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Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: SHRI V. DURGA RAO, HON’BLE & SHRI G. MANJUNATHA, HON’BLE
आदेश / O R D E R PER G. MANJUNATHA, AM: This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals), Income Tax Department, National Faceless Appeal Centre, Delhi, dated 08.09.2022 and pertains to assessment year 2015-16.
2. The assessee has raised the following grounds of appeal:
1. The order of Learned CIT(A) dated 08.09.2022 for the Assessment year 2015- 16 is contrary to the facts and circumstances of the case and is opposed to the principles of equity, justice and fair play.
ITA No.863/Chny/2022 :: 2 ::
2. The Learned CIT(A) erred in mechanically invoking the provisions of Section 2(22)(e) of the Act to the facts and circumstances of the present case especially when none of the basic conditions stipulated under the relevant provision are satisfied.
3. The Learned CIT(A) ought to have appreciated that in the absence of any advances/loans or funding by the Company to the Appellant demarcating a financial relationship with respect to the purchase of the property, the provisions of Section 2(22)(e) of the Act would be inapplicable.
4. The Learned CIT(A) failed to appreciate that the transaction involving purchase of property by the Appellant and Mrs.V. Padma was effected by her out of her own personal funds thereby being a 'personal transaction' and that the Appellant did not derive any individual benefit from any financial 'commercial transaction' with the Company warranting invocation of the provisions of Section 2(22)(e) of the Act.
5. The Learned CIT(A)'s order is bad in law inasmuch as it is in stark contravention of the letter and spirit of Section 2(22)(e) of the Act as well as the CBDT Circular No. 19/2017 dated 12.06.2017.
6. For the aforesaid grounds and for other grounds to be raised at the time of hearing, the order of CIT(A)may be set aside and justice be rendered.
The brief facts of the case are that the assessee had filed return of income for the AY 2015-16 on 14.08.2015 admitting total income of Rs.1,79,640/-. The case was selected for scrutiny and during the course of assessment proceedings, the AO noticed that the assessee along with Smt.V.Padma (mother of assessee), purchased a flat in Chennai for a total consideration of Rs.7,19,44,048/-, including Service Tax and other charges.
It was further noticed that the assessee’s share of investment works out to Rs.3,59,72,024/-. The assessee was called upon to explain source for investment in the property, for which, the assessee submitted that he along with his mother Smt.V.Padma, purchased a flat and source for purchase of property was sale of 5,00,000 equity shares of M/s.City Union Bank Ltd., (in short “M/s.CUBL") by his mother amounting to Rs.3,69,84,352/-. The AO called upon the assessee to file necessary details, including bank
ITA No.863/Chny/2022 :: 3 :: statement from where amount has been paid to M/s.Chaitanya Builders.
The AO on the basis of information furnished by the assessee noticed that a sum of Rs.2.75 Crs. has been paid out of sale proceeds of M/s.CUBL shares by Smt.V.Padma. The AO further noted that a sum of Rs.3,64,45,648/- has been paid to M/s.Chaitanya Builders by M/s.Integrated Enterprise India Ltd. (in short “M/s.IEIL"), where the assessee is one of the shareholders having 29.17% shares in the company.
Since, M/s.IEIL has paid amount to M/s.Chaitanya Builders, on behalf of the assessee, the AO opined that provisions of Sec.2(22)(e) of the Act, would apply, and thus, rejected arguments of the assessee and made addition of Rs.3,10,22,424/- as deemed dividend u/s.2(22)(e) of the Act.
The relevant findings of the AO are as under:
2.17. To sum up
The assessee invested an amount of Rs.3,10,22,424/- in the property which is out of the funds advanced by the Company M/s.Integrated Enterprises India Private Limited in which it holds 29% share.
The assessee was not able to substantiate that the amounts advanced by the company were repaid subsequently. It was not able to prove that the purported repayments made by the HUFs of P.Vaidyanathan were standalone transactions relating only to the purchase of property The assessee also could not furnish the ledger accounts of the HUFs in the Books of the company.
3. The bank account statements of the HUFs of assessee's father except for account number 30654 were also not furnished.
It is very evident that there is no commercial expediency for the company in the transaction of purchase of property for its Director and main shareholder.
