INCOME TAX OFFICER, MOHALI V. GURTEJ SINGH, CHANDIGARH

ITA 649/CHANDI/2023

AI Insights

The case involves the Income Tax Department (Revenue) appealing against the order of the Commissioner of Income Tax (Appeals) which had deleted the addition of Rs.4,23,95,000 deemed as dividend in the hands of the assessee, Shri Gurtej Singh. The Income Tax Officer (ITO) had initially added this amount as deemed dividend under Section 2(22)(c) of the Income Tax Act, considering it a loan from a closely held company to its substantial shareholder. However, the CIT(A) reversed this decision, citing that the transaction was a business transaction related to the purchase of property and not a loan. The Tribunal agreed with the CIT(A)'s decision, emphasizing that the transaction was conducted in the ordinary course of business and thus should not be treated as a deemed dividend.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 360632 (ITAT-CHANDIGARH)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-05-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Assessment Year: 2012-2013
• Other Referred Cases: Collector Land Acquisition Vs. Mst. Katiji & Others, N. Balakrishnan Vs. M. Krishnamurthy, S.A. Builders v. CIT, CIT Vs Creative Dying and Printing Pvt Ltd, CIT v. Dalmia Cement, P.K. Badiani, Navnit Lai C Javeri, Jamnadas Khimji Kothari
• Laws Referred To: Income Tax Act, Indian Limitation Act, 1963
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANAV BANSAL
• Assessee Lawyers: YOGESH MONGA
• Keywords: Condonation of delay; Set aside; Capital asset; Business expenditure; Depreciation; Deemed dividend; Commercial expediency
• Section: 148; 2(22)(e)

Judgement Text

"आयकर अपीलȣय अͬधकरण,चÖडीगढ़ Ûयायपीठ, चÖडीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, ‘A’ CHANDIGARH BEFORE SHRI RAJPAL YADAV, VICE PRESIDENT AND SHRI KRINWANT SAHAY, ACCOUNTANT MEMBER आयकर अपील सं./ ITA No. 649/CHD/2023 Ǔनधा[रण वष[ / Assessment Year: 2012-13 The ITO, Mohali. Vs Shri Gurtej Singh, House No. 245, Sector 16-A, Chandigarh. èथायी लेखा सं./PAN NO: ABZPS6303A अपीलाथȸ/Appellant Ĥ×यथȸ/Respondent Assessee by : Shri Yogesh Monga, CA Department by : Shri Manav Bansal, CIT DR Date of Hearing : 05.05.2025 Date of Pronouncement : 19.05.2025 PHYSICAL HEARING O R D E R PER RAJ PAL YADAV, VP The Revenue is in appeal before the Tribunal against the order of the ld. Commissioner of Income Tax (Appeals)[in short ‘the CIT(A) ] dated 28.03.2023 passed for assessment year 2012-13. 2. The Registry has pointed out that appeal is time barred by 149 days. In order to explain the delay, Revenue has filed ITA No.649/CHD/2023 A.Y.2012-13 2 an application for condonation of delay wherein it has been pleaded that PAN of the assessee was transferred to Ward 2(1), Chandigarh on 11.04.2023 and since his income exceed Rs.35 lacs, then case was transferred to DCIT, CC-1. These records reached to the ITO, Ward 6(1),Mohali very late and due to this communication, appeal has become time barred by 149 days. The Revenue has prayed that the delay be condoned. 2.1 On the other hand, ld. counsel for the assessee opposed the prayer of the Revenue and submitted that no specific explanation has been propounded by the Revenue. It is just a general explanation given by the Revenue. 3. Sub-section 5 of Section 253 contemplates that the Tribunal may admit an appeal or permit filing of memorandum of cross- objections after expiry of relevant period, if it is satisfied that there was a sufficient cause for not presenting it within that period. This expression sufficient cause employed in the section has also been used identically in sub- section 3 of section 249 of Income Tax Act, which provides powers to the ld. Commissioner to condone the delay in filing the appeal before the Commissioner. Similarly, it has been ITA No.649/CHD/2023 A.Y.2012-13 3 used in section 5 of Indian Limitation Act, 1963. Whenever interpretation and construction of this expression has fallen for consideration before Hon’ble High Court as well as before the Hon’ble Supreme Court, then, Hon’ble Court were unanimous in their conclusion that this expression is to be used liberally. We may make reference to the following observations of the Hon’ble Supreme court from the decision in the case of Collector Land Acquisition Vs. Mst. Katiji& Others, 1987 AIR 1353: 1. Ordinarily a litigant does not stand to benefit by lodging an appeal late. 2. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this when delay is condoned the highest that can happen is that a cause would be decided on merits after hearing the parties. 