ACIT, CHENNAI V. M/s. Madras Madurai Properties Pvt. Ltd., CHENNAI

ITA 1947/CHNY/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 7913 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-11-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 06-10-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 29-09-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JR
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Income from undisclosed sources; Search and seizure; Document seized; Deemed to accrue or arise in india; Corroborative evidences; Deemed dividend; Commercial expediency; Documents seized; Set aside; Liquidation; Capital Gains
• Section: 2(22)(e); 234B; 250; 32; 69; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH D : CHENNAI [BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER] I.T.A.NO.1947 TO 1949/MDS/08 ASSESSMENT YEARS : 2002-03, 2005-06 & 2006-07 THE ACIT CENTRAL CIRCLE I(4) CHENNAI VS M/S MADRAS MADURAI PROPERTIES PVT. LTD NO.1, KUPPUSAMY STREET T. NAGAR CHENNAI - 17 [PAN AADCF1932D] (APPELLANT) (RESPONDENT) I.T.A.NO. 469/MDS/09 ASSESSMENT YEAR : 2006-07 THE ACIT CENTRAL CIRCLE I(4) CHENNAI VS SHRI V. AYYADURAI NO.1, KUPPUSAMY STREET T. NAGAR CHENNAI - 17 [PAN ADVPA4958M] (APPELLANT) (RESPONDENT) APPELLANTS BY : SHRI K.E.B RENGARAJAN, JR. STANDING COUNSEL RESPONDENTS BY : SHRI R. VIJAYARAGHAVAN O R D E R PER BENCH: THIS IS A BUNCH OF FOUR APPEALS, ALL F ILED BY THE REVENUE, THREE FOR ASSESSMENT YEAR 2002-03, 2005-06 AND 2006 -07 AGAINST THE ITA 1947 TO 1949/08 469/09 :- 2 -: ASSESSEE-COMPANY, M/S MADRAS MADURAI PROPERTIES PV T. LTD AND THE FOURTH ONE IS AGAINST ONE OF THE DIRECTORS OF THE COMPANY, NAMELY, SHRI V. AYYADURAI, MANAGING DIRECTOR, WHO IS A NON- RESIDENT SETTLED IN USA, FOR ASSESSMENT YEAR 2006-07. FOR THE SAKE OF CONVENIENCE AND BREVITY, WE PROCEED TO DECIDE THEM BY A COMMON ORDE R. 2. TO SUMMARIZE THE RELEVANT FACTS, IN BRIEF, WE MA Y MENTION THAT THE ASSESSEE-COMPANY WAS INCORPORATED UNDER TH E COMPANIES ACT, 1956, ON 20.11.2001. THIS COMPANY IS ENGAGED IN THE REAL ESTATE BUSINESS, WHICH ALSO INCLUDE LEASING OUT OF PROPERT IES. SHRI V.AYYADURAI AND HIS SON SHRI V.A SHIVA ARE THE DIRE CTORS OF THIS COMPANY. BOTH OF THEM ARE NON-RESIDENT INDIANS SET TLED IN USA. A SEARCH U/S 132 OF THE INCOME-TAX ACT, 1961 (HEREINA FTER REFERRED TO AS 'THE ACT' FOR SHORT) WAS CONDUCTED BY THE INVESTIGA TION WING OF THE DEPARTMENT ON 15.3.2006 AND ON OTHER FOLLOWING DATE S AT THE BUSINESS PREMISES OF THE COMPANY AND RESIDENCE OF DIRECTORS IN CHENNAI. DURING SEARCH OPERATION, VARIOUS INCRIMINATING DOCU MENTS INCLUDING BOOKS OF ACCOUNT WERE FOUND AND SEIZED. CONSEQUENT UPON THE EVIDENCE COLLECTED DURING SEARCH, NOTICES U/S 153C WERE ISSUED BY THE ASSESSING OFFICER ON 5.9.2006 FOR THESE YEARS. A REQUEST WAS MADE TO TREAT THE ORIGINAL RETURNS FILED TO BE TREATED AS R ETURNS FILED IN COMPLIANCE OF THE NOTICE(S) ISSUED U/S 153C OF THE ACT. ITA 1947 TO 1949/08 469/09 :- 3 -: I.T.A.NO. 1947/MDS/2008(A.Y 2002-03) 3. IN THIS YEAR, THE ASSESSEE-COMPANY FILED THE RETURN OF INCOME ON 26.9.2007 U/S 153C ADMITTING THEREIN A TOTAL INCOME OF ` 19905/-. APART FROM ACCEPTING, VIDE LETTER DATED 12.12.2006, THAT THE RETURN FILED ORIGINALLY FOR ASSESSMENT YEAR 2002-03, MAY BE TREATED AS THE RETURN FILED IN PURSUANCE TO THIS NOTICE. FINALLY, THE ASSESSMENT ORDER WAS FRAMED U/S 153C/143(3) ON 28.12.2007 AT A TOTAL INCOME OF ` 8,01,203/-, AS A RESULT OF WHICH AN ADDITIONAL DEMA ND OF ` 4,68,244/- WAS RAISED INCLUDING INTEREST U/S 234A AND 234B OF THE ACT AND SURCHARGE WAS ALSO LEVIED AT THE PREVALENT RATE(S). THE FOLLOWING ADDITIONS WERE MADE BY THE ASSESSING OFFICER: A) A SUM OF ` 7,54,098/- REPRESENTING RENTAL ADVANCE/DEPOSIT RECEIVED BY THE APPELLANT FROM ITS SISTER CONCERN M/S MILLENNIUM SOFTWARE PRODUCTIONS(I) PVT. LTD. (MSPIPL) WAS TREATED BY THE ASSESSING OFFICER AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. B) A SUM OF ` 27,200/- REPRESENTING ROC FEES BORNE BY THE GROUP CONCERN M/S MSPIPL ON BEHALF OF THE APPELLANT COMPANY WAS ALSO TREATED BY THE ASSESSING OFFICER AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. 