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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO& SHRI D.S. SUNDER SINGH
आदेश /O R D E R
PER D.S. SUNDER SINGH, Accountant Member: This appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals) [CIT(A)]-2, Visakhapatnam vide I.T.A No.0385/13-14/ITO W-3(2)/VSP/2014-15 dated 19.01.2015 for the Assessment Year (A.Y. 2008-09).
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The assessee filed total four grounds in this appeal. Ground No.1 and 4 are general in nature which does not require specific adjudication.
Ground No.2 is related to the issue of validity of assessment made u/s 148. During the appeal hearing, the Ld.AR did not press this ground, therefore, this ground is dismissed as not pressed.
Ground No.3 is related to the addition of Rs.27,36,018/- made by the AO as deemed dividend u/s 2(22)(e) of the Act. In this case, the assessee filed the return of income declaring total income of Rs.1,60,400/- and agricultural income of Rs.70,000/-. The AO reopened the assessment by issue of notice u/s 148 of the Act. During the assessment proceedings, the AO found that the assessee had taken advance of Rs.27,36,018/- from M/s Pinion Software Private Ltd., in which the assessee is one of the directors and having substantial interest in the company. Therefore, the AO has asked the assessee to explain as to why the advance received by the assessee from M/s Pinion Software (P) Ltd. should not be treated as deemed dividend u/s 2(22)(e) of the Act. In response to the notice issued by the AO, the assessee explained that the assessee is owner of a vacant site and the company has requested the assessee to construct the rest
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house for staff in the vacant site belonging to her. Accordingly the assessee had entered into Memorandum of Understanding (MoU) with the company for construction of rest house on the vacant site belonging to the assessee. Since the amount was received for construction of rest house building for the benefit of the company, the same is meant for business purpose and should not be treated as deemed dividend u/s 2(22)(e) of the Act. The assessee contended that, since, the amount was received for construction of rest house building for the benefit of the company, the same should not be treated as deemed dividend u/s 2(22)(e) of the Act. The AO not being impressed with the explanation of the assessee treated the advance received by the assessee as deemed dividend u/s 2(22)(e) of the Act and brought to tax.
Aggrieved by the order of the AO, the assessee went on appeal before the Ld.CIT(A) and the Ld.CIT(A) confirmed the addition made by the AO observing that the assessee has not produced any evidence to show that the construction activity was commenced by the assessee and the assessee has not furnished any plan or estimate made with regard to construction. Since the claim of the assessee that the construction of the building was not
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established, the Ld.CIT(A) confirmed the action of the AO in treating the advance as deemed dividend u/s 2(22)(e) of the Act. Against the order of the Ld.CIT(A) the assessee is in appeal before us.
We have heard both the parties and perused the material placed on record. The assessee’s case is that the assessee owned the vacant site on which the company requested the assessee to construct a building for the benefit of the company which the assessee had accepted. The revenue’s case is that though there was memorandum of understanding and the assessee had received a sum of Rs.27,36,018/- from the company, the assessee has not even commenced the construction of the building. Thus, there is no case of genuine activity and the same is required to be treated as deemed dividend u/ 2(22)(e) of the Act. In this case, it is undisputed fact that the assessee owned the vacant site which is useful for the company for the purpose of rest house for the staff of the company. The assessee has agreed to surrender vacant site of 370 sq.yds covered by HIG- 183, VUDA Phase 1 Layout, Survey No.17, Peda Gantyada village. The assessee also accepted the construction of the building for the benefit of the company. The assessee as well as M/s Pinion Software India (P) Ltd.,
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have entered into MoU on 01.10.2007 to construct the staff rest house. The Ld.AR explained that subsequently, the company has incurred the losses and the proposal for construction of the building was shelved and the company started recovering the amounts from the assessee. It is found that the assessee has surrendered its land for construction of the staff rest house and the said vacant site was not put to use for any other purpose by the assessee. The said proposal for construction of rest house was proposed by the company and would be beneficial to the company and its staff. The intention of the MoU was the construction of rest house for the staff in the site owned by the assessee. Since there is a clear benefit to the company, it had advanced the amounts to the assessee for construction of the building. The assessee submitted that subsequent to the MoU, the company went into losses and the assessee has to return the amount to the company. Therefore, we observe that though the advance given by the company to the assessee required to be treated as deemed dividend as per section 2(22)(e) of the Act, in the facts and circumstances, we observe that the company has advanced the amounts for construction of the rest house for staff and the department did not place any evidence to controvert the purpose of MoU entered by the assessee with the company. The revenue
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did not dispute the recitals of MoU dated 24.04.2007. The Hon’ble High Court of Calcutta in the case of CIT Vs. Gayatri Chakraborty(2018) 168 DTR (Cal) 91 held that in the event of transaction between shareholder and a company to create mutual benefits and obligations, then the provisions of treating any sum received by the shareholder out of accumulated profits as deemed dividend would not apply. In the instant case, there is no dispute that the assessee owned a vacant site and agreed for construction of the staff rest house and entered into MoU with the company. The assessee submitted that subsequently, the company incurred losses and the proposal regarding the construction of the building could not be materialized and the assessee had to refund the said sums to the company. The department did not controvert the submission made by the assessee with regard to genuineness of the MoU. No evidence was brought on record to show that the MoU was bogus or ingenuine. Therefore, we hold that the transaction entered into by the assessee with the company appears to be genuine transaction for the benefit of the company, hence, there is no case for application of deemed dividend u/s 2(22)(e) of the Act. Accordingly, we set aside the orders of the lower authorities and delete the addition made by the AO.
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In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 20th March, 2019.
Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्दर धसंह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER नवशधखधपटणम /Visakhapatnam नििधांक /Dated : 20.03.2019 L.Rama, SPS आदेश की प्रतितिति अग्रेतिि/Copy of the order forwarded to:- 1. निर्धाऩरती/ The Assessee-Smt.Myneni Rajeswari, Prop :M/s Jayanthi Enterprises, 24-111-41, Jayanthi Residency, China Gantyada, Old Gajuwaka, Visakhapatnam 2. रधजस्व/ The Revenue – The Income Tax Officer, Ward 5(2), Visakhapatnam 3. The Commissioner of Income Tax -2, Visakhapatnam 4. The Commissioner of Income-Tax (Appeals)-2, Visakhapatnam 5. तिभागीय प्रतितिति, आयकर अिीिीय अतिकरण, तिशाखािटणम /DR, ITAT, Visakhapatnam 6.गार्डफ़ाईि / Guard file आदेशािुसार / BY ORDER // True Copy //
Sr. Private Secretary ITAT, Visakhapatnam