3. \"Every day’s delay must be explained\" does not mean that a pedantic approach should be made. Why not every hour's delay, every second's delay? The doctrine must be applied in a rational common sense pragmatic manner. ITA No.649/CHD/2023 A.Y.2012-13 4 4. When substantial justice and technical considerations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay. 5. There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact, he runs a serious risk. 6. It must be grasped that judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to do so. 4. Similarly, we would like to make reference to authoritative pronouncement of Hon’ble Supreme Court in the case of N. Balakrishnan Vs. M. Krishnamurthy (supra). It reads as under: “Rule of limitation are not meant to destroy the right of parties. They are meant to see that parties do not resort to dilatory tactics, but seek their remedy promptly. The object of providing a legal remedy is to repair the damage caused by reason of legal injury. Law of limitation fixes a life-span for such legal remedy for the redress of the legal injury so suffered. Time is precious and the wasted time would never revisit. During efflux of time newer causes would sprout up necessitating newer persons to seek legal remedy by approaching the courts. So a life span must be fixed for each remedy. Unending period for ITA No.649/CHD/2023 A.Y.2012-13 5 launching the remedy may lead to unending uncertainty and consequential anarchy. Law of limitation is thus founded on public policy. It is enshrined in the maxim Interest reipublicae up sit finislitium (it is for the general welfare that a period be putt to litigation). Rules of limitation are not meant to destroy the right of the parties. They are meant to see that parties do not resort to dilatory tactics but seek their remedy promptly. The idea is that every legal remedy must be kept alive for a legislatively fixed period of time. A court knows that refusal to condone delay would result foreclosing a suitor from putting forth his cause. There is no presumption that delay in approaching the court is always deliberate. This Court has held that the words \"sufficient cause\" under Section 5 of the Limitation Act should receive a liberal construction so as to advance substantial justice vide Shakuntala Devi lain Vs. Kuntal Kumari [AIR 1969 SC 575] and State of West Bengal Vs. The Administrator, Howrah Municipality [AIR 1972 SC 749]. It must be remembered that in every case of delay there can be some lapse on the part of the litigant concerned. That alone is not enough to turn down his plea and to shut the door against him. If the explanation does not smack of mala fides or it is not put forth as part of a dilatory strategy the court must show utmost consideration to the suitor. But when there is reasonable ground to think that the delay was occasioned by the party deliberately to gain time then the court should lean against acceptance of the explanation. While condoning delay the Could should not forget the opposite party altogether. It must be borne in mind that he is a looser and he too would have incurred quiet a large litigation expenses. It would be a salutary guideline that when courts condone the delay due to laches on the part of the applicant the court shall compensate the opposite party for his loss”. 5. In the light of above, if we go through the application of the Revenue, then it would emerge out that this delay was not made intentionally by the AO, rather it has happened on ITA No.649/CHD/2023 A.Y.2012-13 6 account of some bonafide communication error. Therefore, we condone the delay and proceed to decide the appeal on merit. 6. Though the Revenue has taken five grounds of appeal, but its solitary grievance is that CIT(A) has erred in deleting the addition of Rs.4,23,95,000/- which was added by the AO with the aid of Section 2(22)(c) of the Income Tax Act as deemed dividend in the hands of the assessee. 7. The brief facts of the case are that assessee has filed his return of income on 31.12.2012 declaring an income of Rs.1,01,57,100/-. The assessment was reopened by issuance of notice u/s 148 of the Income Tax Act. It revealed to the AO that assessee is a Director in M/s IVY Health & Life Science Pvt. Ltd. He was having 82.2% shareholding. The company has given a loan of a sum of Rs.4,23,95,000/-. The AO was of the view that Section 2(22)(c) is attracted and this Section contemplated following conditions : “1. The company must be a company in which public are not substantially interested i.e. a closely held company. It means that the company which is paying loan/advance should be a closely held company but the company which is receiving such loans/advances can be a public company or a listed company on the stock exchange. 2) The borrower must be a shareholder having a substantial interest in the company on the date on which loan/ advance is given. (Not less than 10% of voting power). ITA No.649/CHD/2023 A.Y.2012-13 7 3) Loan advanced by company can be deemed to be dividend only to the extent the company possesses accumulated profits on the date of loan/advance being given. 4) The loan must not have been advanced by company in the ordinary course of its business. 7.1 If these conditions are fulfilled, then alleged sum paid by a company to its shareholder would be considered as deemed dividend in the hands of the recipient. In response to the query of AO, it was contended by the assessee that the hospital was interested in acquiring the piece of land which was owned by the assessee and adjoining to the company’s hospital. An Agreement to Sell was executed and this sum was paid to assessee, however, later on deal was not materialized and it was cancelled. 