4. AGAINST THESE ADDITIONS, FIRST APPEAL WAS FILED BEF ORE THE LD. CIT(A), WHO AGREED AND ALLOWED THE CLAIM OF THE ASS ESSEE. BY A ITA 1947 TO 1949/08 469/09 :- 4 -: DETAILED ORDER, HE HAS DELETED THE ENTIRE ADDITION S. NOW, THE REVENUE IS AGGRIEVED AND HAS RAISED FOLLOWING GROUNDS: 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY T O LAW AND FACTS OF THE CASE. 2.1. THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE U/S 2(22)(E) OF THE ACT BY THE ASSESSING OFFICER ON THE GROUND THAT AO HAS NOT LEGALLY JUSTIFIED IN CLASSIFYING THE REN TAL SECURITY DEPOSIT RECEIVED BY THE ASSESSEE AS AN RENTAL ADVAN CE WITHIN THE MEANING OF SEC. 2(22)(E) OF THE ACT. 2.2 THE LD. CIT(A ) FAILED TO APPRECIATE THE FACT THAT IN THE LEASE AGREEMENT ENTERED INTO BY THE ASSES SEE IT WAS CLEARLY MENTIONED THAT M/S MILLENNIUM SOFTWARE PRODUCTIONS INDIA PVT. LTD. (M/S MSPIPL) HAS TO PAY RENT IN ADDITION TO THE ADVANCE OF RS. 9 LAKHS. 2.3. THE LD. CIT(A) FAILED TO APPRECIATE THE FACT T HAT M/S MSPIPL WAS A CLOSELY HELD COMPANY IN WHICH PUBLIC W ERE NOT SUBSTANTIALLY INTERESTED AND THAT IT POSSESSED HUGE ACCUMULATED PROFIT AT THE TIME WHEN THE RENTAL ADVA NCE WAS GIVEN BY M/S MSPIPL TO THE ASSESSEE AND THEREBY THE CONDITIONS LAID DOWN IN SEC. 2(22)(E) WERE SATI SFIED IN THE ASSESSEE'S CASE. 2.4 THE LD. CIT(A) FAILED TO APPRECIATE THE FACT TH AT THE ASSESSEE HAS NOT GIVEN ANY DEPOSIT TO ITS DIRECTORS SHRI V. AYYADURAI AND SHRI V.A. SHIVA WHILE TAKING THE PROPERTY ON LEASE, THOUGH THE ASSESSEE CLAIMED THAT MAKING/RECEIVING DEPOSIT IS A COMMON BUSINESS PRACT ICE. 2.5. THE LD. CIT(A) IN HIS ORDER THOUGH HELD THAT T HE PAYMENT MADE BY THE ASSESSEE AS RENTAL SECURITY DEPOSIT, FAILED TO DISTINGUISH WHY THE SAID PAYMENT SHOULD NOT BE TREATED AS RENTAL ADVANCE. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. ITA 1947 TO 1949/08 469/09 :- 5 -: 5. WE HAVE HEARD THE RIVAL CONTENTIONS. THE MAIN ISSU E HINGES AROUND THE APPLICABILITY OF THE PROVISIONS OF SECTI ON 2(22)(E) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED THAT THE ASSESSEE-COMPANY HAD FILED ITS RETURN FOR THE FIRST TIME FOR THE ASSESSMENT YEAR 2002-03, AS IT WAS INCORPORATED ONL Y ON 20.11.2002. THE COMPANY WAS FOUND TO HAVE ENTERED INTO A LEASE AGREEMENT ON 11.12.2001 WITH ITS DIRECTORS, NAMELY, SHRI V.AYYAD URAI AND SHRI V.A SHIVA FOR TAKING THEIR PROPERTY SITUATED AT NO.3 KU PPUSAMY STREET, T.NAGAR, CHENNAI -17, ON LEASE FOR A PERIOD OF 51 M ONTHS. THE ASSESSEE-COMPANY WAS REQUIRED TO PAY A MONTHLY RENT OF ` 40,000/-. THE COMPANY, IN TURN, ENTERED INTO A FURTHER LEASE AGREEMENT DATED 14.12.2001 WITH ITS GROUP CONCERN M/S MILLENNIUM SO FTWARE PRODUCTIONS INDIA PVT. LTD (MSPIPL) TO LEASE OUT TH IS VERY PROPERTY AT A MONTHLY RENT OF ` 1,20,000/-, INCLUSIVE OF CHARGES FOR AMENITIES. T HIS AGREEMENT WAS TO BE IN OPERATION FOR 18 MONTHS AND THE ASSESSEE COMPANY ALSO RECEIVED A RENT DEPOSIT OF ` 9 LAKHS. IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE DURING THE RELEVANT ACCOUNTING YEAR AND SUBSEQUENT TO THE AFORESAID LEASE AGREEMEN T, HAD RECEIVED A SUM OF ` 7,54,098/- FROM M/S MSPIPL AS THE RENTAL ADVANCE. UNDOUBTEDLY, BOTH SHRI V.AYYADURAI AND SHRI V.A SHI VA WERE DIRECTORS IN THE ASSESSEE-COMPANY AS WELL AS IN ITS GROUP COM PANY HOLDING MORE ITA 1947 TO 1949/08 469/09 :- 6 -: THAN 10% AND 20% BENEFICIAL SHARES IN THE ASSESSEE COMPANY AND IN M/S MSPIPL RESPECTIVELY. IT WAS ALSO FOUND THAT M/ S MSPIPL HAD HUGE ACCUMULATED PROFITS DURING THE RELEVANT ACCOUNTING YEAR AND ALSO AT THE TIME OF PAYING THE RENTAL ADVANCE TO THE ASSESS EE-COMPANY. FROM THIS, THE ASSESSING OFFICER INFERRED THAT THE PAYME NT OF ` 7,54,098/- ATTRACTED THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. THE CASE OF THE ASSESSEE IS THAT THIS AMOUNT DOES NOT CONSTITUTE AN ADVANCE, BUT A SECURITY DEPOSIT RECEIVED FROM THE GROUP CONCERN TO WHOM THE PROPERTY WAS LEASED OUT AND THIS WAS USUAL BUSINESS PRACTICE WHICH WAS IN FACT CLASSIFIED UNDER CURRENT LIABILITIES OF THE ASSESSEE . BUT AFTER READING THE LEASE AGREEMENT, THE ASSESSING OF FICER CAME TO THE CONCLUSION THAT THIS AMOUNT ONLY REPRESENTED RENT ADVANCE AND NOTHING ELSE AND HENCE SECTION 2(22)(E) OF THE ACT WAS ATTRACTED. AFTER REFERRING TO VARIOUS DECISIONS, THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT EVEN AN ADVANCE RENT GIVEN UNDER A LEASE AGREEMENT HAS TO BE TREATED AS DEEMED DIVIDEND WITHIN THE MEA NING OF SECTION 2(22)(E) OF THE ACT. CONSEQUENTLY, HE HAS TREATED THE AMOUNT AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE AND BR OUGHT THE SAME TO TAX AS ITS INCOME FOR THE BLOCK OF THE YEAR. BE FORE THE LD. CIT(A), THE ASSESSEE FILED A LENGTHY AND DETAILED WRITTEN S UBMISSION IN CONTRAVENTION OF ASSESSING OFFICERS FINDING WHICH HAS BEEN VERBATIM ITA 1947 TO 1949/08 469/09 :- 7 -: EXTRACTED BY THE LD. CIT(A) IN PARA 4.1.2, WHICH WE ALSO LIKE TO EXTRACT HEREIN-BELOW FOR READY REFERENCE: THE A.O HAD MADE THE