Sreeni Parameswaran, Ernakulam V. ACIT Corporate Circle 2(1), Kochi

ITA 186/COCH/2023

• Counselvise Citation: [2023] 100 COUNSELVISE.COM (IT) 6025 (ITAT-COCHIN)
• Duration Of Justice: 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-10-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Appeal Filed On: 06-03-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: K. KRISHNA
• Keywords: Deemed dividend; Liquidation
• Section: 147; 143(3); 2(22)(e)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN Before Shri Sanjay Arora, Accountant Member and Shri Manomohan Das, Judicial Member ITA No. 186/Coch/2023 (Assessment Year: 2011-12) Sreeni Parameswaran 7/42 – B5, Mystic Bells Villa No. 1, Eroor Desom Nadama Village Ernakulam 682308 [PAN: BAHPS6202C] vs. Asst. CIT, Corporate Circle- 2(1) Kochi (Appellant) (Respondent) Appellant by: Ms. K. Krishna, Advocate Respondent by: Smt. J.M. Jamuna Devi, Sr. D.R. Date of Hearing: 18.08.2023 Date of Pronouncement: 30.10.2023 O R D E R Per:Sanjay Arora, AM This is an appeal by the assessee agitating the order dated 20.01.2023 by the National Faceless Appeal Centre, Delhi (NFAC), dismissing his appeal contesting his assessment under section 147 read with section 143(3) of the Income Tax Act, 1961 (hereinafter "the Act") dated 28.03.2016 for Assessment Year (AY) 2011-12. 2. The only issue arising in the instant appeal is the validity or otherwise in law, in the facts and circumstances of the case, of the addition by way of deemed dividend u/s. 2(22)(e) of the Act for Rs. 62,44,215,since confirmed in the first appeal. 3. The background facts of the case are that the assessee, a Director in Shwas Homes Pvt. Ltd. (SHPL), a company in the business of construction and sale of residential apartments and villas, having not filed any return of income for the year u/s. 139, admitted an income of Rs.48,48,717 on account of remuneration received ITANo. 186/Coch/2023 (AY 2011-12) Sreeni Parameswaran vs. Asst. CIT Page 2 from the said company vide return filed on 25.01.2016 on being issued notice under section 148(1) of the Act on 06.08.2014. The sum of Rs.62.44 lakhs owed by him to SHPL as at the year-end, i.e., 31.03.2011, was inferred by the Revenue as deemed dividend u/s. 2(22)(e) of the Act as his shareholding in SHPL was in excess of 10%, while it had reserves in excess of that sum, which had thus escaped assessment. The assessee explained the same to be principally due to the purchase of a Villa from the company during the year, besides monies received by him from the company’s customers for and on behalf of the company which, accordingly, were debited by it to his account. The explanation was found not tenable, both by the assessing and first appellate authority. The sale of flat to the assessee-director had been on credit, not extended to other customers. Similarly, retention of money received from it’s customers could again not be regarded as a transaction in the normal course of business. Both the amounts thus assume the character of a loan or advance in terms of s. 2(22)(e). 4. We have heard the parties, and perused the material of record. 4.1 The summary of the assessee’s ledger account (PB-1, pg. 9) with the company, as submitted by the assessee, is as under: Table 1 (Amount in Rs.) (a) Opening Balance (3,82,150) (b) Sale of Villa 54,19,006 (c) Money received from customers 14,48,500 (d) Balance, representing net of monies advanced and received back (2,41,141) (e) Closing Balance 62,44,215 (*) (Figures in brackets represent credit balance) 4.2 The ledger account (copy on record) contains a series of payments to the assessee, both through bank and in cash, which stand adjusted against credits on account of monthly remuneration of Rs.77,812. Besides, there are debits by way of journal entries, which again appear to be adjustments for the monies (or otherwise ITANo. 186/Coch/2023 (AY 2011-12) Sreeni Parameswaran vs. Asst. CIT Page 3 money’s worth), received by him on company’s account. The credits in his account, apart from remuneration, are principally through bank and also by way of journal entries, i.e., on account of third party adjustments, as where he had made payments to them for and on behalf of the company and, accordingly, claimed credit in their respect. Further, the said summary not reflecting his remuneration separately, it, suitably modified, on it being so, is as under: Table 2 (Amount in Rs.) (a) Opening Balance (3,82,150) (b) Sale of Villa 54,19,006 (c) Money received from customers 14,48,500 (d) Remuneration (40,21,244) (e) Balance, representing net of monies advanced and received back 37,80,103 (f) Closing Balance 62,44,215 (*) (Figures in brackets represent credit balance) 4.3 We shall dwell on each transaction category separately, i.e., with reference to its implications qua deemed dividend u/s. 2(22)(e) of the Act, which, reproduced as under, deems, inter alia, any payment by the company (in which the public is not substantially interested) by way of loan or advance to a shareholder, with a voting power of minimum 10%, as dividend to the extent the company possess accumulated profit: “Definitions 2. In this Act, unless the context otherwise requires,-- (22)(a) ... (d) (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 31st day of May, 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 ; but "dividend" does not include— ITANo. 