5. The confirmation letters given by P.Vaidyanathan (HUF) and P.Vaidyanathan (SHUF) also says that the sum of Rs.1,5741,600/- and Rs.42,87,200 and Rs. were PROVIDED by these HUFs.
Even assuming but not accepting the assessee's contentions that the amounts advanced by the company were repaid, still it has to be treated as deemed dividend. Hon'ble Supreme Court in the case of P Sarada (229 ITR 444) has held that the loan or advance taken from the company may have been ultimately repaid
ITA No.863/Chny/2022 :: 4 :: 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. The same view was earlier expressed by the Hon'ble Supreme Court in the case of Tarulata Shyam in 108 ITR 345, wherein the Apex Court held that deemed dividend is applicable even in cases where there is no balance outstanding on the year end.
7. The accumulated profit as on 31.03.201.5 in the books of the company M/s.Integrated Er1terprises India Private Ltd., is Rs. 29.62 crore excluding the general reserve of Rs.25 crores.
4. Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has filed detailed written submissions on the issue which has been reproduced at Para Nos.5.2 & 5.3 of Ld.CIT(A)’s Order. The sum and substance of the arguments of the assessee before the Ld.CIT(A) are that amount paid by M/s.IEIL, has been subsequently re-paid within a short period of time from the bank account of Smt.V.Padma & others maintained with City Union Bank for equal amount of funds transferred to M/s.Chaitanya Builders.
Therefore, provisions of Sec.2(22)(e) of the Act, cannot be applied. The Ld.CIT(A) after considering relevant submissions of the assessee and also taken note of reasons given by the AO, opined that the assessee couldn’t explain how amount received from M/s.IEIL, does not come under the provisions of Sec.2(22)(e) of the Act, when the company is having accumulated profit more than the amount of loan given to the assessee, where he is having more than 10% ownership in share capital of the company. Therefore, rejected the arguments of the assessee, and sustained the additions made by the AO u/s.2(22)(e) of the Act. The relevant findings of the Ld.CIT(A) are as under:
ITA No.863/Chny/2022 :: 5 ::
6. Findings and decision:
The averments of the AO and, submission of the appellant have been carefully considered.
6.1 Ground No 1. The AO started the proceedings to get explanation for the source of income in respect of a property but proceeded on a completely different ground.
Adjudication: The case is selected for verifying the source for investment in property. The investment was explained with reference to funds advanced by the company in which the assesse is beneficial owner of shares exceeding the threshold and therefore such advance was legitimately treated as deemed dividend. This ground is dismissed.
6.2 Ground No 2. There is no funding or advance by Integrated to or by the assesse for the purchase property. Integrated has no financial relationship in respect of consideration paid for the property and acted only as a facilitator to ensure timely payment of instalments to the builder.
Adjudication: This ground is dismissed for the appellant's assertion was not supported by any evidence how the fund flow from the company would make it a facilitator. No evidence was brought on record to prove that the company acted only as an ESCROW agent.
6.3 Ground No.3. Section 2 (22) (e) is applicable only when a company gives advances to or benefit a shareholder having more than 10 percent stake and the recipient is a shareholder. This is purely a personal property purchase transaction of a normal person out of their own personal funds and using Integrated as a facilitator to make timely payment of instalments to the builder.
Adjudication: For the reasons stated for Ground No.2, this ground is dismissed.
6.4 Ground No 4. The AO had developed a preconceived mind of applying section 2(22)(e) even by 11th November once she came to know on the basis of information given by the appellant that the name appearing in the property document is a substantial shareholder of an unlisted company and therefore did not apply her mind to go through the full facts and explanations given and also the circumstances where the provisions of section 2(22)(e) should be applied. This can be easily verified by the frequency and tone of letters or mails sent on 11th, 16th, 22nd and 27th December. Even the details called for in the last mail dated 27th were submitted on 29th December, i.e., within two days even though no specific date was mentioned for compliance. There is thus an urgency shown in passing the order on 29th December even though time was available to consider the full facts till 31st December.