7.2 Apart from the above, it was contended by the assessee that accumulated profit does not mean, profit as disclosed by the company’s balance sheet. It is to be adjusted by the depreciation admissible under Income Tax Act and if this depreciation is being granted to the assessee, then the alleged accumulated profit is a negative figure and no deemed dividend would be considered in the hands of the assessee. The assessee has submitted these details which are available ITA No.649/CHD/2023 A.Y.2012-13 8 on page No. 7 and 8 of the assessment order in paragraph No.4. The assessee has worked out accumulated loss of Rs.814.90 lacs. The ld. AO while deciding the issue did not adjudicate this aspect, rather simply ignored it and did not accept the alternative contention that this was business transaction between the assessee and the company. It is not a simplister advance to the assessee. The AO rejected this contention and made the addition. 8. On appeal, ld. CIT(A) has deleted the addition. The finding of the CIT(A) read as under : 6.3 I am also in agreement with submission of the appellant that case of the appellant is covered under exceptions to section 2(22)(e) of the Act. The Hon'ble Delhi High Court in the case of CIT Vs Creative Dying and Printing Pvt Ltd [2009] 318 ITR 476 (Delhi) held that the amounts advanced for business transaction between the parties would not fall within the definition deemed dividend under section 2(22)(e) of the Act. In this connection, it is more appropriate to have a glimpse of the ruling of the Hon'ble Apex Court in the case of S.A. Builders v. CIT reported in 288 ITR 1 (SC) wherein the Hon'ble Court, in its infinite wisdom, had observed thus- \"The expression commercial expediency is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency..............That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of ITA No.649/CHD/2023 A.Y.2012-13 9 whether the amount was advanced for earning profits....\" 6.4 While deciding -the issue in the case of S.A. Builders v/s Commissioner of Income-tax(Appeals), (2007) 288 ITR 1 (SC) , the Hon'ble Supreme Court had puts its seal of approval to the ratio laid down by the Hon'ble Delhi High Court in the case of CIT v. Dalmia Cement reported in 254 ITR 377 (Del) wherein the Hon'ble Court held that - “The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced ,ming profits.\" (2) The AO's another contention was that the assessee was able to substantiate its claim that the funds were given for business exigencies and was in the nature of contractual payments. In this connection, we would like to mention here that the balance- sheets, journal entries in the books of account amply make it clear that the funds were provided during the course of business.. 6.5 In the light of the discussion made in paragraphs above, it is to be seen that e Agreement to Sell dated 02.04.2011, in respect of the property, has been entered between M/s Ivy Health & Life Sciences Pvt. Ltd., as a purchaser and appellant, viler. Thus, the payments received by appellant during the year from M/s Ivy was in the nature of advance/share towards purchase of property, not as a as concluded by AO during the assessment proceedings. The subsequent /ents also confirm the nature of transactions that it was purely a commercial transaction, not the loan transactions. The deeming provisions of law contained in Section 2(22)(e) apply in such cases where the company pays to a related person an is advance or a loan as such and not in any other context. The law does not prohibit business/commercial transactions between related concerns, and, therefore payments made in the ordinary course of business cannot be treated as loans and advances, Therefore, in the facts and circumstances of the case and in the light of - Jdic al pronouncements considered above, in the light of decision of the Hon'ble Delhi High Court in the case of CIT Vs Creative Dying and Printing Pvt Ltd [2009] 318 ITR 476 (Delhi) (supra), I hold that the amount of Rs. 4,23,95,000/- received by ant from M/s Ivy Health & Life Sciences Pvt. Ltd is in the nature of business/commercial transaction, not as loan transaction and therefore, not covered by the provisions of section 2(22)(e) of the Act. I, therefore, delete the addition made by AO. The ground of appeal no. 2 is thus allowed.” ITA No.649/CHD/2023 A.Y.2012-13 10 9. With the assistance of ld. Representative, we have gone through the record carefully. A perusal of the assessment order would reveal that AO has rejected the contention of business transaction between the company and the assessee and the assessee,simply on suspecting the alleged cancellation of Agreement to Sell. The AO has raised doubt about the manner of preparing the document for cancellation of Agreement on the back side of the Agreement itself. To our mind, once the assessee has cancelled the Agreement with the buyer, then such writing can be made on the back side of the alleged Sale Agreement itself. There is nothing unusual to this and it is not necessary such record should be on Stamp Paper and should be notarized. It is a simplister transaction between the parties, if they do not want to continue with the Agreement, it could be cancelled in a simplistic manner by reducing it in writing which has been done in this case. The CIT(A) has appreciated this aspect and recorded a finding that transaction between the assessee and the company was of a business transaction and if amounts have been received in connection with some