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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: These appeals are filed by the revenue against the order passed by the Commissioner of Income Tax [(Appeals)] [CIT(A)], Guntur-1 dated 05.03.2018 for the assessment year 2008-09 and 2009-10. Since the issues involved in these appeals are common, they are clubbed, heard together and disposed off in a common order for the sake of convenience as under.
Sri Madala Sudhakar and Smt. Madala Sakunthala are the Directors and the shareholders of M/s Janachaitanya Housing Pvt. Ltd., (hereinafter referred to as JHPL) and M/s Srusti Infrastructure Pvt. Ltd., (hereinafter referred to as SIPL). Sri Madala Sudhakar is the Managing Director of JHPL and Shakuntala is the Director. Both of them are having substantial and n controlling share in both the companies. The Assessing Officer (AO) found that JHPL has purchased the lands from farmers by making payment through cheques and subsequently registered the said lands in the name of SIPL instead of registering in its name. For the assessment year 2008-09, the amount outstanding in the name of SIPL as debtor in the books of JHPL was Rs.3,58,70,000/- and for the assessment year 2009-10, JHPL advanced
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further sum of Rs.2,04,44,000/-. In the books of JHPL, SIPL was shown as a debtor and per contra in the books of SIPL, JHPL was shown as creditor to the extent of payments made by the JHPL for purchase of lands. In a nutshell JHPL advanced a sum of Rs.3,58,70,000/- during the assessment year 2008-09 and further a sum of Rs.2,04,44,000/- for the assessment year 2009-10 for purchase of lands in the name of SIPL. Payments were made directly by JHPL to the landlords and the lands were registered in the name of SIPL. SIPL has shown the lands as stock in trade in their books of accounts. Both Sri Madala Sundhakar and Smt.Madala Sakunthala are the directors in the SIPL with share holding of 50% each. The lands were purchased in Kandukur village to the extent of 38.7750 acres and 4.8500 acres with an amount of Rs.3,10,20,000/- and Rs.48,50,000/- as at the end of 31st March 2008 aggregating to 3,58,70,000/- and for the year ending 2008-09 a sum of Rs.2,04,44,000/- was paid for purchase of 8 acres of land @Rs.25,55,500/- per acre. Since both Sri Sudhakar and Smt. Sakuntala, (shareholders) are having substantial interest in SIPL as well as JHPL, the AO proposed to invoke the provisions of Sec.2(22)(e) of the Income Tax Act, 1961 (hereinafter called as ‘Act’) and to tax the same as deemed dividend in the hands of the shareholders. Accordingly, the AO issued show
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cause notice and in response, the assessee filed the explanation stating that JHPL has not made any payments to both the directors and the payments were made to the land owners and the lands were registered by means of regular conveyance deed in the name of SIPL duly making necessary entries in the books of both the companies and there was no passage of money in the form of loans or advances to the directors in which they have substantial interest. The objects and business activity of both the companies are identical and the properties were acquired in the name of SIPL in the normal course of business. There was no personal benefit derived by the directors directly or indirectly from the advances made by the SIPL for purchase of lands. The arrangement was made in the business interest and to stabilize the SIPL in the market. Since none of the directors have benefited in any manner and the properties were conveyed through conveyance deeds, the assessee argued before the AO that there is no case for taxing the same as deemed dividend and relied on the following decisions and requested not to tax the same as deemed dividend. (a) CIT Vs. Ankitech (P) Ltd. 340 ITR 14 (Del) (b) CIT Vs. A.R.Magnetics (P) Ltd. (2013) 220 Taxman. 209 (Del)
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2.1. Not being convinced with the explanation of the assessee the AO relied on plethora of decisions which upholds the constitutional validity of section 2(22)(e) and taxed the same as deemed dividend u/s 2(22)(e) of the Act, in the hands of both the shareholders of SIPL for the assessment year 2008-09 and 2009-10.
Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A). The Ld.CIT(A) examined the purchase agreements, sale deeds, purchase and sale accounts in the books of SIPL and JHPL, P&L account of both the companies, sale deeds of 2016 and observed that the transactions were business transactions, the said transactions were made to expand the base of customers and to support the business of sister concern, the JHPL had advanced the sums. The Ld.CIT(A) also observed that the subsequently the SIPL developed the said lands and transferred the lands in the normal course of business at market value to JHPL and offered profit to the tax. The assessee filed the ledger accounts before the Ld.CIT(A) to prove that the land in question was stock-in-trade as reflected in the accounts of both the companies. During the appeal proceedings, the Ld.CIT(A) has specifically asked the status of the lands and also the benefits directly or
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indirectly derived by the Director shareholders. Both the shareholders of SIPL vide letter dated 19.01.2018 confirmed that the company SIPL has developed the lands purchased from the farmers and part of it was sold to JHPL and offered the income. They have not derived any pecuniary benefit directly or indirectly from the said transaction. The SIPL also filed confirmatory letter before the Ld.CIT(A) stating that the transaction took place in the course of normal commercial activity and the asset was shown as stock-in- trade and not as fixed assets. The SIPL also submitted before the Ld.CIT(A) that the lands were not mortgaged with any financial institutions / banks either by the shareholders or the company and no benefit was passed on to the any of the shareholders including the directors. The assessee also relied on the following decisions : (a) CIT Vs. Daisy Packers (P) Ltd. (2014) (220 Taxman 331) (Guj) (b) CIT Vs. Creative Dyeing & Printing Pvt. Ltd. (51 taxmann.com 569) (Del) (c) CIT Vs. Amrik Singh (P&H) (231 Taxman 731) (d) CIT Vs. Atul Engineering Udyog (All) (51 taxmasnn.com 569) (e) CIT Vs. Ambassador Travels Pvt. Ltd. (318 ITR 376) 3.1. The assessee further relied on the decision of Hon’ble Madras High Court in the case of G.R.Govinda Rajulu Naidu (90ITR 13) to state that the adjustment by way of book entries does not attract the provisions of sec.2(22)(e) of the Act. Further, the assessee relied on the decision of
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Hon’ble High Court of Andhra Pradesh in the case of India Fruits Ltd. (228 Taxmann 243) and argued before the Ld.CIT(A) that where the subsidiary company advanced money to purchase raw material or to make payments to meet the business liabilities, the provisions of deemed dividend are not applicable. The Ld.CIT(A) considering the decision of Hon’ble Delhi High Court in the case of Ankitech(P) Ltd. (340 ITR 14) (Del), A.R.Magnetics Pvt. Ltd. (220 Taxman 209) (Del) , Daisy Packers (P) Ltd. (220 Taxman 331) and Creative Dyeing & Printing Pvt. Ltd. held that the transactions of the SIPL with the JHPL are the business transactions and accordingly held that the business or trade transactions are out of the purview of the provisions of section.2(22)(e) of the Act. The Ld.CIT(A) also followed the decision of Hon’ble Supreme Court in the case of SA Builders (158 Taxman 74) to hold that the transactions between two sister companies should be seen as business transaction unless the loans made available were siphoned by the directors or shareholders for personal use. The Ld.CIT(A) further relied on Circular No.19/2017 dated 12.06.2017 and accordingly held that there is no case for taxing the amounts advanced to SIPL as deemed dividend in the hands of shareholders and thus deleted the addition made by the AO.
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Aggrieved by the order of the Ld.CIT(A), the revenue carried the matter to the Tribunal. During the appeal hearing, the Ld.DR argued that the transactions between the JHPL and SIPL cannot be held to be trade or business transactions. There were no regular trading transactions transpired between both the parties. The JHPL has paid the amount to the landlords directly by cheque and the lands were registered in the name of SIPL, thereby, the JHPL has advanced the amounts in the form of loans to the SIPL, wherein both the shareholders are having substantial controlling interest in the lending company as well as the borrowing company. Therefore, the provisions of section 2(22)(e) attracts and the AO has rightly taxed the amounts advanced to SIPL as deemed dividend u/s 2(22)(e) of the Act. Since it is only the sole transaction the same cannot be held to be business transaction and argued that the addition made by the AO is to be upheld and the order of the Ld.CIT(A) is to be set aside.
On the other hand, the Ld.AR submitted that the JHPL and SIPL are carrying on identical business, keeping in view of the activity or resources available to JHPL, JHPL has madethe payments to the landlords and registered the lands in the name of SIPL for development of the lands and
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prompt delivery to the customers. Subsequently, after development, the lands were sold to the JHPL at market value and the profits earned by SIPL from the transactions were offered as income in the hands of the company. The transactions were through journal entries and the lands were purchased in the names of SIPL to stabilize the company in the market. The transactions of the both the companies are purely business and trade transactions and there was no personal benefit derived by the shareholders i.e Shri Sudhakar and Smt. Shakuntala. This fact was substantiated by the letters submitted by the assessee before the Ld.CIT(A) at the time of appeal hearing. Both the directors of JHPL and SIPL have confirmed the facts. The fact that the transactions are business transactions was established before the Ld.CIT(A) with the books of accounts of both the companies, ledger account copies, profit and loss account, sale deeds of 2016 etc. at the time of appeal hearing. Not even a penny was utilized by the Directors or the shareholders out of the amounts advanced by the JHPL for purchase of lands, therefore argued that the transactions are purely business transactions, hence, the provisions of deemed dividend does not attract in this case. The assessee also relied on the decisions which was discussed by the Ld.CIT(A) in detail in his order.