IMPUGNED ADDITION ON AN ERRON EOUS APPRECIATION OF FACTS BY TREATING THE SUM OF ` 7,54,098/- FORMING PART OF THE RENT DEPOSIT PAID BY M/S MSPIPL TO THE APPELLANT COMPANY AS D EE M E D D I V I D E ND . M/ S . MAD R A S M ADU R AI PROP ERTIES P VT . L TD . (MMP P L ) WAS R E GIST E R E D UNDER THE COMPANI ES ACT, 19 56 ON 2 0- 11-20 0 1 WITH TH E FOLLOWING MAIN OBJ E CTS WHICH ARE SPELT OUT IN THE MEM O R AN DUM OF AS SOC IATION : ( A ) T O L E T, LEASE AND SUB - LEASE FULLY FURNISHED, FULLY E QUIPP E D PREMISES TOGETHER WITH ALL EASEMENTS, APPU R T E N A N C ES, WHAT E VER BELONGING TO AND HERETO ENJOYED BY TH E C OMP A NY AND TO FIT UP THE PREMISES WITH COMPUTERS, FURNITUR ES, FITTING S, FI X TURES, INFRASTRUCTURES, APPURTENANCE S AND E FFE C TS . (B) T O TAKE ON L E ASE AND SUB-LEASE FLATS AND B U I LDING S, AP A RTMENTS AND TO PROVID E FOR THE CONVENIENC E S CO MM O NLY PROVIDED IN FLATS, SUITES, RESIDENTIAL AND BUSINES S C E NT E R S . A COPY OF THE MEMORANDUM AND ARTICLES OF ASSO C I A TI O N O F TH E APP E LLANT COMPANY IS ENCLOSED HEREWITH FOR KIND PERUSAL O F TH E C IT(A) . SHRI V . AYYADURAI AND SHRI V . A . SHIVA, BOTH B E ING DIR EC T ORS I N T H E APPELLANT, HAD ENTER E D IN T O AN AGREEMENT WITH M/S . MMP P L. TH E AGREEMENT DATED 11-12-2001 , CONSULARLY NOTARIZED AT U SA, W AS ENT E RED . INTO FOR LEASING OUT A PROPERTY AT NO.1, KUPPUSW AM Y STR EE T , T . N A GAR, CHENNAI - 17 HAVING THR E E GROUNDS AND 900 SQ . F T . A S TH E B UILTUP AREA TO THE APPELLANT COMPANY. THE SAID A G REEMENT ( C OP Y OF WHI C H IS FURNISH E D H E REWITH) D E AL S WITH TH E SCOPE OF THE MAN A G E M E NT O F THE P RO P E RTIES AND THE L E GAL POW E RS C ONFERRED TH E REIN. IN T H AT L E A SE AGR EE MENT MONTHLY RENT WAS FIXED AT ` 40,OOO/- AN D L EASE P E RI O D W A S DETERMINED AT 51 MONTHS WITH NO REQUIREMENT FOR P A YM E NT OF ANY L E A S E ' DEPOSIT . THE APPELLANT COMPANY ENTER E D INTO AN A GR EE M E NT DATED 14.12.2001 (COPY OF WHICH IS ALSO ENCLO S ED FOR READY R E F E R E NC E ) W IT H M /S . M S PIPL FOR G I VIN G TH E AB O VE - REFERRED PROP E RTY ON L E AS E T O TH E L ATTER, AS P E R WH I CH TH E L EAS E PERIOD W A S FI XE D AT 1 8 MONT H S, L E A S E R E N T AT ` , 20 , 000/ - P . M . IN C LUSIVE OF AM EN IT IE S C HA RGES A N D L E A S E DE PO SIT A T ` . 9 LAKH S. AFTER TAKING THE IM P U G NE D PR OP E RTY O N L EASE FRO M TH E DIRECTORS , THE APP E LL A NT COMPAN Y HAD SP E NT A SUM O F ` 3 ,4 0 , 000/- DURING ITA 1947 TO 1949/08 469/09 :- 8 -: THE RELEVANT FINANCIAL Y E AR TOWAR D S M A I NTEN A N C E OF TH E PR OPE RTY . TH E COP IE S OF THE RELEVANT BAL A NC E SH E ET AND PR O FI T & LO S S ACC O UNT ARE SUBMITT E D H E REWITH BY WAY O F E VID E N CE I N S U PP O RT O F THE SA I D E X PENDITUR E . AFTER T HE L E ASE AGR EE M E NT W IT H T H E D IR EC T O RS B E CA M E OP E RA TIONAL W. E . F . 01 -0 1 - 2002, TH E A P P EL LANT H A D PRO CEE D E D TO F UR NI SH TH E LEASED PREMISE S WITH AIR CONDITI O N E RS , E L E C TRI C A L F ITTIN GS , FUR NI T U R ES A ND FI X TU RE S , ETC . THE T O TAL I NVES T M E NT I N T HIS R E GARD S T OO D AT ` 70 L AK HS , THE DETAIL S OF WH IC H ARE ALSO FURNI S H ED H E R E WIT H . TH E PRESE NT M AR KET REN T FOR A FULLY - F U RNISHED AND W E LL - EQU I PP E D PR E MI SE S WI TH T H E AF ORESAID DIM E N S IONS AND S I TUATED IN A POSH A RE A L I KE T . NAGA R IS O F TH E OR DER OF ` . L00/- P E R SQ . FT . W I TH A MINIMU M O F O N E Y EA R'S D E P O S I T TO B E PAID T O T H E LAND L ORD/L E SSOR. EV E N I N PL AC E S S ITUAT E D ON OL D MAH A B A LIPURAM RO AD A BAR E OFFI C E PR E MISES CAR R IE S A R E N T OF ` 60/- - TO ` 70/- P E R SQ . FT . THUS THE RENT ( I N CLU D I N G AM E N ITI E S C HARG E S) AND THE R E NT D E PO SI T P AI D BY THE A PP E L L ANT ' S SI S T E R CON CE RN ARE QUI TE R EA SONABL E ON C OMMERCI A L TERMS AND C AN I N NO WA Y B E H E L D AS EXCESSIVE. FR O M THE ABOVE FA C TS IT WI L L TRANSPIRE THAT MA I N P U RPO S E OF TH E A PP E LLANT COMPANY WAS TO LEAS E/ SUB - LE A SE AND O WN CO M M E R C IA L P ROPERTI ES IN PURSUANCE OF WHICH THE APPELLANT HAD E NT E R E D I NTO TH E AFORESAID ARRANGEMENT S/ A GREEMENT S PURELY O N A COMMERCIAL BASIS. THE RENT PER SQ. FT AND THE DEPOSIT R ECE IV E D BY T HE APP E LL A NT W ERE QU I T E REASONABLE , WH E N COMPARED WITH SIMIL AR L E AS E D -O UT PR EMIS ES . THE APPELLANT AL S O PAID THE P R OP E RTY T AX, WATER AN D SE W E RA GE TA X , URBAN LAND TA X E TC . DURING T HE Y E AR TH E APP E L L ANT WAS I N R E C