SMT.B.SEETHARATNAM vs. DY.COMMISSIONER OF INCOME TAX

I IN TIIE HIGH COURT FOR THE STATE OT TELANGANA AT I{YDERABAD THE HON'BLE SRI JI,STICE P'SAM KOSHY AND THE HON'BLE SRI WSTICE NARSING RAO NANDIKONDA APPEAL NOS.354 355 469 AND INCOME TAX TRIBUNAI Date: O4.12.2025 Between Sri B. Dhanunj ayarao ...Appellant And Deputy Commissioner of Income Tax, Circle 1 (3), Ayakar Bhavan, Basheerbagh, Hyderabad, . . . Reqpondent COMMON JUDGMENT her Hon'ble sn Justrce Narsms !'ao Nandikondal Since the parties and issue involved in all these appeals being common, they are being heard together and are disposed of by way of this common judgment. 2. Heard Mr. N.Purnachandra Rao, learned counsel for the appellants and Ms. Bokaro Sapna Reddy, learned Senior Standing Counsel for Income Tax Departrnent, appearing for the respondent. 476 0F 20L3

Page 2 of 15 3. These appeals are frled under Sectio Income Tax Act, 196 1 (for short, the Act, 1961 the common order passed by the learned Incom< Tribunal, Hyderabad Bench ,A,, Hyderabad ( ltribunal') in ITA Nos.443lHyd /2012 CO IOrII 4a4/Hyd/2ot2 Co 98/Hyd l2or2, rTA 44s/r 99 lHyd/2012 and rTA aa6 lHyd/2}12 CO dated 14.12.2O12, for the Assessment years 20o 2OO7, 2003-2004 and 2006_200T respectively. 4. Brief facts of the case are that ther; preferred by assessees. They are wife and hr appellants are Directors of M/s.BDR projects pr Hyderabad, holding more than 1O%o shares in the they are assessed to tax regularly. It is stated t:.r Assessment Years 2002-2003, 2003_20O4 ald 20( the Directors have taken advances from Andhra the credit faciiity be availed by the company fo r purposes for the purpose of construction of buil,l respect of properry bearing No.g_2_293 / g2 / NL/ 6 I PsK,J & NNR,J itta 354 2013&batch r 260-,4 of the ') aggrieved by Tax Appellate or short the yd/2012, ITA .ydl2012 co tO/Hyd/2012, t-2003,2006 r appeals are sband. The vate Limited, )ompaly ald at during the 6-2007, both 3ank against its business ing jointly in , situated at

Page 3 of 16 PSK,] & NNR,.I itta 354 2013&batch MLA & MP Colony Road No. 10C, Jubilee Hills, Hyderabad' admeasuring 600 square yards, rvhich \\ras acquired during the year 2000. 4.a. It is further stated that as the subject property was already pledged to the bank as a collateral security against the credit facilities availed by the company for development of its business purposes, any further loans could not be obtalned on the said property to construct a house building' It is further stated that both the appellants who are wife and husband have no other option except to draw advances from the company and with the help of said advances to construct a building on the said open plot. On account of construction of the building' the value of property shoot up and the company availed further credit facilities for its business purposes from the said bank and the entire property including the building was under the custody of the ba;rk by way of collateral security' 4.b. It is further stated that considering the above facts and circumstances of the case, the Assessing Officer while completing the Income Tax Assessment p:oceedings for all four

Page 4 of 16 PSK,J & NNR,J itta 354 2013&batch years treated the above advances in both the ha: Cs as.deemed dividend' by invoking the provision of Section | (221 (e) of the Act, 196 1. 4.c. Being aggrieved by the said Assessrr:nt Order, the assessee preferred appeal before the learned Cr mmissioner of Income Tax (Appeals) II, Hyderabad, holding thr - there was no individua-l benefit to both the Directors on t I <ing advalces since the propert5z / house building was pledgec :o the bankers as security for the loans obtained by the ci) npany for its business purposes and no further loan or ad q urce could be obtained by the Directors on the said property as it was already pledged. It is further stated that even thoir gh there is a personal element of individua-l benefit to the asser see-appellant, the compal5' from which the advances taken rvas a_lso benefited by using the property as collateral security to tlr: bank. It was further observed that the loan or advance given I e return is art advantage upon the company ald is not a gra- ritous loan or advance given by the company and does not c: Tre under the permission of Section 22 (2) of the Act, 1961 ar d accordingly

