of the case as enumerated in assessment order are not under challenge neither from Revenue nor from assessee. We have gone through the order of AO, Ld. CIT (A) and submissions of the assessee. Based on the facts as enumerated in assessment order, adjudication is to be done based on the law as applicable after consideration of various judicial pronouncements. In this regard we have gone through following judicial pronouncements of Hon’ble Apex Court, Jurisdictional High Court and ITAT Mumbai as under:
[1998] 96 Taxman 11 (SC) Miss P. Sarada v. Commissioner of Income-tax From the facts, as stated hereinabove, it appears that the withdrawals made by the appellant from the company amounted to grant of loan or advance by the company to the shareholder. The legal fiction came into play as soon as the monies were paid by the company to the appellant. The assessee must be deemed to have received dividends on the dates on which she withdrew the aforesaid amounts of money from the company. The loan or advance taken from the company may have been ultimately repaid or adjusted but that will not alter the fact that the assessee, in the eye of law, had received dividend from the company during the relevant accounting period.
It was held by this Court in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 that the statutory fiction created by section 2(6A)(e) of the Indian Income-tax Act, 1922 would come into operation at the time of the payment of advance or loan to a shareholder by the company. The Legislature had deliberately not made the subsistence of the loan or advance, or its remaining outstanding; on the last date of the previous year relevant to the assessment year a prerequisite for raising the statutory fiction.
In the instant case, excess withdrawals were made by the assessee on various dates between 3-7-1972 to 22-3-1973 when the account of Mahesh had not been debited. The assessee's account was consequently overdrawn. On the very last day of accounting year some adjustment was made but that will not alter the position that the assessee had drawn a total amount of Rs. 93,027 between 3-7- 1972 to 22-3-1973 from the company when her account with the company did not have any credit balance at all. That means these advances made by the company to the assessee will have to be treated as deemed dividends paid on the dates when the withdrawals were allowed to be made. Subsequent adjustment of the account made on the very last day of the accounting year will not alter the position that the assessee had received notional dividends on the various dates when she withdrew the aforesaid amounts from the company. [1991] 188 ITR 318 (Bom.) Sadhana Textiles Mills (P.) Ltd. v. Commissioner of Income tax H' was the assessee's subsidiary company. During relevant accounting year 'H' was a creditor of the assessee in amounts larger than the amount of the accumulated profits. The ITO, therefore, treated the accumulated profits as dividend in the assessee's hands under section 2(22) (e). On appeal, the assessee contended before the AAC, that the credit balance due to 'H' arose due to day-to- day transactions of purchase and sale and the like and it would not be covered by section 2(22)(e). It was also contended that this provision would not apply to inter corporate shareholders. The AAC rejected the assessee's contention which was upheld by the Tribunal.
The assessee contended in appeal before the Appellate Assistant Commissioner that the credit balance due to Harshad arose due to day-to-day transactions of purchase and sale and the like and it would not be covered by section 2(22)(e). It was also contended that this provision would not apply to inter corporate shareholders. The Appellate Assistant Commissioner rejected the contention, as did the Tribunal in further appeal. Dividend, by reason of sub-clause (e) of clause (22) of section 2, includes: "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) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, 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 possesses accumulated profits". Mr. Rajagopal argued on behalf of the assessee that a shareholder, payment to whom would be covered by this provision, has to be an individual, and he relied in this context upon the phrase "for the individual benefit" in sub-clause (e). Analysed, the provision of sub-clause (e) is that dividend includes (i) a payment by a company of the nature covered by the provision by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, or (ii) a payment by such company on behalf, or for the individual benefit, of such shareholder, to the extent to which the company in either case possesses accumulated profits. Under clause (31) of section 2, "person" includes a company. This case is, therefore, squarely covered in the first instance by the provision of sub-clause (e), i.e., "of an advance or loan to a shareholder who has a substantial interest in the company". The phrase referred to by Mr. Rajagopal is used in respect of the second instance and has no application. In the result, the first question must be answered in the affirmative and in favour of the Revenue. It is agreed by counsel that the answer to the second question must be in the affirmative and in favour of the Revenue, having regard to the judgment of this court in CIT v. P.K. Badiani [1970] 76 ITR 369 . Accordingly, both questions are answered in the affirmative and in favour of the Revenue.”
Considering the facts on record, which are not under challenge and relying on the judicial pronouncements as reproduced above, we are of firm view conditions precedent to apply section 2(22)(e) are clearly attracted and amount calculated by AO certainly falls in the category of deemed dividend u/s. 2(22)(e). In the light of this discussion and facts of the matter, we sustain the orders of authorities below. Ground Nos. 2 and 3 raised by the assessee is dismissed.
In the result, appeal filed by the assessee is partly allowed. Order pronounced in the open court on 6th day of January, 2023.