EIP T O F THE R ENT DEP OSI T A MOUNTI N G TO ` 7 , 54, 0 98/ - W H I C H , ACC O R DIN G TO THE A.O ., FALL S IN T HE CA TEGORY OF A D EE MED D I V IDE N D W I THI N THE M EA N I NG OF THE PROVI S IONS OF SECTION 2(2 2 )(E) OF TH E I T. A C T . TH E A . O . HA S RE PRODUCED THE RELEVANT PROVISIONS O F S E C T ION 2 (2 2 ) ( E ) IN THE AS S E SSM E NT ORDE R WHILE MAKING THE IMPUGNED ADDIT IO N . F O R READ Y R E F E R E NC E, THE RELEVANT CL A USE OF SECTION 2 IS E XTRA C T E D BELOW: ' ANY PAYM E NT BY A COMPANY, NOT B E ING A C O MPANY IN WH IC H THE PUBL I C ARE SUB S TANTIALLY I NTE RES T E D , OF AN Y SUM (WH E TH E R AS REPRES E NTING A PART OF THE ASSETS OF TH E COM PA N Y OR OTH E RWISE MADE AFTER TH E 31 ST DAY OF MAY 19 8 7 ) B Y W A Y OF ADV A N CE OR LOAN TO A SHARE HOLDER , B EI NG A PER S ON W H O I S THE BENEFI C IAL OWN E R OF S HA RES (NOT BEING S HAR E S E N TI TL E D TO A FIX E D RA TE OF DIV I DEND WH E THER WITH OR WITHOUT A RIGHT T O P ARTICIPA T E IN PR O FI TS ) HOLDING NOT L E SS T HAN TEN P E RCENT OF THE V O TIN G P O W E R, OR TO A NY CONCERN I N WHI C H SU C H SHAREH O LD ER I S A MEMB E R OR A PA R TN E R AND IN WH IC H H E HA S A SUBSTAN TI AL ITA 1947 TO 1949/08 469/09 :- 9 -: IN T ERE S T ( H E R EA F T E R IN THI S C LAUSE REF E RR E D TO A S TH E SAID CON CE RN) O R AN Y P A YMENT B Y ANY SUCH COMP A NY ON B E HALF, OR FOR THE I NDIVIDUA L B E N E FIT, OF AN Y SUCH SHAREHOLDER, T O THE EX T E NT TO WHI C H THE COMP A N Y IN E IT H E R CASE POSSESSES ACCUMULATED PROFITS. THE ANALYSIS OF THE ABOVE CLAUSE WOULD REVEAL THE F OLLOWING: (A) TH E RE SHOULD BE A PAYMENT (B) BY A CLOS E LY- H E L D C OMPANY (C) BY WAY OF ADVAN CE OR LOAN (D ) T O A SHAREHOLDER WHO I S THE BENEF ICI AL OWN E R OF SHAR ES H O LD I NG NOT LESS THAN 1 0 % OF VOTING POW E R (E) T O ANY C ON CE RN (WHI C H INCLUDES COMP A NI E S) IN W H I C H S U C H S H A REHOLDE R H O LD S M ORE TH A N 20 % B E N E F IC I A L I N TERE S T (F) AN Y PAYMENT BY T H E C LOS E LY-HELD C OMPANY ON B E H ALF O F O R F O R TH E INDIVIDU A L BEN E FIT OF SUCH SHAREHOLD E R . TH E S EC TION 2(22) , H O W E V E R , EX CLUD E S ANY A D VANCE OR L O A N M A D E IN TH E ORD I NA R Y COURSE OF B U SIN ESS. THE PROVI S IONS OF S ECTI O N 2 ( 2 2 ) ( E ) ARE ATTR A C TE D ONLY WH E N T H E P A YM E NT IS IN TH E NA TURE OF AN A DVAN CE O R L OA N TO A S HAREHOLD E R . I N TH E I N S TANT CASE , TH E AMOUNT P A ID BY M / S. MSPIPL TO T HE APP E LL A NT C OMPANY I S NOT A L OA N O R ADVAN CE N O R THE AP P E LLAN T CO MPANY IS A S HAREHOL D E R I N M /S. MS PIPL . TH ERE WA S AL S O NO A DVANC E O R LOAN G IV EN B Y M /S . MSPIPL O R T H E A PP E LL A N T C OMPANY TO SH RI V . AYY A DURAI O R H I S S ON WHO A R E THE B E N EFICIAL OWN E R S O F S HAR E S HA V I NG MOR E THAN 10 % O F VO TI N G POWER I N B OT H T HE C O MPANI ES. IN THE I N S TANT C AS E FURTHER TH E RE WA S NO PAYMENT BY M/ S . M MPP P L O N B E HA L F OF OR FOR T HE I ND I VIDUAL B E N EFI T OF SH RI V. AYY A D URA I O R HI S S O N . TH ER E F ORE, T HE CONDITIONS STIPUL A T E D I N TH E S E CTION 2(22) (E ) A RE N O T AT A L L S A TI S FI E D I N THIS CAS E. BOTH SHRI V . AYYADURAI AND HI S SON SH R I V . A . S H IVA LIV E IN USA AND THEY EARN S UFFIC IE NT INC OME IN THAT CO UN T RY W HIC H I S S UBJ E CT E D TAX UNDER THE US T AX A TI ON L A W . TH E Y G E N E R A LLY V ISI T I N DI A O NLY IN CONN EC TION WITH THE BUSIN E SS PUR PO SE OF THE APP E LLAN T AN D IT S GR O UP CONC E RN . IN THE CAPACITY OF THE DIRECTORS THEY ARE ENTITL E D T O VARIOU S PERQU ISI TES I E XPENSES WHICH AR E USUALLY B O RN E BY TH E GR O U P COMP A NIES . N O PAYM E NT WHATSOEVER HAS B E EN MAD E BY T H E SE COMP A NI E S F O R THE INDIVIDUAL B E N E FIT OF THE DIRE C TORS . IN TH E IN S TANT CAS E T H E LEA SE ARRANGEMENTS BET WEE N THE APPELLANT A ND ITS DI RE C T O R S AND A L S O B E TW EE N THE APPELL A NT AND M/S . MSPIPL W ERE E X E C U TE D O N C OM MER CIAL EX P E DIENCY . TH E HON 'B L E SUPREME COURT IN T H E C A S E O F M/S . S. A . BUILDERS LTD . V S . CIT(A) AND ANOTH E R (2007) 28 8 IT R 1 (S C ) HA S H E LD TH A T T R ANSACTIONS BETWE E N SISTER CONCERNS ARE PERMI S SI BL E O N TH E GR OUND OF BUSINESS E XP E DIENCY AND ANY EX P E NDITURE IN CU R R E D IN CONN E CTION TH E R E WITH IS A DEDUCTIBLE BUSINESS E X PENS E . TH OUG H TH E ABOV E DECISION WAS REND E RED BY THE HON ' BLE APE X COURT I N T H E ITA 1947 TO 1949/08 469/09 :- 10 - : C ONT EX T OF S EC TION 36 OF THE I . T.ACT , TH E RATIO