./ Page 5 of 16 PSK.I & NNR,J itta 354 2013&batch the Commissioner tdeleted' the advances made by the Assessing Officer. 4.d Being aggrieved by order passed'by the learned Commissioner of Income Tax (Appeals); the Revenue filed al appeal before the Tribunal and contended that there was no need for a company to advalce a loan, instead the compaly could have utilized the money for its own operations. He further contended that the company derived advantage by granting loan to the assessee though it was the assessee who derived the advantage and what was offered by hT" was only a collateral security in terms of personal guarantee. He also contended that the advances were drawn by the assessees for two years and three yea-rs respectively and the piea that the house was constructed only for the purpose of pledging with the bank is for fetching and to derive a conclusion that there is an advantage to the company in advalcing such loan. 4.e. Further, the assessee also submitted by way of cross-objections to the appeal frled by the Revenue, wherein the Tribunal had held that the payments made by the company \_ e--2

Page 5 of 15 towards advances to the assessee fu1fils all the of 'dividend' as envisaged in Section 2 (22) (e) o In the aforesaid circumstances, there canno t conclusion excepting to consider the advanc:r company to the assessees as 'deemed dividen < of the assessees. It is also held that the C< Income Tax (Appeals) was not justihed in grzur .: the assessees and thereby the order passed Commissioner of Income Tax (Appeals) was i aside and the additions made by the Assessr r restored considering it to be a 'deemed dividr: Section 2 (22lt (3) of the Act, 196 1. 4.f, The main grievance of the of the rr this Court is that the Tribunal did not consider- value of the letter hled and as it is not an additic all as it is only frled on the directions of the I further contended that the letter dated 27.1 speaks about the details of the properties p r bank in getting the credit facilities by the Corr \-1 PSK,J & NNR,J rtta 354 2013&batch lharacteristics the Act, 1961. be any other given by the ' at the hands mmissioner of rg the relief to ry the learned ccordingly set g Officer were rd' in terms of rpellant before lhe evidentiary nal evidence at :ibunal. It is ).2OO2 clearly dged with the pany ald that r -1:.i

Page 7 of 16 PSK,I & NNR,I itta 354 2013&batch not only considered the issue of 'pledge' as that of ?nortgage' which is not a case in the appellants' case, but also the date of letter dated 27.O9.2OO2 read as 27.09.2012 as against the correct one of 27.O9.2OO2. It further ignored the vital fact that the company is also getting benefit of credit facilities on account of pledge of the assessee property with the balk as rightly held in the case laws quoted by the Department are not only differ with that of the case of Pradip Kumar Malhotra v. Commissioner of Income Taxr, as in these cases there is no return benefit to the said compalies from where the advances were taken. 5. He further contended that though there are personal elements of the individual benefrt to the assessees, the company from which the advances were taken also got benefrted by using the property as collateral security for getting credit facilities. It was further stated that the Tribunal also erred in viewing that the said property against which credit facilities were availed is not hgured in the letter dated 'zotr E:g ttn sgg (cat)

Page 8 of 16 PSK,] & NNR,J rta 354 2013&batch 3i.05.2008, when the said property was actua-11t figured in the letter dated 27.O9.2OO2, during which period aior e the properfy was kept as a collateral security. 6. On contra, the learned counsel for tlL, Revenue has argued that in view of the provisions of Section iI ) (22)(e) of the Act, 196 1, any payment by way of advance or loan amounts should be treated as a 'deemed dividend'. Tl e putpose for which the loan was taken is immaterial. 7 . Having heard learned counsel for t re appellalts, learned Senior Standing Counsel for the D I lartment arrd considering the material on record, the substar: t a-l question of law which arose before this Court is as follows: Whether on the facts and circumstairces of lhe case tht lT \T was justihed in Iaw in allowing thc revcnue appeal in tre.l 1g ttre advances taken from company as deemed dividend u/ 2 (22)(e)?" 8. Admittedly, the appellants herein, who are the Directors of M/s. BDR Projects Private Ltd., hr lding share of lO% by Smt. B.Seetharatnam \- \, and 33.33% by

Page 9 of 16 PSK,I & NNRJ itta 354 2013&batch Sri Danunjayarao and during the period of Assessment Year 2OO2-2OO3, 2OO3-2OO4 and 2006-2007 both the Directors intend to construct a building jointiy on the property bearing No.8-2-293182/NLl6A, situated at MLA &MP Colony Road, No. lOC, Jubilee Hills, Hyderabad, admeasuring 6OO square yards, which was acquired during the year 20OO in the name of Smt. B.Seetaratnam. The said plot was pledged as collateral security in Andhra Bank against the credit faciliry availed by the company lor its business purpose. It is also stated that during the assessment year 2OO2- 2OO3 aod 20O6-2007, the Director Sri B.Dhanunjaya Rao had obtained advance of Rs.08.59 lakhs and Rs.20.OO lakhs respectively, making total sum of Rs.28.59 lakhs and Smt. B.Seetaratnam, the other Director for the year 2OO3-20O4 and 2006-2007 availed advance of Rs.30.00 lakhs and Rs.20.00 lakhs respectively making total sum of Rs.50.00 lal<hs and in total both Directors have availed advance of Rs.78.59 lakhs. 9. It is stated that the reason cited is that the were pledged to the balk as collateral security properties

PaEe 10 of 16 PSK,] & NNR,J itta 354 2013&batch against credit facilities availed by the company i r its business purpose and they have not obtained for their inrl ',idual benefit The Assessing Officer while processing the assess ments filed by the Directors for the Assessment year 2OO2-2C ( 3, 2003-2004 and 2006-2007, the Assessing Officer processcrl under Section 143 of the Act, 1961, wherein it was noticed t nat thev have taken advalces for an amount of <78.59 lakhs r r total bv both the Directors who were holding share of 1a.69'y, rnd 33.33%o of individual, as such said advances were trea t d as deemed dividend and within the meaning of Section 212: )(el of the Act, 196 1, as such a notice was as issued under Se,: ion 148 of the Act, 1961 on 76.07.2OO7 and accordingly mad,: zLn addition of the advances made to the Directors and :ompleted the assessment and taking the total income, i test order of assessment was passed under Section 1a3 (3) iL rd Section 147 of the Act, 196 1. 10. As it is the case of the assessee tlr rt since it has mortgaged the property with the bank to enable he company to avail the frnance facilities from the bank, the i dvalce by the

Page 11 of 16 PSK,J & NNR,J itta 354 2013&batch company is not a gratuitous loan or advance, but in return for an advantage which the company has already availed on account of mortgaging of the properties done by the assessee. The appellants have relied upon the judgment of the High Court of Calcutta in Pradip Kumar Malhotra's case, wherein at paragraph Nos.11, 12, 13, it was held as follows: "ln the case before us, the assessce permitted hrs property to be mortgaged to the bank for enal)hng thc compan)'to lake thc bcncfir of loan and in spite of request of thc assessec, lhc company rs unable to release the propert), frorn rhe morlgagc. In sLrch a situatcd, ,or retaining the benelil of loan avarled of from Vijaya []ank rf tlccrsron rs ta-ken Lo give advance to thc asscsscc sut:h dccrsron rs not lo grvc gratuitous advance to its shareholder but to prolect the busLness interest of the company. The view we propose to take finds support from the ru! dccisions, onc of the Bombay High Court and the other of lhc t)elhi Hrgh Court rclied upon by Mr.Khaitan as indrcated earlier. We, tierefore, find that the authorities b€low erred ln law ln treatrng the advance given by the company to the assessee by way of compensation to the asessee for keeping his property as mortgage on behaf of the company to reap the benefrt of Ioan as dcemed dividend rqithi'l the meaning of section 2 (22)(e) of the Act." 11. The contention of the assessee is that they being the Directors of the said Company have taken loans from the banks for its business purposes and as Directors they have offered \ \

Page 12 of 16 personal security of their properties worth Rs.30! Rs.139.09 lakhs respectively to the hnancial inst i said loans are utilized for the pufpose of const property and the sarne was pledged to the ba r security by the Directors. It is further contendr< Ioans were not utilized for their personal benefit. 12. On contra, the leamed Senior Stand r the Department argued that in view of the provil (21 (221(el of the Act, 196 1, any payment by wa'' loal amounts should be treated as a'deemed < purpose for which the loal was taken is immateri 13. For better understanding of the cas( necessary to extract the meaning of the 'Deemed l "Any benefit or payment other than the distribution ( f profits, made by a company to its shareholder, who holds rn of voting rights or related parties, whether as an official d ' is known as a 'deemed dlvtdend'. These payments can l)( ar advance or transfer of an asset other than cash. '' l 'deemed dividend'orrJy applies to private companies or corr public participation is minimal Advance or Loan by a r c shareholders. PSK,J & NNR,] rta 354 2013&batch .61 lakhs and ution and the -uction of the < as personal thzrt the sard g Counsel for >ns of Section of advance or iwidend'. The il. rn hand, it is )ividend. ' accu rnulate d rre than 1O'2, dend or not, r tho form of e concept of :anics where nparry to its 1

