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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI ABRAHAM P. GEORGE
Per N.V. Vasudevan, Judicial Member
This appeal by the Revenue is against the order dated 31.7.2013 of the CIT(Appeals)-I, Bangalore relating to assessment year 2008-09.
The first issue that arises for consideration in this appeal is as to whether the CIT(A) was justified in estimating the annual letting value (ALV) of the property at 8.5% on the total investments for the purpose of determination from house property u/s. 22 of the Act and in doing so, whether he was justified in following the decision of Hon'ble Gujarat High Court in Bipin Bhai Vadilal Family Trust v. CIT, 208 ITR 1005.
The facts giving rise to the aforesaid issue are that the assessee who is an indivdiual, owned a property at 408, 2nd A Cross Road, 3rd Block, Kormangala, Bangalore - 560 034. The property was let out to Hindustan Infrastructure Projects & Engineering Pvt. Ltd. The assessee received a sum of Rs.9 lakhs as rents for letting out of the aforesaid property during the previous year.
The AO was of the view that considering the location of the property, the annual rent declared by the assessee was very low. The AO thereafter after a discussion about the prevailing rate of rents in that area, worked out the rental income of the property as follows:-
Rental income from Koramangala Property No.408 43,20,000
Less: Property tax paid . 29,722 42,90,278 Less: 30% for repairs 12,87,083 Income 30,03,195
On appeal by the assessee, the CIT(A) held that ‘fair rent’ for the property mentioned in the lease agreement between the parties for the property No.407, 408 & 409 has to be fixed. He found that as per material on record revealed that the property was constructed over residential sites that were acquired during the F.Y. 2002-03 and investment made thereon site-wise as follows:-
F.Y. Site No. Total Investment (in Rs.) 2002-03 407 1,50,79,801 2003-04 408 1,70,38,249 2004-05 409 2,21,18,288 Total 5,42,36,338
The CIT(A) held that as per the decision of Hon’ble Gujarat High Court in Bipinbhai Vadilal Family Trust (No.1) v. CIT (1994) 208 ITR 1005, the fair rent of the property would be Rs.46,10,080 per annum being 8.5% of the total investment of Rs.5,42,36,338. Based on this, working for six months, rental income would be Rs.23,05,040 and accordingly he directed the AO re-compute income under the head ‘income from house property. In this connection, he also observed that the doctrine of res judicata or estoppel does not apply as held by Hon’ble Supreme Court in New Jehangir Vakil Mills Co. Ltd. v. CIT (1963) 49 ITR 137 (SC). Thus, assessee was allowed a relief of Rs.20,14,960 by the CIT(A).
Aggrieved by the order of CIT(A), the revenue has preferred the present appeal before the Tribunal.
We have heard the submissions of the ld. DR, who reiterated the stand of the AO. The ld. counsel for the assessee relied on the order of CIT(A).
We have considered the rival submissions. Perusal of the order of CIT(A) shows that annual value for the property in question has been determined by BBMP at Rs.29,722 for the relevant financial year. The Hon'ble High Court of Karnataka in the case of Shri P. Balakrishnan v.
CIT, ITRC No.59/1982 dated 26.2.1982 has taken the view that in the absence of any other details, the ALV fixed by the Corporation is the yardstick for determination of ALV u/s. 23 of the Act. If that yardstick is applied, then the actual rent received by the assessee would be much greater than the ALV determined by the BBMP. The CIT(A), has however determined the ALV u/s. 22/23 of the Act on the basis of Hon'ble Gujarat High Court referred to in the grounds of appeal by the Revenue. The course adopted by the CIT(A) is favourable to the Revenue, but the assessee has not chosen to challenge the same. In the light of law as declared by the Hon'ble High Court of Karnataka and in view of the fact that the CIT(A) has determined the ALV at a much higher figure than what is contemplated by the decision of Hon'ble High Court of Karnataka and in view of the fact that the assessee has not challenged the said determination of ALV by the CIT(A), we are of the view that the order of CIT(A) calls for no interference and should be confirmed. We hold accordingly and dismiss the relevant ground viz., grounds No.2 & 3 raised by the Revenue.