OF THE JUDGEMENT I S E QUA LLY APPL I C A BLE TO TH E APPELL A NT'S C AS E WITH THE SAM E FOR CE. TH E D EE M E D DIV ID E ND IS S U E HAS B E EN THE SUBJECT MATT E R OF M A NY JUDICIAL PRONOUNCEMENTS WHICH ARE HI G HLIGHTED BELOW IN BRIEF: (A) TH E HON'BLE ITAT , C H AND I GARH BENCH I N THE CA S E O F D C I T V S . M/S . LAKRA BRO S. (2007) 1 06 ITJ 250 (CHD) H A S H E L D THAT T HE DEFINITION OF TH E ' D EE M E D DI V ID E ND ' AS E NSH RI N ED I N S EC TI O N 2(22)( E ) CANN O T B E STR E TCH E D TO INCLUDE IN IT S A MB I T TH E LEGITIMATE TRANSACTIONS CARRI E D OUT IN THE ORDINA R Y COUR SE O F BU S IN E SS, WHER E TH E INT E NTION IS NEITH E R TO GIV E A L OAN O R ADVANC E NOR TO CONF E R INDIVIDUAL BEN E FIT O N SHAREH O LD ER S. (B) THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF C IT VS NAGINDAS M. KAPADIA (1989) 177 ITR 393 (BOM.) HAS H ELD THAT ADVANCES MADE AGAINST PURCHASES DO NOT ATTRACT THE PROVISIONS OF SECTION 2(22)(E) WH I CH, IN TURN , IM P LI ES THAT R E GULAR BUSINESS TRANSACTIONS CANNO T B E C O NS T RU ED A S L O A N S AND ADVANCES WITHIN THE MEANING OF SECT I ON 2(22)( E ) . ( C ) TH E HON'BLE MUMBAI ITAT IN THE CAS E OF M/S. N . H. S E C U R IT I E S LT D. VS . DCIT (2007) 11 SOT 302 (MUM.) H A S H E LD A S U N D E R : ' WH E REVER PAYM E NTS MADE BY A LIMITED C O MP AN Y T O ITS S H A R E HOLD E RS ARE PROV E D BY ITS CHAR AC T E RISTICS A S O T H E R THAN LO A N S AND ADVANC E S, TH E QUESTION OF INVOKING TH E PR O V I S I ONS OF S EC T I ON 2(22)(E) DO E S NOT ARISE. THE N A TUR E A ND TH E CHARACTER OF THE PAYM E NTS MADE BY THE COMPANY IS V E RY IMPO R TANT IN EXAMINING WHETHER A PARTICULAR P AYM E NT MAD E BY IT FALLS UNDER THE MISCHI E F OF SE C TI O N 2(22)( E ) O R N O T . IT I S TO B E SEEN WHETH E R THE PAYMENTS AR E MADE BY TH E CO M PA NY THROUGH A RUNNING ACCOUNT IN DISCHARGE OF ITS E XI S TI N G D E BTS O R AGAINST PURCHA S E S OR FOR A VAILING S E RVICES . SU C H PAYM E NT S BEI NG MADE IN TH E ORDINARY COURSE OF BUSINESS CAR R I E D ON B Y BOTH THE PARTIES C A NNOT BE TREATED AS DE E M E D DIV I D E N D F OR T H E PURPOSE OF SECTION 2(22)(E) ' . (D) THE HON ' BLE D E LH I ITAT IN THE CAS E OF M/S. NUL O N I N DIA LT D . V S ITO WARD 1 3 (3) (2007) 12 SOT 2 6 0 (D E L.) H AS H E LD T H A T DEEMED DIV I D E ND PR O VISION CANNOT BE APP LI E D WH E N T H E R E CIPIENT OF A PAYM E NT I S NOT A SHAREHOLDER IN T H E P A Y ER COMPANY . THE HON ' BLE ITAT WAS OF THE OPINION THA T W HE N THE RECIPIENT IS NOT A SHAREH O LDER, THE QU ES TI O N O F TR E ATI N G T H E ADVANCES AS DEEMED DIVIDEND DID NOT ARISE. THE SCOPE OF THE DEEMED DI VIDEND IS ONLY TO TAX A SHAREHOLDER. SINCE THE A PPE L LANT CO MP A N Y IS NO T A S HAREHOLD E R IN M / S MS PIPL , IT C A NNOT B E T A X E D U/ S . 2 ( 2 2)(E) . ITA 1947 TO 1949/08 469/09 :- 11 - : ( E ) M / S . AM BA S SAD OR T R A V E LS PVT . L TD . V S . DCI T ; IT A N O . 3090/D /2 00 3 ; (200 7) 10 ITATINDIA 13 7 ( D EL HI) M/ S. AMB ASS A DOR TRAV E LS PV T . L T D . V S. ITO IT A N O. 9 25/D/ 2 00 4; ( 20 0 7) 10 ITATIND I A 1 37 ( DEL H I) (F) M/ S. NH S EC URI T I E S LTD . VS . DCIT , C E N T . C I R. 40; I T A NO . 2322/MUM/2004 ; (2006) 27 ITATI N DIA 90 2 (M UM) ACIT , C E N T. C IR. 40 ; VS M/S. NH S EC UR ITI ES L TD; I T A NO . 4277/M U M/200 4; ( 2 006) 27 ITATINDIA 90 2 (MU M) (G) M RS . NE E N A B HEL V S . ITO ; ITA N O .11 57 TO 116 4/ D E L / 2 0 04; ( 2 0 06) 20 ITATINDIA 1 0 4 0 (DELHI ) ( H) A CI T VS . SH RI VI NO D B S ET H ; ITA N O. 5200 / M UM/20 0 5 (I) I T A 51(4) VS . S H RI K A L YAN G U PTA; I TA N O . 6 74 5/M U M / 20 0 3 & ITA NO.6746/MUM/2003) ; (2006) 3 1 ITATIND I A 6 9 6 ( M UM ) SH RI KALYAN M. GU PT A V S . JCIT; ITA N O. 1 3/MUM / 2 0 03 ; ( 2 006) 3 1 ITATINDIA 69 6 (M U M ) (J) ACIT VS. M/S. MUKUL FINANCE P. LTD; ITA NO.2620/D/2 002; (2007) 24 ITATINDIA 223 (DELHI) . (K) DY. CIT VS M/S SHREE SHYAM KAMAL INDIA; I .T.A.NO. 412(DEL)/2000; (2006) 11 ITATINDIA 1048(DELHI). (L) ITO 12/(3) VS M/S NANDLAL KILACHAND INVESTMENT LTD; I.T.A.NO. 6925/MUM/2002 AND 6924/MUM/2002; (2006) 31 ITATINDI A 1086(MUM). (M) D C IT, CIRCLE 14(2 ) VS . SH RI RAJ KUMA R; I TA N O . 4 1 25/D E I /99 ; ( 2 007) 26 ITATINDIA 4 7 (DELHI) (N) M/ S. VN PRAKASH SECURITIES PVT . L T D . VS . DCIT ; ITA NO. 3 716/MUM/2004; (2006) 33 ITATINDIA 755 (MUM) D C IT VS. M/S.VN PRAKASH SECURITI E S PVT . LTD . ; ITA N O . 4 894/MUM/2004; (2006) 33 ITATINDIA 755 (F \ 1UF ' . 