Page 13 of 16 PSK,] & NNR,I itta 354 2013&batch Secuon 2 (22llel: As per Section 2(22)(e) of the Act, 1961, any advalrce or loan to the extent of accumulated profits given to a shareholder who has a beneficial interest, by a private company. Here a beneficial shareholder means one who holds 1070 or more of the equit] capital of the company. The payment must be a loan, advance, or any sum paid on behalf of or for the individual benefit of a shareholder. Trade advances made in the ordinary course of a business that involves money lending are excluded. Shareholder Criteri.a: The payment must be made to a shareholder who is the benehcial owner of shares carrying at least lo'/u of the voting power." 14. Section 2(221(el of the Act, 1961, clearly and categorically says that any loan or advance be availed by the shareholder for his individual benefit. Here in this case, as it is the case of the assessee that there is no such individual benefit, as the entire assets were given as a guarantee to raise funds by the company from financial institutions for purpose of business therefore the said provision will not be applicable to this case As the case of the assessee is that the benefrts goes to the company but not to al indMdual Director and since Section 2(22)(el of the Act, 1961 mandates that any loan which has to be extended shor.rld be out of ald from the accumulated prohts

Page 14 of 15 PSK,J & NNR,J tta 354 2013&batch of the Company, as on 31.03.2002 and 3 03.2001, the Companl, has accumulated the prohts to an 3xtent of Rs. 2,4g,53,925/- and Rs. 1,AO,47,986 reserves anc surpluses. As per the compary account extract, it shows that ll ey have made the payments aggregating to Rs.8,59,13O/- by "r ay of advance during the year under the consideration. 15. As seen from the judgment passed b ' the Tribunal at Paragraph No.11, which shows that to believe the version of the assessee as the assessee did not prodlrce arr.documentary evidence to show that they have in fact s r bmitted their personal properties for mortgaging with the banl< for the sake of availing loans by the company and except t E e letter dated 31.03.2008 in the Andhra Bank, which was srrmitted in the paper book and it is disbelieved by the Tribur al, contending that it does not establish the fact that the g roperties were mortgaged with the bank. Having disbelieved th: said letter and also it is further held that assessees have als< not produced any correspondence made either with the bar k or with the company towards release of the properties mort;1 tged. t

Page 15 of 16 PSK,I & NNR,I itta 354 2013&batch 16. As was the fact in Pradeep Kumar Malhotrats case before the Calcutta High Court, wherein the said judgment though says that the loan to shareholder. The aforesaid judgment relied upon by the learned Standing Counsel and also by the assessee before this Court applies to the facts on the case. As the main reason for dismissal of the appeals was that the assessee did not place any material evidence to show that the property was subjected to mortgage by the pet itioner for the benefit of the company. L7 . In the absence of arry such documentary proof as it shows that the Tribunal disbelieved the version of the assessee ald thereby dismissed the appeals of the assessees. As such, we are of the considerable opinion that the frnding given by the Tribunal cannot be found fault with for the reason that the basically the assessee did not place any material to show that if the said loans were obtained by way of advances and loans were obtained for the beneht of the company and by mortgaging their property. In the absence of any such proof, the Tribunal has rightly disbelieved the version and set aside the order ofthe

Page 15 of 16 PSK,.' & NNR,J ta 354 2013&batch commissioner and thereby restoring the finding to treat the advances and loals avajled by the assessee Ls a deemed dividend 18. Hencc, for the aforesaid reasons, tk e substantia-l question of law stands answered accordingly ir favour of the State-Revenue and against assessees' Cons,t quently, the appeals hled by the appellant fail and are cl, serves to be dismissed. 19. Accordingly I.T.T.A.Nos.354, 355, 4rr ) arld 476 of 2Ol3 are dismissed. There shall be no order as t3 costs. Miscellaneous petitions, if any, pendine shali stand closed //TRUE COPY// EKHAR RAO REGISTRAR rsEcrloN oFFlcER sD/- NAYANI CHAI'DRA S - I):PUTY To, ABK 1. The lncome Tax Appellate Tribunal' Hyderabad-Bench / " Hyderabad' ,. d;'iCi;-sri-N Puinachandra Rao' Advocate [oPUCl 3. one CC to Ms eor,'o dJpn; Reddy' (Senior Sb lncorn I Tax)' Advocate loPUCl 4. Two CD CoPies w

HIGH COURT PSK,J & NNR,J DATED: 0411212025 COMMON JUDGMENT ITTA Nos: 354, 355, 469 & 476 OF 2013 DISMISSING ALL THE ITTA Nos. WTTHOUT COSTS i[; U i0fr i/' i .ii . .,/ ,,.:,-,,.'/. --. -. _. -...;'-- r ondu[ \o \cL@# i I