186/Coch/2023 (AY 2011-12) Sreeni Parameswaran vs. Asst. CIT Page 4 (i) .... (iv) Explanation 2.—The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place. Explanation 3.—For the purposes 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 per cent of the income of such concern;” 4.4 Inasmuch as the same is the principal reason for the debit balance in the assessee’s account in the company’s books, we shall examine the transaction of sale of Villa first. The same may also operate to modify the sums appearing in respect of the other transaction groupings as well. The company having reflected the transactions qua the Flat sale to the assessee in it’s accounts separately, the same would continue to be so, having been, for all we know, also reflected separately in the company’s final accounts, with there being clearly no transfer of the debit in the Flat account (as on 31.03.2010) to the assessee’s other accounts with it as at that date. For the purpose of deemed dividend, the debit balance in the Flat account and the current account shall, nevertheless, stand to be adjusted (i.e., against each other) first. As such, the company has correctly reflected the balance (as on 01.04.2010) in the Flat Account and the Current Account at Nil and Rs.3,82,150 respectively. We are conscious, we may add, that the Flat account may well represent the transaction qua a different property; the property sold during the current year being a Villa. Thus, though a matter of clarification/verification, would not have any implication for our purpose inasmuch as the balance in this account as at the beginning of the year (01.04.2010) is reckoned at nil. ITANo. 186/Coch/2023 (AY 2011-12) Sreeni Parameswaran vs. Asst. CIT Page 5 4.5 The debits for the current year (for the Flat/Villa), as a perusal of the account reveals, are at a credit of Rs.54,03,659, i.e., Rs.10 lac as sale of land on 15.11.2010, and Rs.44,03,659 on 31.03.2011, as revenue recognised. There is thus a nominal difference to Rs.15,347/- between the ledger account and its summary, which may be due to some minor sums debited, and would require been shown, as this would alter the amount in respect of another group, i.e., the balance appearing against row (e) in Table-2. Further, why one wonders the sale of land, if it pertains to the same transaction, as we infer, is also not credited to the revenue recognised account, i.e., as is other sum of Rs.44.04 lakhs, raising doubts as to if it pertains to Villa A/c? Also, the latter being by way of journal entry (on 31.03.2011),indicates it being a transfer from another account/s, representing date-wise transactions during the year. Continuing further, as afore-stated, all the debits in the account, to be maintained/tabulated separately, would stand to be adjusted first, i.e., where there is no debit balance in the current account; the balance, both in the current account as well as Flat account being reckoned date-wise and, in any case, month-wise, as the credit for the remuneration is on a monthly basis. As shown to us during the course of hearing, the amount due on sale of villa stands paid in full in the following year, i.e., f.y. 2011-12. That being the case, we do not think the same could be regarded as a loan or advance so as to attract section 2(22)(e) of the Act. SHPL, the company in which the assessee has substantial interest, is in the business of real estate, selling residential houses. The assessee, it’s Director, with substantial interest therein, in purchasing one for himself, deals with the company in the capacity of a customer. The Revenue has no case that in doing so there has been any under-selling by the company, as discount allowed to him, which, where so, would rather attract section 56 of the Act. True, he has been extended a credit, which it may not to it’s other customers, as would be the inference arising as the assessee has, despite the AO clearly stating so, not adduced any material – nay, not even made any contention in rebuttal, i.e., to the effect of it similarly allowing credit to it’s other customers. The ITANo. 