1) TH E HON'BLE ITATS IN THE C ASES R E F E RRED TO ABOVE AT SL . N OS. ( E ) T O (N ) HA V E CAT E G O RICALLY HELD THAT PAYMENTS MADE IN THE ORDINARY C O UR S E O F BU S INESS A R E NOT LIABLE TO BE TR E AT E D AS DEEM E D DIV I DEND . TH E Y HA V E AL S O DISTINGUI S HED BETWEEN THE DEPOSITS AND THE LOANS AND A D V AN CE S . TH E HON ' BLE MUMBAI ITAT IN THE CASE OF M/S. NANDL A L K IL A C HA ND INVESTMENT LTD . CITED SUPRA HA S ITA 1947 TO 1949/08 469/09 :- 12 - : H E LD THAT SECURITY D E PO S IT S R E C E I V E D BY AN ASSESS EE I N CONN E CTION WITH THE LEASING OUT OF A PRO PER TY CA NN O T P A RTAKE TH E C HARACTER OF LO A NS AND ADVANCES WITHIN THE M EA N I N G OF TH E PR O VI SI ONS OF SECTION 2(22)(E) AND THER E BY CANNOT B E RE G A RDED AS D EE MED DIVIDEND. IN VIEW OF THE AFORESAID ARGUMENTS AND THE JUDICIAL PRONOUNCEMENTS, THE A.O WAS LEGALLY NOT JUSTIFIED IN TREATING THE SECURITY DEPOSIT OF ` 7,54,098/- AS THE DEEMED DIVIDEND AND THEREFORE, THE ADDITION MADE U/ S 2(22)(E) DESERVES TO BE DELETED. 6. AFTER CONSIDERING THE ABOVE WRITTEN SUBMISSION, HE HELD THAT THE ASSESSING OFFICER WAS NOT LEGALLY JUSTIFIED IN TREA TING THE SECURITY DEPOSIT RECEIVED BY THE ASSESSEE DURING THE YEAR AS AN ADVANCE WITHIN THE MEANING OF SECTION 2(22)(E) OF THE ACT A ND THEREBY ERRONEOUSLY APPLIED THE RATIO LAID DOWN BY THE HON 'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS SHRI P.K. ABUBUCKER, 25 9 ITR 507, AND DELETED THE ADDITION. 7. IT WAS ALSO NOTICED BY THE ASSESSING OFFICER DURING THE RELEVANT YEAR THAT THE ASSESSEE-COMPANY HAD INCURRED AN EXPE NDITURE OF ` 27,200/- BY WAY OF ROC FEES. AT THE TIME OF ITS IN CORPORATION WHICH WAS BORNE BY M/S MSPIPL ON BEHALF OF THE ASSESSEE C OMPANY. THIS PAYMENT WAS ALSO FOUND TO BE COVERED BY THE ASSESSI NG OFFICER UNDER THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT ON TH E SAME REASONSING. THE ASSESSEE AGREED WITH THIS VIEW OF THE ASSESSING OFFICER BUT BEFORE THE LD. CIT(A) IT WAS PLEADED THAT THIS AMOUNT OF ` 27,200/- IS INCLUDED ITA 1947 TO 1949/08 469/09 :- 13 - : IN THE SUM OF ` 7,54,098/- WHICH WAS RECEIVED AS SECURITY DEPOSIT BY THE ASSESSEE FROM ITS SISTER CONCERN. CONSEQUENTLY TO AVOID DOUBLE ADDITION, BY TREATING IT AS SECURITY DEPOSIT, THIS ADDITION WAS ALSO DELETED. NOW, THE REVENUE IS AGGRIEVED. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND THE MA TERIAL AVAILABLE ON RECORD. BEFORE DECIDING THE CONTENTI OUS ISSUES IN DISPUTE, WE HAVE TO EXAMINE THE ACTUAL AND EXACT NATURE OF DEEMED DIVIDEND AS HAS BEEN INCORPORATED IN THE INCOME-TAX ACT, 196 1. AS PER THE INCOME-TAX ACT, 1961 WHAT IS TO BE TAXED SUBJECT TO ITS PROVISIONS, IS THE INCOME. THE DEFINITION OF INCOME IS INCLUS IVE ONE AND NOT EXHAUSTIVE. IN CASE WE EXTRACT SECTION 2(24), HERE INBELOW, TO A GREATER EXTENT THE MEANING OF INCOME WILL BECOME CL EAR ALTHOUGH IT WILL NOT BE COMPLETE. BUT ONE CAN EASILY BE IN A POSITI ON TO COMPREHEND THE REAL PURPORT OF THE ACT AND WHAT THE WORD INCO ME CONVEYS FOR TAX PURPOSES. SECTION 2(24) READS ASUNDER: 2(24) INCOME 12 INCLUDES 12 ( I ) PROFITS AND GAINS 12 ; ( II ) DIVIDEND ; 13 [( IIA ) VOLUNTARY CONTRIBUTIONS RECEIVED BY A TRUST CREAT ED WHOLLY OR PARTLY FOR CHARITABLE OR RELIGIOUS PURPOSES OR BY A N INSTITUTION ESTABLISHED WHOLLY OR PARTLY FOR SUCH PURPOSES 14 [OR BY AN ASSOCIATION OR INSTITUTION REFERRED TO IN CLAUSE ( 21 ) OR CLAUSE ( 23 ), OR BY A FUND OR TRUST OR INSTITUTION REFERRED TO IN SUB-CLAUSE ( IV ) OR SUB-CLAUSE ( V ) 15 [OR BY ANY UNIVERSITY OR OTHER EDUCATIONAL INSTITUTION REFERRED TO IN SUB-CLAUSE ( IIIAD ) OR SUB-CLAUSE ( VI ) OR ITA 1947 TO 1949/08 469/09 :- 14 - : BY ANY HOSPITAL OR OTHER INSTITUTION REFERRED TO IN SUB-CLAUSE ( IIIAE ) OR SUB-CLAUSE ( VIA )] OF CLAUSE ( 23C ) OF SECTION 10 15A [ OR BY AN ELECTORAL TRUST ] ]. EXPLANATION. FOR THE PURPOSES OF THIS SUB-CLAUSE, TRUST INCLUDES ANY OTHER LEGAL OBLIGATION ;] ( III ) THE VALUE OF ANY PERQUISITE OR PROFIT IN LIEU OF SALARY TAXABLE UNDER CLAUSES ( 2 ) AND ( 3 ) OF SECTION 17 ; 16 [( IIIA ) ANY SPECIAL ALLOWANCE OR BENEFIT, OTHER THAN PERQ UISITE INCLUDED UNDER SUB-CLAUSE ( III ), SPECIFICALLY GRANTED TO THE ASSESSEE TO MEET EXPENSES WHOLLY, NECESSARILY AND EXCLUSIVELY F OR THE PERFORMANCE OF THE DUTIES OF AN OFFICE OR EMPLOYMEN T OF PROFIT ; ( IIIB ) ANY ALLOWANCE GRANTED TO THE ASSESSEE EITHER TO M EET HIS PERSONAL EXPENSES AT THE PLACE WHERE THE DUTIES OF HIS OFFICE OR EMPLOYMENT OF PROFIT ARE ORDINARILY PERFORMED BY HI M OR AT A PLACE WHERE HE ORDINARILY RESIDES OR TO COMPENSATE HIM FOR THE INCREASED COST OF LIVING ;] ( IV ) THE VALUE OF ANY BENEFIT