SARDAR MADAN SINGH BHARARA,MUMBAI vs. JCIT (OSD) RG 8(1), MUMBAI

The common issue raised is that learned CIT(A) erred in sustaining the addition made by the Assessing Officer u/s. 2(22)(e) of the Act. These appeals were earlier dismissed by the ITAT ex-parte. However, subsequently they were recalled and accordingly heard by this Bench.

Facts are identical as such we are referring facts and figures from A.Y. 2008-09. Brief facts of the case leading to addition u/s. 2(22)(e) of the Act by the Assessing Officer and confirmation by learned CIT(A) are as under :- M/s. Gazebo Developers Pvt. Ltd. (GDPL) a concern in which Director Mr. Madan Singh Bharara (Assessee) had a substantial interest and given a loan of Rs. 36,50,000/- to M/s. Om Siddi Vinayak Creation Pvt. Ltd.(OSCPL) in 2 Sardar Madan Singh Bharara which Mr. Madan Singh Bharara has a substantial interest. The AO assessing the case of OSCPL has added this sum as deemed dividend in the hands of OSCPL, which is not a shareholder in the M/s. Gazebo Developers Pvt. Ltd. (GDPL). The Hon'ble IT AT following the decision of M/s. Bhaumik Colour Lab. Pvt. Ltd., 118 ITD 1 Mumbai Special Bench and CIT Vs. Universal Medicare Pvt. Ltd. 324 ITR 263 (Bom.) has deleted the additions. The Ld.CIT(A)-17 while deciding the case of M/s. Om Siddi Vinayak Creation Pvt. Ltd. deleted the said addition. The Ld.AO of the assessee stated that Shri Madan Singh Bharara (assessee) is a registered and beneficial shareholder of M/s. Gazebo Developers Pvt. Ltd. which is a lender company in this case and having more than 20% of shareholding also holds a substantial shareholding in M/s. Om Siddi Vinayak Creation Pvt. Ltd. wherein he holds 90% of the shareholding. The assessee Shri M.S. Bharara had given a loan to M/s. Gazebo Developers Pvt. Ltd. amounting to Rs.12,48,79,552/-. Therefore, the advancing of loan By M/s. Gazebo Developers Pvt. Ltd. to M/s. Om Siddi Vinayak Creation Pvt. Ltd. in which the assessee is also a beneficial shareholder was held to be for the benefit of the registered and beneficial shareholder of M/s. Gazebo Developers. Therefore, the provisions of section 2(22) (e) were held to be squarely applicable in the case of the assessee by the Assessing Officer. The addition made by the Ld.AO were confirmed by learned CIT(A).

We have heard both the counsel and perused the records. Learned Counsel of the assessee submitted that assessee has given advances both to GDPL and OSCPL. Sum advanced were as under :-

Furthermore, learned Counsel of the assessee referred to the decision of ITAT in the case of Ravindra R. Fotedar Vs. ACIT (85 taxmann.com 314) to submit that payment is neither made on behalf of the assessee nor for the benefit of the assessee. He submitted that it is illogical to presume that a person would pay to a third party to give benefit of a person to whom he directly owes money. Learned Counsel of the assessee further referred to the decision of ITAT in the case of Shyam K. Borele Vs. CIT (ITA No. 93/Nag/2015 for the proposition that section 2(22)(e) of the Act is introduced to bring to tax amount paid by closely held companies to avoid payment of tax. Learned counsel submitted that in this case the same is not applicable since the assessee has given loan to both companies.

Furthermore, learned counsel submitted that sum advances by GDCPL to OSCPL was for business purposes and hence the same cannot come under the ambit of provisions of section 2(22)(e) of the Act. He submitted that sum of Rs. 37,50,000/- which was advanced in A.Y. 2006-07 was for the purchase of property. For this purpose, learned counsel referred to the copy of MOU filed. Learned Counsel further submitted that in A.Y. 2008-09 GDPL paid sum of Rs. 33,95,000/- to OSCPL. He submitted that one of the objects of GDPL is financing activity and accordingly sum given as business advance is specifically exempted. He further submitted that the assessee has earned interest income on this and same has been duly reflected in the accounts.

Per contra, learned Departmental Representative relied upon the orders of the authorities below.

Upon careful consideration, we find that learned Counsel of the assessee has very cogently brought out the facts of the case which support the case of 4 Sardar Madan Singh Bharara the assessee. Firstly, we know that provisions of section 2(22)(e) of the Act are not attracted when advances are given for the purpose of business.

In the present case, as referred above, sum advanced by GDPL to OSCPL were for business purpose as enumerated hereinabove. Sum advanced in A.Y. 2006-07 for purchase of property. Sum advanced in A.Y. 2008-09 was in line of business activity of the assessee and interest income has also been reported.

In this view of the matter when advances are given in furtherance of the objects and purpose of company, provisions of section 2(22)(e) are not attracted. Hence any addition u/s. 2(22)(e) of the Act in the hands of the assessee who is shareholder of both companies is not sustainable.

Another claim on which the assessee deserves to succeed is that assessee has given loans and advances to both GDPL and OSCPL. Hence, if the assessee wanted any benefit he could have asked for the loan to be repaid by either of the companies. There was no reason that the assessee will derive any benefit by sum being advanced by one of the companies who also owes money to the assessee to another company who also owes money to the assessee. Further the proposition that the assessee would derive any benefit out of advances given by one of his debtor-company to another of his debtor- company is totally illogical

Accordingly in the background of the aforesaid discussion, we set aside the order of the authorities below and decide the issue in favour of the assessee.

In the result, these appeals stand allowed. Order has been pronounced in the Court on 29.5.2019.