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Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
Before: H.S.SIDHU & SHRI PRASHANT MAHARISHI
Assessee by : Mr. Kapil Goel, Adv Revenue by: Sh. T. Vasenthan, Sr. DR Date of Hearing 09/03/2016 Date of pronouncement 06/05/2016 O R D E R PER PRASHANT MAHARISHI, A. M. This is appeal filed by the assessee against the order of the ld CIT (A)-XVI, 1. Delhi dated 28.01.2013 for the Assessment Year 2009-10. The assessee has raised the following grounds of the appeal:- 2. “1. The assessing officer & CIT(Appeals) have rejected the claim of the assessee that out of the total amount received, a sum of Rs. 15,00,000/- has been received as security deposit against the property let out to the Company.
2. That while ascertaining the amount of, accumulated profits of the Company for the purposes of section 2(22)(e), the following two adjustments are required to be made:- a) Reduction of Rs. 2,15,683/- on account of accrual to deferred tax assets, credited to the Profit & Loss Account of the Company, being a notional profit. b) Reduction of Rs.320517/- being prepaid expenses, not debited to the profit and loss account of the company.”
The assessee is an individual filed its return of income on 23.07.2009 for income of Rs. 539793/-. During the course of the assessment proceeding assessee was asked to furnish details of share holding in various companies. It was found that the assessee has 97% of share holding of one company namely Ocean King Shipping Services Pvt. Ltd. During the year total amount received by the assessee from that company was Rs. 2377000/-. The ld Assessing Officer asked the assessee that why it should Page 2 of 7 not be treated as deemed dividend under the provision of section 2(22)(e) of the Income Tax Act. Assessee submitted that the amount is paid as a security deposit of Rs. 15 lacs against the tenancy rights, against the property let out to the company. The ld Assessing Officer rejected the contention of the assessee and treated Rs. 2377000/- as deemed dividend. Assessee preferred appeal before the ld CIT(A), who in turn reduced the addition to Rs. 1123551/- up to the accumulated profit of the lender company. Therefore, the assessee is in appeal before us.
The ld AR of the appellant submitted that in the Board Meeting 1st August 2008., the company has taken on rent the property of the assessee at 305, Aggarwal Bhawan, 35-36, Nehru Palace, new Delhi-19 admeasuring 576 sq/ft for a monthly rent of Rs. 6000/- and also security deposits of Rs. 15 lacs was paid by that company to the assessee. He said that all these facts are undisputed. Ld CIT(A) has imputed that appellant is holding 97% shares of the company and other share holders is his wife therefore he disbelieved the transaction of security deposit for rented property, which is incorrect as both are separate entities. He further submitted the ledger account of the company wherein the total amount received from the company is Rs. 2386493/- and whereas amount paid to the company was Rs. 2455000/-. Therefore, he submitted that in fact there is no loan from the company to the assessee. He therefore stated that in the business transactions the provision of section 2(22)(e) cannot be applied. He further stated that there are large transactions on both the sides and the funds are moving on needs basis to and from the parties. Therefore, they are not in the nature of advances in the nature of loan. For this he relied on the decision of Hon’ble Gujarat High Court in CIT Vs. SCHUTZ Dishman Biotech Pvt. Ltd. in Tax Appeal No. 958, 959/2015 dated 21.12.201. He further relied on the decision of the Kolkata Bench of ITAT in wherein it is held that where there is running mutual current account it cannot be charged to tax u/s 2(22)(e) as it is a current account and not loan. He further relied on the decision of Hon’ble Kolkata High Court in case of Pradeep Kr. Malhotra Vs. CIT, in ITA No. 219/2003 dated 2nd August 2011. Therefore, he submitted that the addition confirmed by the ld CIT(A) is erroneous and may be deleted.
Page 3 of 7 5. Ld DR relied on the orders of the lower authorities vehemently and submitted that assessee is the 97& shareholder of the company and therefore the transaction of security deposit is shown to subvert the provision of section 2(22)(e) of the Act. He stated that ld CIT(A) has taken all the aspects of the transaction into consideration including the accumulated balances of reserve and surplus from the balance sheet of the lender company and therefore no further relied is allowable to the assessee.