OR PERQUISITE 17 , WHETHER CONVERTIBLE INTO MONEY OR NOT, OBTAINED FROM A COMPANY EITHER BY A D IRECTOR OR BY A PERSON WHO HAS A SUBSTANTIAL INTEREST IN THE C OMPANY, OR BY A RELATIVE OF THE DIRECTOR OR SUCH PERSON, AND A NY SUM PAID BY ANY SUCH COMPANY IN RESPECT OF ANY OBLIGATION WH ICH, BUT FOR SUCH PAYMENT, WOULD HAVE BEEN PAYABLE BY THE DIRECT OR OR OTHER PERSON AFORESAID ; 18 [( IVA ) THE VALUE OF ANY BENEFIT OR PERQUISITE 17 , WHETHER CONVERTIBLE INTO MONEY OR NOT, OBTAINED BY ANY REPRESENTATIVE A SSESSEE MENTIONED IN CLAUSE ( III ) OR CLAUSE ( IV ) OF SUB-SECTION (1) OF SECTION 160 OR BY ANY PERSON ON WHOSE BEHALF OR FOR WHOSE BENEFIT ANY INCOME IS RECEIVABLE BY THE REPRESENTAT IVE ASSESSEE (SUCH PERSON BEING HEREAFTER IN THIS SUB-CLAUSE REF ERRED TO AS THE BENEFICIARY) AND ANY SUM PAID BY THE REPRESEN TATIVE ASSESSEE IN RESPECT OF ANY OBLIGATION WHICH, BUT FO R SUCH PAY- MENT, WOULD HAVE BEEN PAYABLE BY THE BENEFICIARY ;] ( V ) ANY SUM CHARGEABLE TO INCOME-TAX UNDER CLAUSES ( II ) AND ( III ) OF SECTION 28 OR SECTION 41 OR SECTION 59 ; 19 [( VA ) ANY SUM CHARGEABLE TO INCOME-TAX UNDER CLAUSE ( IIIA ) OF SECTION 28 ;] 20 [( VB ) ANY SUM CHARGEABLE TO INCOME-TAX UNDER CLAUSE ( IIIB ) OF SECTION 28 ;] 21 [( VC ) ANY SUM CHARGEABLE TO INCOME-TAX UNDER CLAUSE ( IIIC ) OF SECTION 28 ;] 22 [( VD )] THE VALUE OF ANY BENEFIT OR PERQUISITE TAXABLE U NDER CLAUSE ( IV ) OF SECTION 28 ; ITA 1947 TO 1949/08 469/09 :- 15 - : 23 [( VE ) ANY SUM CHARGEABLE TO INCOME-TAX UNDER CLAUSE ( V ) OF SECTION 28 ;] ( VI ) ANY CAPITAL GAINS CHARGEABLE UNDER SECTION 45 ; ( VII ) THE PROFITS AND GAINS OF ANY BUSINESS OF INSURANC E CARRIED ON BY A MUTUAL INSURANCE COMPANY OR BY A CO-OPERATIVE SOC IETY, COMPUTED IN ACCORDANCE WITH SECTION 44 OR ANY SURPLUS TAKEN TO BE SUCH PROFITS AND GAINS BY VIRTUE OF PROVISIONS C ONTAINED IN THE FIRST SCHEDULE ; 24 [( VIIA ) THE PROFITS AND GAINS OF ANY BUSINESS OF BANKING (INCLUDING PROVIDING CREDIT FACILITIES) CARRIED ON BY A CO-OPE RATIVE SOCIETY WITH ITS MEMBERS;] ( VIII ) [ OMITTED BY THE FINANCE ACT, 1988, W.E.F. 1-4-1988. ORIGINAL SUB-CLAUSE ( VIII ) WAS INSERTED BY THE FINANCE ACT, 1964, W.E.F. 1- 4-1964; ] 25 [( IX ) ANY WINNINGS FROM LOTTERIES 26 , CROSSWORD PUZZLES, RACES INCLUDING HORSE RACES, CARD GAMES AND OTHER GAMES OF ANY SORT OR FROM GAMBLING OR BETTING OF ANY FORM OR NATURE WHATSOEVE R.] 27 [ EXPLANATION. FOR THE PURPOSES OF THIS SUB-CLAUSE, ( I ) LOTTERY INCLUDES WINNINGS FROM PRIZES AWARDED T O ANY PERSON BY DRAW OF LOTS OR BY CHANCE OR IN ANY OTHER MANNER WHATSOEVER, UNDER ANY SCHEME OR ARRANGEMENT BY WHAT EVER NAME CALLED; ( II ) CARD GAME AND OTHER GAME OF ANY SORT INCLUDES A NY GAME SHOW, AN ENTERTAINMENT PROGRAMME ON TELEVISION OR ELECTRONIC MODE, IN WHICH PEOPLE COMPETE TO WIN PRI ZES OR ANY OTHER SIMILAR GAME ;] 28 [( X ) ANY SUM RECEIVED BY THE ASSESSEE FROM HIS EMPLOYE ES AS CONTRIBUTIONS TO ANY PROVIDENT FUND OR SUPERANNUATI ON FUND OR ANY FUND SET UP UNDER THE PROVISIONS OF THE EMPLOYE ES STATE INSURANCE ACT, 1948 (34 OF 1948), OR ANY OTHER FUND FOR THE WELFARE OF SUCH EMPLOYEES ;] 29 [( XI ) ANY SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY INCLUDING THE SUM ALLOCATED BY WAY OF BONUS ON SUCH POLICY. EXPLANATION .FOR THE PURPOSES OF THIS CLAUSE * , THE EXPRESSION KEYMAN INSURANCE POLICY SHALL HAVE THE MEANING AS SIGNED TO IT IN THE EXPLANATION TO CLAUSE ( 10D ) OF SECTION 10 ;] 30 [( XII ) ANY SUM REFERRED TO IN 31 [CLAUSE ( VA )] OF SECTION 28 ;] 32 [( XIII ) ANY SUM REFERRED TO IN CLAUSE ( V ) OF SUB-SECTION (2) OF SECTION 56 ;] 33 [(XIV) ANY SUM REFERRED TO IN CLAUSE (VI) OF SUB-SE CTION (2) OF SECTION 56 ;] ITA 1947 TO 1949/08 469/09 :- 16 - : 33A [(XV) ANY SUM OF MONEY OR VALUE OF PROPERTY REFERRE D TO IN CLAUSE (VII) OF SUB-SECTION (2) OF SECTION 56 ;] 9. THE INCOME TAX BECOME CHARGEABLE FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATES, INCOME TAX AT THAT RATE OR THOSE RATES APPLICABLE FOR THAT YEAR IN ACCORDANCE WITH AND SUBJECT TO THE PRO VISIONS, BENEFICIAL PROVISIONS FOR THE LEVY OF ADDITIONAL INCOME-TAX , IN RESPECT OF THE TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON. THE EXPRESSION PERSON IS AGAIN DEFINED IN SECTION 2(31) BUT IT IS ALSO AN INCLUSIVE DEFINES WHICH READS AS UNDER: PERSON INCLUDES ( I ) AN INDIVIDUAL 57 , ( II ) A HINDU UNDIVIDED FAMILY 57 , ( III ) A COMPANY, ( IV ) A FIRM 58 , ( V ) AN ASSOCIATION OF PERSONS 58 OR A BODY OF INDIVIDUALS 58 , WHETHER INCORPORATED OR NOT, ( VI ) A LOCAL AUTHORITY, AND ( VII ) EVERY ARTIFICIAL JURIDICAL PERSON, NOT FALLING WI THIN ANY OF THE PRECEDING SUB-CLAUSES. 