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We have heard both the parties and perused the material placed on record and gone through the orders of the lower authorities. In this case, the assessee had purchased lands at Kandukur village to the extent of 38.7750 acres for a sum of Rs.3,10,20,000/- on 17.11.2007 and 4.8500 acres on 14.12.2007 for a sum of Rs.48,50,000/- aggregating to Rs.3,58,70,000/- as at the end of the year 31.03.2008. Similarly, a sum of Rs.2,04,44,000/- was paid on 28.07.2008 for purchase of 8.00 acres of land. The entire amount of Rs.5,63,14,000/- was paid by JHPL directly to the land owners by cheque. The amount was paid by cheque and the lands were registered in the name of assessee company. The assessee company and the lending company are sister concerns carrying on identical business. Sri Madala Sudhakar and Smt. Madala Sakunthala, both are Directors and the shareholders in JHPL as well as SIPL and having controlling shares in both the companies. In fact, Sri Madala Sudhakar and Smt. Madala Sakunthala are holding 100% shares in SIPL @ 50% each. Since the share holders are having substantial share in JHPL and the amounts were advanced to the borrowing company, where the directors are having substantial interest, the AO was of the view that the loans advanced to the borrowing company constitutes deemed dividend within the meaning of 2(22)(e) of the Act in
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the hands of the Shri Sudhakar and Smt. Shakuntala. The assessee’s case is that both the companies are carrying on identical business and to stabilize the newly promoted company in the market and to deliver the products to the customers in time frame, the lending company has advanced the sums to the borrowing company by transfer of lands, therefore, the advances are to be treated as trading advances and there is no application of provisions of section 2(22)(e) of the Act. It is undisputed fact that the lending company has not given any cash to the borrowing company which was utilized by the directors for their personal benefit. The amount was transferred by way of journal entry and by registering the lands which was infact purchased by the JHPL. Subsequently, the said lands were developed by SIPL and sold the lands to the JHPL at a market rate and offered the profit to the income tax purpose. There was no evidence to controvert the finding of the Ld.CIT(A) that the amounts advanced to the borrowing company were utilized by the directors for their personal benefit. Both the lending company and the borrowing company have placed the books of accounts, sale deeds, purchase and sale accounts, purchase agreements etc. before the Ld.CIT(A) who has gone through the same and held that the transaction in question was a trading transaction but not the personal
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transaction. The Ld.CIT(A) relied on plethora of decisions and held that the business transaction does not attract the deemed dividend. Further, the Ld.CIT(A) relied on the decision of SA Builders (supra), wherein, Hon’ble Apex court held that the transaction between two sister companies should be seen as business transaction unless the loans made available were siphoned by the Directors or the shareholders for their personal use. In the instant case, there was no such instance of having used the funds by the Directors or the shareholders for their personal use. It is established by the assessee before the Ld.CIT(A) that the funds were used by the company for the purpose of business. Since the funds were placed at the disposal of the sister concern for developing the lands and to deliver the product in time frame, there is no doubt to hold that the amounts were advanced on commercial expediency. It is accepted that the borrowing company has delivered the product to the borrowing company after developing the land and offered the resultant profit the tax. Therefore, we agree with the finding of the Ld.CIT(A) that the transaction between the two companies in the form of purchase and sale of land is purely business and trade transaction and beyond the purview of the deemed dividend u/s 2(22)(e) of the Act. The Ld.CIT(A) relied on the plethora of judicial decisions
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discussed in this order apart from the following decisions to hold that the business transactions does not attract the provisions of deemed dividend u/s 2(22)(e) of the Act.