We have carefully considered the rival contentions. The fact of the property of the assessee taken on rent by Lender Company is not in dispute. It is not also in dispute the resolution of the company dated 1st August 2008 was with respect to the renting of the above property from the assessee and simultaneously paying security deposit of Rs 15 lakhs to the assessee. The only reason given by the ld CIT(A) is that security deposit can be given only for recovery of unpaid rent, influence the quantum of the rent and to recover the damages caused to the property. All these three reasons have been negated by ld CIT(A) holding that as assessee is 97% share holder and the security deposit is paid later on it is not acceptable as the objective of security deposit are irrelevant in this case. We failed to understand such a finding by the ld CIT(A) when assessee as well as the lender company is two different distinct entities in the eye of law. It is also common practice to ask for security deposit when the rent is on lower side to compensate the lender. This is what is argued by the assessee and it was not controverted by the lower authorities. In view of this, the terms and condition of the rent pursuant to which security deposit is paid cannot be brushed aside. Further, on looking at the account of the lender company from the books of the assessee which is placed at pg No. 19 of the paper book shows 14 entries on the credit side and 3 entries on the debit side excluding the transaction of security deposit paid and received. Generally, In each of the month, there is a transaction. This shows that the assessee is maintaining with the company a current account where the money is flowing on need basis. The coordinate bench of ITAT in has dealt with an identical issue where there are multiple entries and then relying on the decision of the Hon’ble Kolkata High Court in case of Pradeep Kr. Malhotra (supra) has deleted the addition of deemed Page 4 of 7 dividend chargeable u/s 2(22)(e) of the Act. The coordinate bench has held as under:- 11. We have given a very careful consideration to the rival submissions. A copy of the ledger of the Assessee in the books of BAPL is placed at pages 41 to 46 of the Assessee's paper book. A copy of the statement showing the balance after every transaction in the Assessee's ledger in the books of BAPL is placed at page 47 to 52 of the Assessee's paper book. The same is given as annexure to this order for better appreciation of facts.
A perusal of the statement of balances of transactions between the Assessee and BAPL shows that as on 2.4.2008 BAPL owed Assessee a sum of 1,95,000. BAPL paid the Assessee a sum of Rs.2.4.2008 a sum of Rs.21,05,000 and the Assessee owed BAPL a sum of Rs.19,10,000. The amounts given in the bracket in the last column of the enclosed balances in the running current account is the amount which BAPL owed the Assessee. Mutual transactions go on in this fashion throughout the previous year Smt.Gayatri Chakraborty A.Yr.2009-10 and as on the last date of the previous year the account is squared i.e., neither the Assessee owes BAPL nor BAPL owes Assessee any sum. The Assessee was beneficiary of the sums given by BAPL at some point of time during the previous year and BAPL was the beneficiary of the sums given by the Assessee at another point of time during the previous year. It was therefore a case of mutual running or current account which created independent obligations on the other and not merely transactions which created obligations on the other side, those on the other being merely complete or partial discharge of such obligations. There were reciprocal demands between the parties and the account was mutual.
This tribunal in the case of Mr.Purushottam Das Mimani (supra) on identical facts came to the conclusion that the account between the Assessee and a public limited company was a running mutual current account and thereafter following the decision of the Hon'ble Calcutta High Court in the case of Pradip Kumar Malhotra (supra) held as follows: "4. We have heard rival submissions and gone through facts and circumstances of the case. We have gone through the facts of the case and found from the perusal of ledger account of assessee in the books of account of Ganesh Wheat Products (P) Ltd., the lender company, it is seen that as on the first day of the relevant accounting year 2005- 06 (A.Y. 2006-07) opening balance is at Rs.28,07,584/-. Thereafter, on several dates during the entire financial year there were several transactions through cheques and some in cash by either parties, i.e. the assessee and the loan giving company, resulting in shifting balances. On many occasions the balance was in favour of the assessee and on some other occasions the balance was in favour of Ganesh Wheat Products (P) Ltd. The ledger of the assessee further reveals that no payment by loan creditor is followed by a repayment by the loan debtor and, in fact, the payments by the assessee and Page 5 of 7 Ganesh Wheat Products (P) Ltd. are independent of one another. No interest was charged by either side for advancing money on mutuality inasmuch as the loan account was a current account in nature. It is thus evident that there were reciprocal demands between the parties and thus mutual in characteristic. At the close of accounting year as on 31-03-2006, debit balance stood at a sum of Rs.18,87,522/- which was duly reflected in the balance sheet under the head Loans & Advances. Similarly, in respect of Mima Flour Mills opening balance was Nil and there were several shifting of balance and the resultant debit balance was Rs.5,00,833/-. For A.Y. 2007-08, in respect of Mima Flour Mills, opening balance was Rs.5,00,833/- and after shifting balance, the debit balance came to nil. In respect of Ganesh Wheat Products, opening balance was Rs.18,87,522/- and after shifting balance the credit balance came to Rs.9 lakhs. On perusal of the ledger account of the assessee in the books of M/s. Mima Flour Mills (P) Ltd. it is seen that on several dates there were shifting balances. On many occasions the balance was in favour of the Smt.Gayatri Chakraborty A.Yr.2009-10 assessee and on some other occasions the balance was in favour of Ganesh Wheat Products (P) Ltd. It is thus evident that there were reciprocal demands between the parties and thus mutual in characteristic. The account so maintained in respect of such mutual transfer of amount by way of giving and taking financial assistance is, therefore, a current account and this current account is different from a loan account for the sole reason that feature of mutuality is not present in a loan transaction.