Adjudication: This ground is dismissed for the reason that the appellant is bringing on extraneous facts not relevant to the issue on hand .
6.5 Ground No.5. The officer has deliberately refused to understand the spirit of application of section 2(22)(e) and also the explanations and examples given in the circular no. 19 and has bluntly stated that this circular is not applicable to the facts of this case ignoring the particulars given.
Adjudication: CBDT in para 3 of the impugned circular explained as under: ITA No.863/Chny/2022 :: 6 ::
"3. In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word 'advance' in section 2(22)( e) of the Act." The appellant failed to prove that how the impugned transaction would meet the test of trade advance. Therefore, this ground is dismissed. In the result, the AO has brought on record all the relevant facts attendant to the transaction and the appellant invested 50% of its share by taking credit of funds remitted to the builder and its beneficial ownership of the requisite percentage and the extent of accumulated profits not in doubt, the assessment by the AO of the impugned amounts during the relevant previous year as deemed dividend is confirmed.
The Ld.Counsel for the assessee submitted that there is no dispute with regard to the fact that M/s.IEIL has paid to M/s.Chaitanya Builders for purchase of property, but facts remain that whatever amount paid by M/s.IEIL, has been subsequently re-paid by the assessee through his mother Smt.V.Padma account on very same day or within a short period i.e. less than one month without there being any outstanding balance in the name of the assessee in the books of M/s.IEIL. Therefore, it cannot be held that said payment comes under the provisions of Sec.2(22)(e) of the Act. The Ld.Counsel for the assessee referring to assessment order dated 29.12.2017, more particularly, annexure to assessment order submitted that the assessee has filed a chart explaining amount paid to M/s.Chaitanya Builders, payment to M/s.Chaitanya Builders from M/s.IEIL and payment made by family members to M/s.IEIL submitted that whatever amount paid by the company has been subsequently re-paid by family members through Smt.V.Padma’s Savings Bank A/c maintained with M/s.CUBL bearing A/c No.001001000030654 and said repayment has been made either on the same day or within a short period i.e. less than one month that too exact amount paid by the company without leaving any balance. Therefore, the ITA No.863/Chny/2022 :: 7 ::
AO & the Ld.CIT(A) is completely erred in invoking provisions of Sec.2(22)(e) of the Act.
6. The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A), submitted that there is no dispute with regard to the fact that M/s.IEIL has paid amount to M/s.Chaitanya Builders on behalf of the assessee. Although, the amount paid by the company has been subsequently re-paid by the assessee or his family members, but facts remain that the moment loan or advance taken from the company, provisions of Sec.2(22)(e) of the Act, does come into operation, even if such payment has been ultimately re- paid or adjusted as held by the Hon’ble Supreme Court in the case of P.Sarada v. CIT reported in [1997] 229 ITR 444 (SC). The AO & the Ld.CIT(A) after considering relevant facts has rightly concluded that provisions of Sec.2(22)(e) of the Act, is applicable and thus, their orders should be upheld.
We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The fact with regard to impugned dispute are that the assessee along with Smt.V.Padma has purchased a property at Chennai for a consideration of Rs.7,19,44,048/-. During the Financial Year relevant to the AY 2015-16, a sum of Rs.2.75 lakhs has been paid by Smt.V.Padma from her bank account and to this extent, there is no dispute. The AO further noticed that a sum of Rs.3,10,22,424/- has been paid by M/s.IEIL, a company in which, the assessee is having 29.17% shareholding. According to the AO, the moment
ITA No.863/Chny/2022 :: 8 :: loan or advance has been given to shareholder having more than specified percentage of share capital, then, provisions of Sec.2(22)(e) of the Act, would come into play, even if such advance has been subsequently re-paid or adjusted. The AO has analyzed the issue in light of payments made by M/s.IEIL to M/s.Chaitanya Builders and subsequent repayment of said amount to company by family members of the assessee and concluded that the assessee could not able to explain the transactions with clarity, including bank statements of family members. The AO further noted that the assessee had taken a different explanation at different stages.
According to the AO, the assessee initially claims that source for purchase of property is out of sale of M/s.CUBL shares by his mother Smt.V.Padma.