Hon’ble High Court of Delhi in the case of CIT vs. Arvind Kumar Jam ITA No.589/2011 [2011-ITRVHC-DEL-270] has held that if the payments are made by a company to its shareholder having substantial Interest but are result of business transactions between the parties (trade advances), the such payment cannot be treated as ban and advance and the money so received cannot be treated as deemed dividend within the meaning of section 2(22)(e). 2. Hon’ble ITAT Chandigarh in the case of DCIT Vs. Lakhra Brothers (2007) 106 TTJ (Chd); 250 (162 Taxman 170 (Mag.) has held that amount was advanced during the ordinary course of business for business expediencies. So it cannot be said that there was intention of the company to give a loan, the such advances cannot be treated as loan and advance and the money so received cannot be treated as deemed dividend within the meaning of section 2(22)(e). 3. Hon'ble ITAT Chennai in the case of Farida Holding P. Ltd vs. DCIT, 51 SOT 452 has held that assessee company manages the financial affairs of its subsidiary company in its ordinary course of business and assessee company involved in the activities of taking loan from the subsidiaries and advancing it to other subsidiaries in ordinary course of business cannot be treated as deemed dividend. 4. Hon'ble Apex court in the case of Bombay Steam Navigation Company P. Ltd. vs. CIT (/965) 56 JTR 52 (SC) has held that every sale of goods on credit does not amount to a transaction of loan. A loan contracted no doubt creates a debt but there may be a debt without contract a loan. 5. Hon'ble High Court of Karnataka in the case of Bagmane Constructions Pvt. Ltd. (ITA No.473/2013) held that loan or advance given to shareholder or to any sister concern as a consideration for the goods or for purchase of a capital asset, which indirectly would benefit the company advancing the
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loan, the same cannot be treated as deemed dividend u/s 2(22)(e). Any loan or advance or any payment by a company, in which public are not substantially interested, to the shareholder or to a concern in which the shareholder is having substantial interest, out of business exigencies, the same were held to be not deemed dividend in the following cases: 1. Hon'ble ITAT Chennai in the case of ACT vs. Smt. G. Sreevidya [2012- ITR V-ITAT-CHE-276]has held that there would be no 'Deemed Dividend' if loan to shareholder is given as quid pro quo. It was held that: "Every payment by a company to its shareholders may not be a loan/ advance so as to come within the ambit of s.2(22)(e). In the present case, the amount was withdrawn by the assessee from the company only to meet her short term cash requirements. By virtue of offering personal guarantee and collateral security for the benefit of the company, the liquidity position of the assessee had gone down. In the strict sense, the amount forwarded by the company tot eh assessee was not in the shape of advances or loans. The arrangement between the assessee and the company was merely for the sake of convenience arising out of business expediency” 2. Hon'ble High Court of Calcutta in the case of Pradip Kumar Malhotra vs. CIT ITA No.219/2003 [2011-ITRVHC- KOL-274] has held that "non- gratuitous" advances to substantial shareholder is not deemed dividend u/s 2(22)(e). It was held:
"The phrase "by way of advance or loan' s. 2(22)(e) must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shores. If such loan or advance is given to such share holder as a consequence of any further consideration received from the shareholder, then such advance or loan cannot be said to be "deemed dividend" u/s 2(22)(e). Thus, while gratuitous loan or advance given by a company to a substantial shareholder comes within the purview of s.2(22)(e), a case where the loan or advance is given in return to an advantage conferred upon the company by the shareholder does nat. On facts, as the advance was in lieu of the company being permitted
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to mortgage the assessee's fault, it was not "gratuitous" and so not assessable as "deemed dividend".
In the foregoing paragraphs we upheld the view of the Ld.CIT(A) that the transaction entered in to by both the companies are business transactions and the revenue could not place any evidence to controvert the same. We are in agreement with the view of the Ld.CIT(A) that the business transactions does not attract the rigor of deemed dividend u/s 2(22)(e) of the act as per the decided case laws cited above. Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the appeals of the revenue.
In the result, appeals of the Revenue are dismissed.
The above order was pronounced in the open court on 12th September, 2018.
Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्दर ससह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER धिशाखापटणम /Visakhapatnam ददिांक /Dated : 12.09.2018 L.Rama, SPS
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आदेश की प्रधिधलधप अग्रेधर्ि/Copy of the order forwarded to:- 1. ननर्ााररती/ The Assessee- Sri Sudhakar Madala and Smt. Sakunthala Madala, Janachaitanya Housing Pvt. Ltd., 1st Floor, Pasumalai Complex, 5/1, Aundelpet, Guntur 2. राजस्व/ The Revenue – The ACIT, Circle-1(1), Guntur 3. The Pr.Commissioner of Income Tax, Guntur 4. The Commissioner of Income Tax(Appeals)-1, Guntur 5. धिभागीयप्रधिधिधि, आयकरअपीलीयअधिकरण, धिशाखापटणम /DR, ITAT, Visakhapatnam 6.गाडाफ़ाईल / Guard file आदेशािुसार / BY ORDER // True Copy //
Sr. Private Secretary ITAT, VISAKHAPATNAM