business transaction, then it will not fall within the ambit of deemed dividend. ITA No.649/CHD/2023 A.Y.2012-13 11 10. Apart from the above, we find that ld. AO failed to take cognizance of the depreciation as per Income Tax Act. The assessee has produced the details of depreciation as per Company’s Act as well as of Income Tax Act. The depreciation under the Company’s Act is at a lower amount than the depreciation under the Income Tax Act. If the alleged accumulated profit in the balance sheet is adjusted with the depreciation, then there is an accumulated loss and no deemed dividend could be assumed by the AO. For this proposition, we are fortified by the judgement of Hon'ble Telangana High Court (ITA No.319 of 2007)wherein Hon'ble Court has considered the following question : \"1. Whether on the facts and in the circumstances of the case, for the purpose of arriving at the accumulated profits u/S.2(22)(e) of the Income-tax Act whether deduction of depreciation as provided under the Income-tax Act is necessary or not for taxing any loan borrowed from the company, as deemed dividend? 2. Whether the loan borrowed by the appellant amounting to Rs. 14,51,281/- is liable to tax as deemed divided u/S.2(22)(e) of the Income-tax Act on the facts and circumstances of the case? and replied these questions as under : 8. We have considered the rival submissions made on both sides and have perused the record. ITA No.649/CHD/2023 A.Y.2012-13 12 9. In Navnit Lai C Javeri (supra), Bombay High Court dealt with the issue as to what is the correct method for determination of accumulated profits under Section 2(6A)(e) of the Income-tax Act, 1922 and if there are any accumulated profits so determinable, what is the correct amount thereof. The aforesaid issue was answered by the Division Bench of Bombay High Court in the following terms. \"....If the gross profits are treated as profits without provision of any depreciation, at the end of the useful life of the assets they will be lost completely. It is to provide for replacement of the capital assets so lost by reason of normal wear and tear that depreciation is allowed, so that at the end of the useful life of those assets a fund is available to replace those assets. In short, a provision for depreciation is of a capital nature and is intended to replace the capital which is lost by wear and tear. Now, the Income-tax Act does make a provision for allowing depreciation as a deduction, for example, under Section 10(2)(vii). In our opinion, therefore, for the purpose of calculating profits within the meaning of the phrase \"accumulated profits\" under section 2(6A)(e), an allowance of depreciation should be made by way of a deduction at the rates provided for by the Income-tax Act itself..........\" 10. Another Division Bench of Bombay High Court in Jamnadas Khimji Kothari (supra) held as follows: \"As regard question No.2, the answer is: The phrase \"accumulated profits\" does not mean profits as disclosed by the company's balance-sheet. The profits disclosed would be subject to adjustment and the depreciation as granted in accordance with the rates prescribed by the Income-tax Act would have to be deducted for ascertaining the accumulated profits.\" 11. The Supreme Court in P.K. Badiani (supra) dealt with the following issue. \"The main question for our determination in this appeal is whether the aggregate of the development rebates allowed to the company under Section 10(2)(vi-b) of the 1922 Act could be treated as accumulated profits in the hands of the company under Section 2(6-A)(e).\" 12. The Supreme Court while answering the aforesaid issue neither referred to the decisions of the two Division Benches of Bombay High Court in Navnit Lai C Javeri and Jamnadas Khimji Kothari (supra) nor dealt with the issue which is involved in the present appeal. The ITA No.649/CHD/2023 A.Y.2012-13 13 issue involved in this appeal is answered by the two Division Benches of Bombay High Court and we concur with the view taken by the two Division Benches of Bombay High Court. 13. For the aforementioned reasons, the substantial questions of law framed by a Bench of this Court are answered in favour of the assessee and against the Revenue. 14. In the result, the order dated 27.07.2007 passed by the Income-tax Appellate Tribunal is set aside and the order dated 3.09.2004 passed by the Commissioner of Income-tax (Appeals) is restored. 15. Accordingly, the appeal is allowed. Miscellaneous applications, if any pending, shall stand closed. There shall be no order as to costs. ALOK ARADHE,CJ J.SREENIVAS RAO, J 14TH November,2024. 11. On due consideration of both the fold of contentions, we do not find any reason to interfere in the order of the ld. CIT(A). Accordingly, the appeal of the Revenue is dismissed. 12. In the result, appeal of the Revenue is dismissed. Order pronounced on 19.05.2025. Sd/- Sd/- (KRINWANT SAHAY) (RAJPAL YADAV) ACCOUNTANT MEMBER VICE PRESIDENT “Poonam” ITA No.649/CHD/2023 A.Y.2012-13 14 आदेश कȧ ĤǓतͧलͪप अĒेͪषत/ Copy of the order forwarded to : 1. अपीलाथȸ/ The Appellant 2. Ĥ×यथȸ/ The Respondent 3. आयकर आयुÈत/ CIT 4. ͪवभागीय ĤǓतǓनͬध, आयकर अपीलȣय आͬधकरण, चÖडीगढ़/ DR, ITAT, CHANDIGARH 5. गाड[ फाईल/ Guard File आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar "