ACIT 11(1), MUMBAI vs. SAJID S. NADIADWALA, MUMBAI

The captioned appeal filed by the Revenue is directed against an order passed by the CIT(A)-3, Mumbai dated 16.11.2012, which in turn, arises out of an order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) dated 30.12.2011.

Grounds of appeal raised by the Revenue reads as under:-

"On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) was justified in deleting the disallowance made by the A.O. on account of deemed dividend u/s.2(22)(e) of the Act amounting to Rs.2,30,33,460/-.

On. the facts and in the circumstances of the case and in law, whether the Ld.CIT(A) was justified in holding the amount received by the assessee from Nadiadwala Grandson Entertainment Pvt.Ltd. as business advance despite the fact that the same was categorized term as "loans and advances" in the books of the assessee himself.

On the facts and in the circumstances of the case and in law, whether the Ld.CIT(A) was justified in holding the amount received by the assessee from Nadiadwala Grandson Entertainment Pvt. Ltd. as business advance despite the fact that the same was utilized for buying a personal asset namely Bentley car.

The appellant prays that the order of the CIT(Appeals) on the above grounds be set aside and that of the Assessing Officer be restored.

The appellant craves leave to amend or alter any ground or add a new ground which may be necessary."

Briefly put, the relevant facts are that assessee individual filed his return of income for Assessment Year 2009-10 on 29.09.2009 declaring total income of Rs.50,25,049/-. In the return of income so filed, he declared income under various heads viz. Income from Salary, House property, Business and Profession and Other sources. In the course of assessment proceedings, the Assessing Officer noted that assessee was a director of Nadiadwala Grandson Entertainment Pvt. Ltd. (hereinafter referred to as “NGEPL”) and was also a shareholder of the said company holding approximately 98% interest in the company. The Assessing Officer noted that assessee had received Rs. 7,79,24,880/- towards loans and advance from NGEPL which was reflected under the head “Loans and Advances” in the Balance Sheet of the assessee's proprietary concern M/s. Nadiadwala Grandson Entertainment (hereinafter referred to as “NGE”). The Assessing Officer further noted that from the total amount of Rs. 7.79 crores received by the assessee from NGEPL, Rs. 2.30 crores was utilized for purchase of Bentley car. The assessee was show caused as to why such loans and advances should not be treated as “Deemed Dividend” within the meaning of section 2(22)(e) of the Act. In response, assessee furnished copies of ledger account of NGE in the account books of NGEPL, ledger account of NGEPL in the account books of NGE, copy of agreement between NGEPL and NGE and asserted that the advance of funds from NGEPL to NGE was purely for the purpose of business i.e. for utilization towards production of the film “Housefull”. It was further submitted by the assessee that loans and

Before the CIT(A), assessee submitted that the transaction between NGEPL and NGE was in the normal course of business, an aspect which has not been negated by the Assessing Officer. It was further submitted that NGEPL had entered into joint venture agreement for production of film vide agreement dated 05.05.2016. Since substantial part of ‘Houseful’ film was shot in London, a company was incorporated in London to carry out film production, who in turn appointed NGE as service agent for carrying out shooting of “Houseful” film in India. Thus, NGE has incurred Rs. 2.83 Crore on behalf of NGEPL for production of film “Houseful” and has received remuneration of Rs. 1.25 crore for production services from NGEPL in Assessment Year 2010-11 upon release of the said film. Therefore, advances by NGEPL to NGE were purely for provision of services. The assessee placed reliance on the decisions of CIT vs. Nagindas M Kapadia 117 ITR 393 (Bom.), CIT vs. Rajkumar 318 ITR 463 (Del), CIT vs. Ambassador Travels Pvt. Ltd. 318 ITR 376 (Del) and CIT vs. Creative Dyeing & Printing Pvt. Ltd. 318 ITR 476 (Del) for proposition that where business nexus between company and shareholder is established, the provisions of section 2(22)(e) of the Act would not be attracted. As an alternate, assessee also explained the utilisation of funds received from NGEPL and pointed out that during the year under consideration no fresh loan was received from NGEPL; the closing balance of the loans and advances decreased as compared to opening

The CIT(A), after a detailed discussion, upheld the plea of the assessee that there was a business connection between NGEPL and NGE; and that the funds utilised by the assessee for purchase of car was out of his own money receivable from NGEPL and therefore, he deleted the addition made by the Assessing Officeru/s 2(22)(e) of the Act.