Here in the present case, from the facts narrated above, it is clear that both the parties are beneficiary of the transaction being current account of the above transactions i.e. shifting balances. This issue has been answered by Hon'ble Calcutta High Court in the case of Pradip Kumar Malhotra v. CIT 338 ITR 538 (Cal) wherein Hon'ble High Court held as under: "The phrase "by way of advance or loan" appearing in sub-clause (e) of section 2(22) of the Income-tax Act, 1961, 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 shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate ín profits) holding not less than ten per cent. of the voting power; but if such loan or advance is given to such shareholder as a consequence of any further consíderation which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to be deemed dividend withín the meaning of the Act. Thus, gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder." From the above facts and legal proposition decided by Hon'ble jurisdictional High Court, it is clear that section 2(22)(e) of the Act was Page 6 of 7 inserted to bring within the purview of taxation those amounts which are actually a distribution of profits but are disbursed as a loan so that tax thereon can be avoided. It is pertinent to note here that when dividends are declared by a company, it is solely the shareholders who benefit from the transaction. No benefits accrue to the company by way of dividend distribution. Thus, section 2(22)(e) of the Act covers only such situations, where the shareholder alone benefits from the loan transaction, because if the company also benefits from the said transaction, it will take the character of a commercial transaction and hence will not qualify to be dividend. In the case of the assessee, by giving and taking financial assistance from each other, both the assessee and the company were benefited and such transactions between them were nothing but commercial IT(SS)A No.60-62 & 73- 76/Kol/2011 A.Ys.06-07 to 08-09 and 02-03 to 05-06Mr. Purushottam Das Mimani. v. DCIT, CC-V, Kol Page 5 transactions and dividend attributable to the shareholder is nothing to do with such business transaction. From the above discussions it can be said that sec. 2(22)(e) of the Act covers only those transactions which benefit the shareholder alone and results in no benefit to the company. On the other hand, if the transaction is mutual by which both sides are benefited, it is undoubtedly outside the purview of provisions of sec. 2(22)(e) of the Act. From the above, it is clear that the loan account differs from current account and the provisions of section 2(22)(e) of the Act, being a deeming section, cannot be applied to current account. In such circumstances, we delete the addition and this common issue of assessee's appeals is allowed."
We are of the view that in the present case also the transactions in question does not benefit the shareholder i.e., the Assessee alone and the results in no benefit to the Company BAPL. The loan account is different from a current account with a shareholder and the transactions between the Assessee and BAPL are in the nature of current account and provisions of Sec.2(22)(e ) of the Act will not be applicable to the case of the Assessee. We therefore concur with the decision of the CIT(A) and dismiss the appeal of the Revenue.”
On perusal of the above decision, it is important that unless advances it is not gratuitous to its shareholder but it is to protect the business interest of the company, it falls out of the purview of taxation u/s 2(22) (e) of the act. Further, it is not a current account but advances in the nature of loan which assessee enjoys, simply on account to being a share holder exceeding specific percentage, then only, the provisions the section 2(2)(e) of the act comes into play. The above view further gets support from the decision of Hon’ble Delhi High court in the case of CIT Vs. Creative Dying and Printing Pvt. Ltd [318 ITR 476]. No other contrary decisions were brought to our notice by the ld DR. In view of the above finding we reverse the finding of the ld CIT(A) in confirming the addition of Rs. 1123551/- as deemed dividend u/s 2(22)(e) of the Act. We also clarify that in the present appeal the