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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
O R D E R
PER PAVAN KUMAR GADALE JM:
The assessee has filed the appeal against the order of the Commissioner of Income Tax (Appeals)- 36, Mumbai passed u/s 143(3) and 250 of the Act. The assessee has raised the following grounds of appeal:
1. (a) The learned CIT (Appeals) erred in law and facts in confirming the action of the Learned Assessing Officer of assessing the loan taken from Sadguru Krupa Constructions Pvt. Ltd. (herein referred as "Company") on 05.05.2013 of Pravin Laxmichand Chheda., Mumbai. - 2 -
Rs.25,00,000/- as deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961. (b) The learned CIT (Appeals) failed to appreciate the fact that the company did not have accumulated profits as on the date on which the loan was advanced. (c) The learned CIT (Appeals) erred in law by confirming the manner of computation of accumulated profits adopted by the learned Assessing officer. (d) The learned CIT (Appeals) erred in law by not appreciating the fact that the company had followed the principles of revenue recognition laid down in Accounting Standard 9 issued by ICAI. (e) The learned CIT (Appeals) erred in law in relying on the statement of Mr. Dllip Porwal without giving Your Appellant the opportunity to cross-examine him. (f) Your Appellant prays that the additions made u/s 2(22)(e) of the Income-tax Act, 1961 is against the provisions of law and against the principals of natural justice and may please be deleted.
2. Your Appellant craves leave to add to, amend, alter, modify or withdraw any of the grounds of appeal.
The brief facts of the case are that the assessee is an individual having income from salary, income from house property, interest on capital from partnership firm and income from capital gains. The assessee has filed return of income for A.Y 2014-15 on 31.07.2014 with a total income of Rs.79,25,280/-. Subsequently, the case was selected for scrutiny
Pravin Laxmichand Chheda., Mumbai. - 3 - under the CASS and notice u/s 143(2) and 142(1) of the Act are issued. In response to notice, the Ld.AR of the assessee appeared from time to time and furnished the details. The Assessing Officer (A.O) on perusal of the facts and submissions find that the assessee has obtained a loan of Rs.25 lakhs from M/s Sadguru Krupa Construction Pvt Ltd by cheque dated 06.05.2013 and is a closely held company in which the public are not substantially interested. The assessee does not have any business activity and the company is in the line of development and real-estate. Whereas, the assessee is holding 12.5% of the shareholding for the period from 01.04.2013 to 01.11.2013 and at the point of receiving the loan, the assessee has more than 10% voting power/ rights in the company. The A.O. observe that the assessee is a beneficiary as well as the registered shareholder of 12.5% share holding in the company and the shares held by the assessee are not entitled to a fixed rate of dividend and falls within the definition of the shareholder as required u/s 2(22)(e) of the Act and worked out accumulated profits at page 5 Para 5.4 of the order as under:
Pravin Laxmichand Chheda., Mumbai. - 4 -
5.4 The working of Accumulated profit can thus in the following manner: Accumulated profit as 2,56,424 on 31.03.2013 Add: Revenue from 60,00,000 operations accrued and received as on 06.05.2013 Add: other income 1,27,182 * 35/365 12,196 taken proportionately for 35 days Less: Change in 43,07,819 13,97,130 inventory taken *60,00,000/1,85,00,000 proportionately to revenue received Less: Employee benefit 38,84,421 * 35/365 3,72,479 expenses taken proportionately for 35 days Less: other expenses 20,31,186 * 35/365 1,94,771 taken proportionately for 35 days Commercial profit as on 06.05.2013 37,91,392
Further, the assessee was issued show cause notice to treat loan transaction as deemed dividend. In compliance, the assessee has filed submissions on various dates explaining the nature of transactions. Finally the A.O having dealt on the facts and submissions has concluded at page 8 Para 7.1 & 7.2 of the order as under: 7.1 Thus, in a nutshell, the payment by way of loan amounting to Rs. 25,00,000/- to a majority shareholder being
Pravin Laxmichand Chheda., Mumbai. - 5 - the assessee, is held to be deemed dividend u/s 2(22)(e) of the Act die to the following reasons:
1. 1. The company is a closely held company, not being a company in which the public is substantially interested.
2. The assessee has more than 10% shareholding as on date of payment.
3. The payment is in the nature of a loan as submitted by the assessee himself, and also as there are no business transactions between the company and the Thus, the loan cannot be in the regular course of business.