10. The second issue that arises for consideration is as to whether CIT(A) was justified in deleting the disallowance of interest of Rs.10,45,850 on borrowings made. As far as the aforesaid issue is concerned, the facts are that the assessee, as we have already seen, was the owner of property at Koramangala from which he received a rent of Rs.9 lakhs during the previous year. The assessee against the aforesaid income of Rs.9 lakhs claimed deduction u/s. 24(1) of the Act of a sum of Rs.15,57,000 and declared loss under the head income from house property. The AO disallowed the claim of assessee for deduction u/s. 24(1) of the Act on the ground that assessee did not prove with documentary evidence the nexus between the loan taken and acquisition of property.
11. On appeal by the assessee, the CIT(A) gave the following findings:-
“4.4 I have considered the appellant’s submissions and the reasons given by the AO in the assessment order. As mention in preceding para that property bearing No. 407, 408 and 409 acquired during the financial year 2002-03 and total investment made thereon of Rs.5,42,36,338/-. Initially loan was borrowed from ING Vysya Bank which was repaid by obtaining loan from M/s Innovision Properties Pvt. Ltd. amounting to Rs.5,19,00,000/-. Here it would be worthwhile to mentioned that said loan was taken for purchase of four sites i.e. site No. 407, 408, 409 and 445 at Koramangala and investment made in site No.445 at Rs.1,70,37,600/- and remaining Rs.3,48,62,400/- towards purchase of site No.407, 408 and 409. Further it is also observed that the outstanding loan as on 29/06/2084 was repaid after obtaining loan from M/s Tayana Consult Pvt. Ltd. of Rs.5,61,81,550/- on 29/06/2004. Thus if at all interest to be charged on Rs.3,48,62,408/- not on Rs.5,19,00,000/-, since site No.445 was not subjected to lease agreement. Thus the total interest would comes at Rs.20,91,744/- and six months interest would be Rs.10,45,872/-. The Assessing Officer is therefore directed to consider interest of Rs.10,45,872/- while computing income under the head ‘Income from House Property.’ Thus the appellant partly succeeds in this ground.”
Aggrieved, the Revenue has raised the aforesaid issue before the Tribunal in the form of ground No.4.
We have heard the submissions of the ld. DR who relied on the order of AO and the ld. counsel for the assessee who relied on the findings of CIT(A).
We have considered the rival submissions. The findings of the CIT(A) clearly show that assessee had borrowed loans for the purpose of acquiring the property. There is no material on record brought out by the Revenue to dislodge the findings of CIT(A). In view of the above, we find no merits in ground No.4 and the same is dismissed.
The third issue that arises for consideration in this appeal is as to whether the CIT(A) was justified in deleting the addition made by the AO on a sum of Rs.3,10,28,384 as deemed dividend u/s. 2(22)(e) of the Act.
On the above issue, the undisputed facts are that the assessee had received advance from M/s Jupiter Capital Pvt. Ltd to the tune of Rs.3,10,28,384. The AO sought for an explanation as to why the said amount should not be treated as deemed dividend u/s. 2(22)(e) of the Act. The assessee vide letter dated 12/11/2010 replied that the amount received was neither a loan nor advance simpliciter and it was an advance towards sale of property and further the appellant was not a shareholder in Jupiter Capital Pvt. Ltd. and consequently the amount could not be held to be deemed dividend by applying the provisions of section 2(22)(e) of the Act.
The AO, however, held that though the appellant was not a shareholder in Jupiter Capital Pvt. Ltd, he was shareholder with 95% shareholding in M/s Vectra Holdings Pvt. Ltd. which in turn was holding 99.9% share holding in Jupiter Capital Pvt. Ltd. Accordingly, it was held that the assessee being the beneficiary of dividend in Vectra Holdings which in turn is a beneficiary of dividend from Jupiter capital Pvt. Ltd., he can be held as beneficiary or actual owner of share of Jupiter Capital Pvt. Ltd. Accordingly the advance in question was treated as deemed dividend in the hands of assessee u/s. 2(22)(e) and added to the total income of the assessee by the AO.
On appeal by the assessee, the CIT(A) deleted the addition made by the AO holding that since the assessee was not shareholder in M/s. Jupiter Capital Pvt. Ltd., the same cannot be assessed as deemed dividend in the hands of assessee.
Aggrieved, the Revenue has raised the aforesaid issue in ground Nos. 5 & 6 before the Tribunal.
