ITO, CHENNAI vs. PEACOCK CHENNAI FINVEST PRODUCTS PVT. LTD., CHENNAI

Shri B. Sahadeevan, the Ld. Departmental Representative submitted that the only issue arises for consideration is disallowance made by the Assessing Officer to the extent of ₹38,59,002/- under Section 2(22)(e) of the Income Tax Act, 1961 (in short ‘the Act’). According to the Ld. D.R., the assessee has received a loan of ₹18.15 lakhs from M/s. G.M.P Properties Pvt. Ltd. According to the Ld. D.R., the assessee company is having more than 20% of the share holding in M/s. G.M.P Properties Pvt. Ltd. Therefore, the Assessing Officer found that the loan received from M/.s G.M.P Properties Pvt. Ltd. is a deemed dividend under Section 2(22)(e) of the Act. The assessee claimed before the Assessing Officer that the advance was made for the purpose of making investment in some landed properties. However, the assessee could not substantiate the so called investment. According, to the Ld. D.R., M/s. G.M.P Properties Pvt. Ltd. is not in the business of real estate and not in the business of money lending. Therefore lending of money by M/.s G.M.P Properties Pvt. Ltd. cannot be in the ordinary course of its activities. Referring to the order of the CIT (Appeals) and by placing reliance on the judgment of the Madras High Court in CIT v Madurai Chettiyar Karthikeyan, 223 Taxmann 350 Madras, the Ld. D.R., submitted that the assessee before the Madras High Court was in the business of real estate.

On the contrary, Shri Quadir Hoseyn, the Ld. counsel for the assessee submitted that there was an agreement between M/.s G.M.P Properties Pvt. Ltd. and the assessee company on 11.08.2016. As per the agreement, the assessee has identified certain new projects for joint development. The M/s. G.M.P Properties Pvt. Ltd. agreed to invest in the project of the assessee company. The Ld. counsel further clarified that the assessee company invested the funds in another company which deals in real estate business. Referring to the object of M/.s G.M.P Properties Pvt. Ltd., the Ld. counsel submitted that the main business of the 4 assessee is real estate. The Ld. counsel further submitted that out of commercial expediency, M/.s G.M.P Properties Pvt. Ltd. advanced a sum of ₹18.15 lakhs to the assessee company which was in turn invested in another real estate company called M/s. Galaxy Properties Pvt. Ltd. Therefore, the CIT (Appeals) has rightly placed his reliance on the judgment of the Madras High Court in Madurai Chettiyar Karthikeyan supra and allowed the claim of the assessee.

We have considered the rival submissions on either side and perused the material available on record. It is not in dispute that the assessee has received ₹18.15 lakhs from M/s. G.M.P Properties Pvt. Ltd. It is also not in dispute that M/s. G.M.P Properties Pvt. Ltd. is in the business of real estate. Money lending is not one of the objects of M/.s G.M.P Properties Pvt. Ltd. The assessee now claims that in pursuance of agreement dated 11.08.2006, the assessee received advance of ₹18.15 lakhs for the purpose of making investment in the real estate business. The Ld. counsel claims that the amount received by the assessee to the extent of ₹18.15 lakhs was invested in another company M/s. Galaxy Properties Pvt. Ltd for the purpose of making investment in the landed properties. The question arises for consideration is whether the advance / loan received by the assessee to the extent of ₹18.15 lakhs could be considered as deemed dividend under Section 2(22)(e) of the Act. We have carefully gone through the provisions of Section 2(22)(e) of the Act.

We have also carefully gone through the agreement between M/s. G.M.P Properties Pvt. Ltd. and the assessee dated 11.08.2016. As per this agreement, the assessee appears to have been identified few investment projects in the area of commercial real estate and also for joint development of properties either by the assessee or through its associate companies. The fact remains is that the assessee company has not used the funds received from M/s. G.M.P Properties Pvt. Ltd. for making any investment in the landed properties. In fact, the money was further diverted to M/s. Galaxy Properties Pvt. Ltd. If the intention of the M/s. G.M.P Properties Pvt. Ltd. was to invest the funds in the real estate, this Tribunal is of the considered opinion that would have invested the funds directly since, that company was in the business of real estate. Moreover, the assessee company also has not invested the funds in any real estate business. The funds were merely diverted to M/s. Galaxy Properties Pvt. Ltd. Therefore, it is obvious that the assessee company received ₹18.15 lakhs and diverted the same to M/s. Galaxy Properties Pvt. Ltd. Hence, the money paid to the assessee company is nothing, but diversion of the profit of M/s. G.M.P Properties Pvt. Ltd. The assessee is holding more than 20% of the shares, therefore, ₹18.15 lakhs received by the assessee has to be definitely treated as deemed dividend under Section 2(22)(e) of the Act.

We have also carefully gone through the judgment of the Madras High Court in the case of Madurai Chettiyar Karthikeyan supra. In the case before the Madras High Court one Shri Vekkaliamman Builders and Promoters was a proprietorship concern. The proprietor of Shri Vekkaliamman Builders and Promoters also happens to be the Managing Director of Southern Academy of Maritime Studies Pvt. Ltd. In fact, he was holding 63% of the shares in Southern Academy of Maritime Studies Pvt. Ltd. The Managing Director being the proprietor of Shri Vekkaliamman Builders and Promoters, received advance from the company for construction of building. It is not in dispute that the building was constructed for the company also. Therefore, the Madras High Court found that the assessee had executed the work for the company in the nature of construction of building. Therefore a transaction between the company and the Managing Director, who happens to be the proprietor of Shri Vekkaliamman Builders and Promoters is a simple business transaction. Therefore the provisions of Section 2 (22) (e) of the Act is not applicable at all.

In the case before us, even though the money was said to be advance for business purpose and for commercial expediency, in fact, the assessee company has not invested the funds in any of the landed properties as per the agreement. The money was diverted to another company namely Galaxy Properties Pvt. Ltd. When the funds are diverted to M/s. Galaxy Properties Pvt. Ltd. by the assessee company, this Tribunal is of the considered opinion, it cannot be said that there was any business expediency as claimed.

We have also carefully gone through the orders of the lower authorities. The Assessing Officer after examining the balance sheet found that as on 31.03.2006, the accumulated profit of M/s. G.M.P Properties Pvt. Ltd. was ₹38,59,002/-. Therefore, even though a sum of ₹18.15 lakhs was advanced by the assessee, the Assessing Officer has rightly restricted the addition to the extent of accumulated profit as on 31.03.2006. Therefore, this Tribunal is of the considered opinion that the CIT (Appeals) is not justified in allowing the claim of the assessee. Accordingly the order of the CIT(Appeals) is set aside and that of the Assessing Officer is restored.

In the result, the appeal of the Revenue stands allowed.