186/Coch/2023 (AY 2011-12) Sreeni Parameswaran vs. Asst. CIT Page 6 payment for the Flat, adjusting the credits arising to the assessee, stands made latest by the end of the following year. The same would not, in our view, alter its character to a loan or advance, which would, we may add, surely be the case where an extended credit, dehors the trade practice, is allowed. The company paying the remuneration to an extent of Rs.50 lakhs per annum to the assessee assumes a limited financial risk when it extends credit to him. No inference of diversion of funds, representing the profit of the company, arises under the circumstances, to ascribe it as coming within the mischief of section 2(22)(e) of the Act. This is of course subject to the nature of credit for Rs. 10 lac, forming part of Rs. 54.04 lacs, being clarified. 4.6 This leaves us with the assessee’s other, i.e., current, account. The same comprises: (a) Direct transfer of funds by the company the assessee; (b) Monies received from the company’s customers. Both qualify to be regarded as loans of advances within the meaning of the term u/s. 2(22)(e), case law on which, including by the Hon'ble Apex Court, is legion. Why, no objection or any contention in this regard stands made at any stage, including before us, nor could possibly be; it being the clear case of company’s monies being advanced to the Director, falling within the mischief of section 2(22)(e) of the Act. We may, nevertheless, dilate upon the second category (b) with a view to allay any doubt in its respect as qualifying to be deemed as dividend u/s. 2(22)(e). As queried by the Bench during hearing, to no answer, if the assessee had any authorization to accept trade debts. This is as, unless so – it shall require a Board resolution authorising him (and which may further also prescribe the manner, viz. account payee cheque, etc.) or a monetary limit up to which the amount could be received by him, etc. In the absence thereof, no receipt, for and on behalf of the company, can be issued by the assessee. And the customer paying money to the director does so at his own risk and cost, implying him to continue to be liable to the company for the same. ITANo. 186/Coch/2023 (AY 2011-12) Sreeni Parameswaran vs. Asst. CIT Page 7 Further, even assuming that he being a Director had the implied authority, the same is to be deposited forthwith with the company, and there is no question of it debiting him for the same, which implies it allowing him to retain the same. It is this retention which translates into a debit balance that assumes the form of loan or advance, attracting section 2(22)(e) of the Act. It would though be a different matter where the assessee has a credit balance on the relevant date, in which case there is no question of any loan or advance by the company to him, who thereby only receives from the company, albeit through its customer/s, monies due to him. Both the categories of amounts would, thus, need to be clubbed and maintained (tabulated) in separate accounts, which shall stand to be credited, similarly, when sums are paid or transferred to the company, as well as remuneration from it. Any debit balance in the account, even if adjusted subsequently, shall attract section 2(22)(e) of the Act (Sarada (P.) v. CIT [1998] 229 ITR 444 (SC); Tarulata Shyam v. CIT [1997] 108 ITR 345 (SC)). Only the surplus, if any, in this account would stand to be adjusted against debit balance in the Flat (Villa) account. 4.7 A surviving issue would be the date of the debits or credits in respect of transactions by way of journal entries. This is as money (money’s worth) stand already received or, as the case may be, discharged, though given effect to later (or, perhaps, even earlier). The transactions shall have to be reckoned, irrespective of the date of journal entry, with reference to the actual date of the transactions. 5. The matter shall, accordingly, travel back to the file of the AO for determination of deemed dividend u/s. 2(22)(e) afresh along the lines indicated. The assessee shall provide necessary details and working, which the AO shall verify, including seeking clarification/s in its respect, duly supported by evidences. The difference between the amount debited in account and the cost as per the document, would need to be reconciled and explained. Any fresh/new facts (inasmuch as Ms. Krishna, the ld. counsel for the assessee, could not provide reconciliation, despite ITANo. 186/Coch/2023 (AY 2011-12) Sreeni Parameswaran vs. Asst. CIT Page 8 being allowed time during hearing, with the information furnished before us being again so in a piecemeal manner), coming to the notice of the AO would again require being considered as per law, for which guidance may be taken by him from the instant order. We decide accordingly 5. In the result, appeal by the assessee is allowed for statistical purposes. Order pronounced on October 30, 2023 under Rule 34 of The Income Tax(Appellate Tribunal) Rules, 1963. Sd/- Sd/- (Manomohan Das) (Sanjay Arora) Judicial Member Accountant Member Cochin, Dated: October 30, 2023 n.p. Copy to: 1. The Appellant 2. The Respondent 3. The CIT concerned 4. The Sr. DR, ITAT, Cochin 5. Guard File By Order Assistant Registrar ITAT, Cochin