We have heard the submissions of the ld. DR who relied on the order of AO. The ld. counsel for the assessee relied on the order of CIT(A).
We have heard the rival submissions. The provisions of Sec.2(22)(e) of the Act, reads as follows:
“(e) Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31-5-1987, by way of advance or loan to a shareholder, 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 in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.”
Explanation-3 to Section 2(22)(e) is as follows:
“Explanation-3: For the purpose of this clause- (a) “concern” means a Hindu Undivided Family, or a firm or an association of persons or a body of individuals or a company; (b) A person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty percent of the income of such concern;”
Section 2(32) defines the expression “person who has a substantial interest in the company”, in relation to a company, means 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 in profits, carrying not less than twenty percent of the voting power.
An analysis of the above provisions shows that there are three limbs to Sec.2(22)(e) which are as follows:-
“Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31-5-1987, by way of advance or loan First limb (a) to a shareholder, 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 in profits) holding not less than ten per cent of the voting power, Second limb (b) or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) Third limb (c) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.”
In the present appeal we are concerned with the second limb of Sec.2(22)(e) of the Act, viz., “to any concern in which such shareholder is a member or a partner and in which he has a substantial interest”. The following conditions are required to be satisfied for application of the above category of payment to be regarded as Dividend. They are:-
(a) There must be a payment to a concern by a company. (b) A person must be Shareholder of the company being a registered holder and beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power. This is because of the expression “Such Shareholder” found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of Sec.2(22)(e) viz., a registered and a beneficial holder of shares holding 10% voting power. (c)The very same person referred to in (b) above must also be a member or a partner in the concern holding substantial interest in the concern viz., when the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than twenty percent of the income of such concern; and where the concern is a company he must be the owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty percent of the voting power (d) If the above conditions are satisfied then the payment by the company to the concern will be dividend.
The Special Bench of ITAT, Mumbai, in the case of Bhaumik 26.
Color Labs ITA 5030/M/04, 118 ITD 1 (SB) (Mum), considered the question Whether deemed dividend u/s. 2(22)(e) of the Income Tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender? The Special Bench held that deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. The Special Bench on the above issue has observed as follows:-
At the outset it has to be mentioned that provisions of Sec.2(22)(e) which brought in a new category of payment which was to be considered as dividend as introduced by the Finance Act 1987 w.e.f.1-4-88 viz., payment by a company “to any concern in which such shareholder is a member or a partner and in which he has a substantial interest” do not say as to in whose hands the dividend has to be brought to tax, whether in the hands of the “concern” or the “shareholder”. We have already seen the divergent views on this issue which have been referred to in the earlier part of this order.
The above provisions were subject matter of consideration before the Hon’ble Rajasthan High Court in the case of CIT Vs. Hotel Hilltop. 217 CTR 527(Raj). The facts of the case before the Hon’ble Court were as follows. The Assessee was one M/S.Hotel Hilltop a partnership firm. This firm received an advance of Rs.10 lacs from a company M/S.Hilltop palace Hotels (P) Ltd. The shareholding pattern of M/S.Hillltop Palace Hotels (P) Ltd., was as follows:
Shri Roop Kumar Khurana : 23.33% 2. Smt.Saroj Khurana : 4.67% 3. Vikas Khurana : 22% 4. Deshbandhu Khurana: 25% 5. Shri.Rajiv Khurana : 25%
The constitution of the firm Hotel Hill Top was as follows: 1. Shri Roop Kumar Khurana: 45% 2. Shri.Deshbandhu Khurana: 55%
The AO assessed the sum of Rs.10 lacs as deemed dividend u/s.2(22)(e) of the Act in the hands of the firm because the two partners of M/S.Hotel Hill Top were holding shares by which they had 10% voting power in M/S.Hill Top Palace Hotels (P) Ltd. They were also entitled to 20% of the income of the firm M/S.Hotel Hill Top. Therefore the loan by M/S.Hill Top Palace Hotels (P) Ltd. To the firm M/S.Hotel Hill Top was treated as deemed dividend in the hands of M/S.Hotel Hill Top, the firm under the Second limb of Sec.2(22)(e) of the Act. The CIT(A) held that since the firm was not the shareholder of the company the assessment as deemed dividend in the hands of the firm was not correct. The order of the CIT(A) was confirmed by the Tribunal. On Revenue’s appeal before the Hon’ble High Court, the following question of law was framed for consideration:-