The assessee further changed his arguments and claimed that the company has paid to builders and the same has been subsequently re-paid by his family members. Therefore, the AO came to the conclusion that payments made by M/s.IEIL is nothing but loans & advances taken by shareholders having more than specified percentage of share capital, which attracts provisions of Sec.2(22)(e) of the Act.
We have given our thoughtful consideration to the reasons given by the AO in light of various arguments advanced by the Ld.Counsel for the assessee and we ourselves do not subscribe to the reasons given by the AO & Ld.CIT(A) for simple reason that M/s.IEIL has paid to M/s.Chaitanya Builders on behalf of the assessee. Further, the family members of the assessee, including his mother has re-paid said amount to M/s.IEIL from ITA No.863/Chny/2022 :: 9 ::
their savings bank A/c No.30654 maintained with M/s.CUBL. In other words, whatever amount paid by M/s.IEIL to M/s.Chaitanya Builders has been subsequently re-paid by Smt.V.Padma, mother of the assessee from her bank account either on the same day or on or before 30 days from the date of payment by the company without there being any outstanding balance in the name of the assessee in the books of accounts of the company. For example, M/s.IEIL has paid a sum of Rs.26,27,664/- on 27.06.2014 to M/s.Chaitanya Builders. The family members including Smt.V.Padma mother of the assessee has re-paid a sum of Rs.26,27,664/- to M/s.IEIL on 01.07.2014. Similarly, M/s.IEIL has paid a sum of Rs.56,81,184/- on 09.10.2014 to M/s.Chaitanya Builders and said amount has been re-paid by Smt.V.Padma from her Savings bank a/c No.30654 maintained with M/s.CUBL on 30.10.2014. Likewise, each amount paid by M/s.IEIL has been subsequently re-paid by Smt.V.Padma and other family members either on the same day or within one month from the date of payment. From the above, it is very clear that company has paid to M/s.Chaitanya Builders on behalf of the assessee for purchase of property as a stop gap arrangement and the same has been subsequently re-paid by the assessee and his mother out of their source of income. Therefore, we are of the considered view that the amount paid by M/s.IEIL to M/s.Chaitanya Builders on behalf of the assessee, cannot be considered as loan or advance which can be treated as deemed dividend u/s.2(22)(e) of the Act, because, at no point of time, there is no outstanding loan or ITA No.863/Chny/2022 :: 10 :: advance in the name of the assessee in the books of accounts of M/s.IEIL.
Further, at best transactions between the assessee and M/s.IEIL can be treated as a running current account between the shareholder and company, but said transaction cannot be considered as loan or advance within the meaning of provisions of Sec.2(22)(e) of the Act.
In so far as case law relied upon by the AO in the case of P.Sarada (supra), we find that in the said case, the assessee has taken loan or advance from the company right from the beginning of the Financial Year at the end of the Financial Year, the same has been ultimately re-paid or adjusted through a journal entry to square off of the loan or advance in the name of the shareholder. Under those facts, the Hon’ble Supreme Court came to the conclusion that loan or advance taken from the company may have been ultimately re-paid or adjusted but that will not alter the fact that the assessee in the eye of law had received deemed dividend from the company during the relevant accounting period. In this case, facts are entirely different, because, at no point of time, M/s.IEIL has given any loan or advance to the assessee either by way of cash payment or through account transfer. Although, the company has given some payments to the third party on behalf of the assessee, but said payments have been subsequently re-paid by the assessee or his family members either on the same day or within a short period i.e. less than one month without there being any outstanding balance in the books of accounts of the company.
Therefore, transactions between the assessee and company cannot be ITA No.863/Chny/2022 :: 11 :: treated as loan or advance within the meaning of provisions of Sec.2(22)(e) of the Act. Thus, we are of the considered view that the AO as well as the Ld.CIT(A) are completely erred in invoking provisions of Sec.2(22)(e) of the Act, and making additions u/s.2(22)(e) of the Act. Hence, we direct the AO to delete the additions made towards deemed dividend u/s.2(22)(e) of the Act, in the hands of the assessee.
In the result, appeal filed by the assessee is allowed.