Before us, the ld. DR merely relied on the reasoning of the Assessing Officer in the assessment order to state that assessee has utilised the loan funds received from NGEPL for purchase of car; apart therefrom, no other argument has been put forth by the ld DR.

On the other hand, ld. Counsel for the assessee, relied on the order of CIT(A) and pointed out that the Assessing Officer in the assessment order has agreed with the contention of the assessee that the transaction between NGEPL and NGE was in the normal course of business. The Assessing Officer proceeded to hold that car purchased by the assessee was out of the funds received from NGEPL due to the reason that immediately after credit of funds of Rs. 5 Crore from NGEPL, assessee purchased car worth Rs. 2.3 Crore. It was explained that before CIT(A), assessee had established that said money was recoverable by the assessee from NGEPL and it was not in the nature of fresh loan taken by the assessee. In fact, at the year end, the opening balance of Rs.2,67,30,047/- reduced to Rs. 2,54,24,880/- as such no new loan was taken during the year. The ld. Counsel further canvassed that section 2(22)(e) of the Act is not applicable to amounts paid in normal course of business.

We have carefully considered the rival submissions. The issue before us is whether purchase of car by the assessee of Rs. 2.3 Crore by utilising funds received from a company can be treated as “deemed dividend” within the meaning of section 2(22)(e) of the Act. Admittedly, the assessee is a shareholder of NGEPL holding 98% shares of the company. During the year under consideration, the assessee received amounts to the extent of Rs.7.79Crore from the said company; that NGEPL was having sufficient reserves and surplus on the date of payment of money to the assessee. Before the Assessing Officer, assessee explained that the amounts were advanced to the assessee in the normal course of business and there was a business nexus between the assessee and NGEPL. The Assessing Officer,in principle, accepted the contention of the assessee that funds were advanced in the normal course of business, however noted that funds to the extent of Rs. 2.30 Crores were utilized by the assessee for purchase of car and accordingly he treated the aforesaid sum as “deemed dividend” u/s 2(22)(e) of the Act. The CIT(A) after careful consideration of the facts and law, has decided the issue in favor of the assessee. The relevant discussion is contained in para 2.3 of his order, which reads as under:

The CIT(A) has categorically recorded a finding of fact that before purchase of car worth Rs. 2.30 Crore, NGEPL received Rs. 5 Crore from Eros Pictures Pvt. Ltd on behalf of the assessee. The said sum was thus credited in the name of the assessee in the account books of NGEPL. The assessee was having opening debit balance of Rs. 2.67 lacs in the books of NGEPL. Thus, after set-off of opening debit balance against Rs. 5 Crore received on behalf of assessee, there remained a credit balance of Rs. 2.31 Crore which means assessee was to have received said sum from NGEPL. Thereafter, assessee was paid various sums by the NGEPL from which assessee purchased the car in question. Thus, in sum and substance the source of

In fact, the entire premise of the Assessing Officer is based on his perception that the assessee has utilized the loans and advances received from NGEPL for purchase of car, wherein assessee was a shareholder. As noted by the CIT(A), the funds utilized by the assessee for purchase of car, was in fact his own money which was lying with the NGEPL. An amount can be assessed u/s 2(22)(e) of the Act only in a case wherein funds belonging to the company have been utilized by the shareholder for his own benefit. In the present case, undisputedly, the car was purchased out of assessee’s own money and was not sourced from the funds belonging to the company. Thus, no part of the funds of the company has been used by the assessee- shareholder for the purchase of car. In our view, this very fact is sufficient to hold that provisions of section 2(22)(e) of the Act are not applicable in the instant case, and the order of the CIT(A) is hereby affirmed.

Thus, in view of the aforesaid discussion, we hereby uphold the decision of CIT(A) and Revenue fails in its appeal.

In the result, appeal of the Revenue is dismissed.