“Whether on the facts and in the circumstances of the case and in law the learned Tribunal was justified in upholding the order of learned CIT(A) deleting the addition of Rs.10 lacs as deemed dividend under Section 2(22)(e) of the IT Act? ”
The Hon’ble Court held as follows:-
“ The important aspect, being the requirement of section 2(22)(e) is, that ‘the payment may be made to any concern, in which such shareholder is a member, or the partner, and in which he has substantial interest, or any payment by any such company, on behalf or for the individual benefit of any such shareholder ……. “ Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any such shareholder, obviously, the provision is intended to attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is pad by the company, whether to the shareholder, or to the concerned firm. In which event, it would fall within the expression ‘deemed dividend’. Obviously, income from dividend, is taxable as income from the other sources under section 56, and in the very nature of things the income has to be of the person earning the income. The assessee in the present case is not shown to be one of the persons, being shareholder. Of course, the two individuals being R and D. are the common persons, holding more than requisite amount of shareholding and are having requisite interest, in the firm, but then, thereby the deemed dividend would not be deemed dividend in the hands of the firm, rather it would obviously be deemed dividend in the hands of the individuals, on whose behalf, or on whose individual benefit, being such shareholder, the amount is paid by the company to the concern. Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax, as deemed divided, could be attracted in the hands of the individuals, being the shareholders, and not in the hands of the firm.”
The aforesaid decision of the Hon’ble Rajasthan High Court which is the only decision of High Court, should be sufficient to answer question No.2 which has been referred to the Special Bench by holding that deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. The argument of the learned D.R. that the Hon’ble Rajasthan High Court did not deal with the second limb of Sec.2(22)(e) of the Act is not correct.”
The Special Bench further held as follows:-
“34. We are of the view that the provisions of Sec.2(22)(e) does not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern(non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of Sec.2(22)(e) of the Act.
The intention behind enacting provisions of section 2(22)(e) are that closely held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would became taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions such payment by the company is treated as dividend. The intention behind the provisions of section 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which it’s shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern.
The basis of bringing in the amendment to Sec.2(22)(e) of the Act by the Finance Act, 1987 w.e.f 1- 4-88 is to ensure that persons who control the affairs of a company as well as that of a firm can have the payment made to a concern from the company and the person who can control the affairs of the concern can drawn the same from the concern instead of the company directly making payment to the shareholder as dividend. The source of power to control the affairs of the company and the concern is the basis on which these provisions have been made. It is therefore proper to construe those provisions as contemplating a charge to tax in the hands of the shareholder and not in the hands of a non-shareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words there is a deemed accrual of income even u/s.5(1)(b) in the hands of the shareholder only and not in the hands of the payee viz., non-
shareholder (Concern). Sec.5(1)(a) contemplates that the receipt or deemed receipt should be in the nature of income. Therefore the deeming fiction can be applied only in the hands of the shareholder and not the non- shareholder viz., the concern.
The definition of Dividend U/s.2(22)(e) of the Act is an inclusive definition. Such inclusive definition enlarges the meaning of the term “Dividend” according to its ordinary and natural meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word “Dividend” is extended to loans and advances to a shareholder or to a concern in which a shareholder is substantially interested deeming them as Dividend in the hands of a shareholder the ordinary and natural meaning of the word “Dividend” is altered. To this extent the definition of the term “Dividend can be said to operate. If the definition of “Dividend” is extended to a loan or advance to a non shareholder the ordinary and natural meaning of the word dividend is taken away. In the light of the intention behind the provisions of Sec.2(22)(e) and in the absence of indication in Sec.2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non- shareholder cannot be taxed as Deemed Dividend in the hands of a non-shareholder.”
Since the Assessee in the present case is not a shareholder in the lender company, we are of the view that the above decision is squarely applicable to the facts of the Assessee’s case.
In view of the aforesaid decision, we are of the view that the order of CIT(A) does not call for any interference. Consequently ground Nos. 5 & 6 raised by the Revenue are also dismissed.
In the result, the appeal by the Revenue is dismissed. 30.
Pronounced in the open court on this 27th day of February, 2015.