4. The company as on the date of the payment possessed sufficient accumulated profits as elaborated in Para 6. To summarize, since the company had entered into a legally binding and enforceable contract for sale and this has not been disputed by the assessee, the purchase consideration had been fixed and part thereof had been paid, a right to receive had arisen and the income had accrued.
5. The payment to the assessee was actually made out of the income accrued and received from the buyer. 7.2 In view of the above, the loan to the assessee by a company in which he holds substantial shareholding, is hereby assessed under the head Income from Other Sources u/s 56 r.w.s 2(22)(e) of the Income Tax Act, 196 1.Therefore, Rs.25,00,000 is added to the total income of assessee under the head income from other sources. Penalty proceedings u/s. 271(1)(c) is hereby initiated for furnishing inaccurate particulars of income.
The A.O. has assessed the total income of Rs. 1,04,25,280/- with the addition of Rs.25,00,000/-as deemed dividend U/sec2(22)(e) of the Act and passed the order u/s 143(3) of the Act dated 29.12.2016.
Pravin Laxmichand Chheda., Mumbai. - 6 -
Aggrieved by the order, the assessee has filed an appeal before the CIT(A), whereas the CIT(A) considered the grounds of appeal
, findings of the A.O and the submissions of the assessee and confirmed the action of the A.O and dismissed the assessee appeal. Aggrieved by the CIT(A)order, the assessee has filed an appeal before the Hon’ble Tribunal.
6. At the time of hearing, the Ld. AR submitted that the CIT(A) erred in sustaining the addition of loan as deemed dividend u/s 2(22)(e) of the Act. The CIT(A) has failed to consider that the lender company does not have any accumulated profits as on the day of providing loan to the assessee. Further mere computation of accumulated profits by the A.O is not accordance with the accounting standards and revenue recognition and over looking actual profits. The CIT(A) has relied on the statement of Mr.Dilip Porwal without providing opportunity to the assessee for cross examination. The Ld.AR substantiated the submissions with factual paper book and judicial decisions and prayed for allowing the appeal. Contra, the Ld.DR supported the orders of the lower authorities.
Pravin Laxmichand Chheda., Mumbai. - 7 -
We heard the rival submissions and perused the material available on record. The sole crux of the disputed issue envisaged by the Ld.AR with respect to treatment of loan as deemed dividend u/s 2(22)(e) of the Act by the A.O. The Ld.AR emphasized that the method adopted by the A.O. in calculating the Accumulated profits is not in accordance with the principles of accounting and such method in not recognized.The Ld.AR demonstrated the Audited financial statements in particular at page 11, under ‘Share holders Funds’’- Reserves and surplus were the balance as at 31March is Negative. The Ld.AR referred to the memorandum of understanding dated 31-12- 2013 and the loan transaction took place on 6-05- 2013 and there was no activity of development of property has under taken at the time of granting of loan. We find on the date of obtaining the loan, there are no accumulated profits generated by the Lender company, and at page 94 of the paper book, the assessee has filed the unaudited balance sheet as on 5-05-2013 which discloses carry forward of negative balance of Reserves and surplus. The assessee was individually holding 12.5% of share holding in the Pravin Laxmichand Chheda., Mumbai. - 8 - lender company for the period 1-04-2013 to 1-11- 2013 and was reduced to 8.5% as on 1-11-2013. We find on comparison of balance of Reserves and Surplus as on 31-03-2013 i.e.(Rs.-2,56,424) and as on 31-03-2014 i.e Rs.52,17,663/-and it is clear that as on 06.05.2013 there is no accumulated profits generated by the lender company. Whereas the A.O based on the presumption workered out accumulated profit overlooking the Audited accounts and Balance sheet as on 31-03-2013, as the balance in the reserves and surplus is negative(Loss) and as on 31.03.2014 there is profit disclosed in the financial statements.
Whereas on the date of loan transaction there is no accumulated profits and the Ld. AR referred to the Agreement for development at page 56 in particular at clause h- confirming the ratification of agreement and deed of confirmation dated 31-12-2013. The Ld.AR emphasized that the activity has started only in December 2013 and there cannot be any profits earned before such period. On comparison to the Loan Transaction on 6-05-2013, no profit is available for accumulation as per unaudited balance sheet as at Pravin Laxmichand Chheda., Mumbai. - 9 - 5-05-2013. We find the Ld.AR has made elaborate submissions on the disputed issues of revenue recongnition and relied on the judicial decisions as under: the case of Alapati Venkataramaiha Vs. CIT, [1995] 57 ITR 185 (SC) the Honble Supreme Court has held as under:
Section 45 of the Income-tax Act, 1961 [Corresponding to section 12B of the Indian Income- tax Act, 1922] - Capital gains - Chargeable as - Assessment year 1948-49 - Assessee entered into agreement on17-3-1948 with a company to sell its plant, machinery, furniture and goodwill for a sum - Assessee was credited with sale price in books of company - Sale deed was executed on 22-11-1948 - Assessee had returned income from sale as capital gain assessable under section 12B of 1922 Act - Whether no conveyance was executed before 14- 1948 and it was only on 22-11-1948, that a sale deed was executed and registered in respect of site and therefore, it was clear that title to assets did not pass to company till after 1-4- 1948, and consequently, no sale took place of assets before 1- 4-1948 - Held, yes - Whether before section 12B of 1922 Act can be attracted, title must pass to company by any of modes mentioned in section 12B of the 1922 Act, i.e., sale, exchange or transfer and delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of immovable property - Held, yes - Whether date of sale or transfer according to section 12B of the 1922 Act, is date when sale or transfer takes place, and entries in account books were irrelevant for purpose of determining such a date - Held, yes - Whether sum returned by assessee was not assessable as capital gains but only such part of it, if any, as was attributable to capital gain made by transfer of furniture which was transferred prior to 1-4-1948 was assessable - Held, yes
Pravin Laxmichand Chheda., Mumbai. - 10 -
Further the Hon’ble Supreme Court in the case of CIT Vs. Balbir Singh Maini, [2017] 398 ITR 531(SC) has held as under:
Section 2(47), read with sections 45 and 48, of the Income-tax Act, 1961 - Capital gains - Transfer (Joint Development Agreement) - Assessment year 2007-08 - Whether where for want of permissions, entire transaction of development of land envisaged in Joint Development Agreement (JDA) fell through, there would be no profit or gain which arose from transfer of a capital asset, which could be brought to tax under section 45, read with section 48 - Held, yes [Para 27][In favour of assessee] 10.Whereas, the Hon’ble High Court of Gujarat in the case of CIT Vs. Ashaland Corporation, [1981] 133 ITR 55, (Guj) has held as under:
The assessee-firm was a dealer in land, adopting the cash system of accounting and having the calendar year as the accounting year. On 14-11-1970, it executed an agreement to sell certain number of plots (out of land purchased by. it in 1967) to a co-operative society who also took over their possession by paying Rs. 5,000 as an earnest money at the time of agreement and Rs. 2,08,772 as advance towards sale price in December 1970. The assessee credited the above aggregate receipts of Rs. 2,13,772 in its trading account in the calendar year 1970 relevant for the assessment year 1972-73. All the formal sale deeds were, however, executed on different dates between 26-2-1971 and 26-6-1972 for a total consideration of Rs. 4,40,939 but the sale transactions with the society were completed in the accounting year relevant to the assessment year 1972-73. For the assessment year 1971- 72, the ITO practically accepted the assessee's declared profit from the aforesaid receipts of Rs. 2,13,772. This assessment was set aside under section 263 by the Commissioner who
Pravin Laxmichand Chheda., Mumbai. - 11 - held that, since the sale deeds were executed in the next calendar year 1971, the entire profit arising from the sale transaction would probably be taxable in the assessment year 1972-73. On appeal, the Tribunal accepted the assessee's plea that the impugned receipt was rightly taxed in the assessment year 1971-72. On reference :
We considering the facts, circumstances, provisions of law, and judicial decisions of Hon’ble Supreme Court, Honble High Court observe that the Assessing officer has overlooked the factual aspects that there is no accumulated profits derived on the date of loan transaction and it clear from the Audited financial statements as on 31-03-2014 & 31-03-2013, there is Negative balance of Reserves & Surplus as on 31-03-2013 and the loan transaction took place on 6- 05-2013. Further as per books of accounts and unaudited financial statements as on 5-05-2013, there is no profit accrued/ earned and the negative balance disclosed under the Reserves & surplus was carried forwarded from 31-03-2013. Further the methodology applied by the A.O. does not satisfy the accounting standards and cannot be accepted and the transaction of development took place in December 2013 which cannot be disputed as receipt/income
Pravin Laxmichand Chheda., Mumbai. - 12 - accrual. We do not find merits in the sustainment of the addition by the CIT(A).Accordingly, we set aside the order of the CIT(A) and direct the Assessing officer to delete the addition and allow grounds of appeal in favour of the assessee.
12. In the result the appeal filed by the assessee is allowed. Order pronounced in the open court on 04.03.2022.