59 [ EXPLANATION. FOR THE PURPOSES OF THIS CLAUSE, AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUALS OR A LOCAL AUTHORI TY OR AN ARTIFICIAL JURIDICAL PERSON SHALL BE DEEMED TO BE A PERSON, WH ETHER OR NOT SUCH PERSON OR BODY OR AUTHORITY OR JURIDICAL PERSO N WAS FORMED OR ESTABLISHED OR INCORPORATED WITH THE OBJECT OF DERI VING INCOME, PROFITS OR GAINS;] 10. SUBJECT TO THE PROVISIONS, THE TOTAL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVES WHICH IS RECEIVED OR IS DEEMED TO B E RECEIVED IN INDIA FOR SUCH YEAR BY AND ON BEHALF OF SUCH PERSON, OR A CCRUES OR ARISES OR ITA 1947 TO 1949/08 469/09 :- 17 - : IS DEEMED TO ACCRUE OR ARISE TO HIM IN INDIA DURING SUCH YEAR, OR ACCRUES OR ARISES TO HIM OUTSIDE INDIA DURING SUCH YEAR IS WITHOUT GIVING COMPLETE SCOPE OF TOTAL INCOME, BECAUSE THAT IS NOT RELEVANT FOR THIS PURPOSE, WHAT IS RELEVANT HERE IS THE ACT RECO GNIZES DEEMED INCOME. NOT ONLY A DIVIDEND HAS BEEN INCLUDED IN T HE DEFINITION OF INCOME BUT DEEMED DIVIDEND HAS ALSO BEEN INCL UDED IN THIS FRAY EXPRESSION. WHAT IS A DIVIDEND IS GIVEN IN SECTI ON 2(22) (E) WHICH IS EXTRACTED BELOW: ( 22 ) 90 DIVIDEND 91 INCLUDES ( A ) ANY DISTRIBUTION 91 BY A COMPANY OF ACCUMULATED PROFITS 91 , WHETHER CAPITALISED OR NOT, IF SUCH DISTRIBUTION EN TAILS THE RELEASE BY THE COMPANY TO ITS SHAREHOLDERS OF ALL OR ANY PA RT OF THE ASSETS OF THE COMPANY ; ( B ) ANY DISTRIBUTION 91 TO ITS SHAREHOLDERS BY A COMPANY OF DEBENTURES, DEBENTURE-STOCK, OR DEPOSIT CERTIFICATE S IN ANY FORM, WHETHER WITH OR WITHOUT INTEREST, AND ANY DISTRIBUT ION TO ITS PREFERENCE SHAREHOLDERS OF SHARES BY WAY OF BONUS, TO THE EXTENT TO WHICH THE COMPANY POSSESSES ACCUMULATED P ROFITS 91 , WHETHER CAPITALISED OR NOT ; ( C ) ANY DISTRIBUTION 91 MADE TO THE SHAREHOLDERS OF A COMPANY ON ITS LIQUIDATION, TO THE EXTENT TO WHICH THE DISTRIBUTIO N IS ATTRIBUTABLE TO THE ACCUMULATED PROFITS OF THE COMPANY IMMEDIATE LY BEFORE ITS LIQUIDATION, WHETHER CAPITALISED OR NOT ; ( D ) ANY DISTRIBUTION 91 TO ITS SHAREHOLDERS BY A COMPANY ON THE REDUCTION OF ITS CAPITAL, TO THE EXTENT TO WHICH TH E COMPANY POSSESSES ACCUMULATED PROFITS 91 WHICH AROSE AFTER THE END OF THE PREVIOUS YEAR ENDING NEXT BEFORE THE 1ST DAY OF APR IL, 1933, WHETHER SUCH ACCUMULATED PROFITS HAVE BEEN CAPITALI SED OR NOT ; ( E ) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WH ETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) 92 [MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF AD VANCE OR LOAN TO A SHAREHOLDER 93 , BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIX ED RATE OF ITA 1947 TO 1949/08 469/09 :- 18 - : DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICI PATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING PO WER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER I N THIS CLAUSE REFERRED TO AS THE SAID CONCERN)] OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, O F ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS 94 ; BUT DIVIDEND DOES NOT INCLUDE ( I ) A DISTRIBUTION MADE IN ACCORDANCE WITH SUB-CLAUSE ( C ) OR SUB- CLAUSE ( D ) IN RESPECT OF ANY SHARE ISSUED FOR FULL CASH CONSIDERATION, WHERE THE HOLDER OF THE SHARE IS NOT ENTITLED IN THE EVENT OF LIQUIDATION TO PARTICIPATE IN THE SURP LUS ASSETS ; 95 [( IA ) A DISTRIBUTION MADE IN ACCORDANCE WITH SUB-CLAUSE ( C ) OR SUB- CLAUSE ( D ) IN SO FAR AS SUCH DISTRIBUTION IS ATTRIBUTABLE TO THE CAPITALISED PROFITS OF THE COMPANY REPRESENTING BON US SHARES ALLOTTED TO ITS EQUITY SHAREHOLDERS AFTER THE 31ST DAY OF MARCH, 1964, 96 [AND BEFORE THE 1ST DAY OF APRIL, 1965] ;] ( II ) ANY ADVANCE OR LOAN MADE TO A SHAREHOLDER 97 [OR THE SAID CONCERN] BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS, WHERE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY ; ( III ) ANY DIVIDEND PAID BY A COMPANY WHICH IS SET OFF B Y THE COMPANY AGAINST THE WHOLE OR ANY PART OF ANY SUM PREVIOUSLY PAID BY IT AND TREATED AS A DIVIDEND WITHIN THE MEANING OF SUB -CLAUSE ( E ), TO THE EXTENT TO WHICH IT IS SO SET OFF; 98 [( IV ) ANY PAYMENT MADE BY A COMPANY ON PURCHASE OF ITS OW N SHARES FROM A SHAREHOLDER IN ACCORDANCE WITH THE PROVISION S OF SECTION 77A 99 OF THE COMPANIES ACT, 1956 (1 OF 1956); ( V ) ANY DISTRIBUTION OF SHARES PURSUANT TO A DEMERGER B Y THE RESULTING COMPANY TO THE SHAREHOLDERS OF THE DEMERG ED COMPANY (WHETHER OR NOT THERE IS A REDUCTION OF CAP ITAL IN THE DEMERGED COMPANY).] EXPLANATION 1. THE EXPRESSION ACCUMULATED PROFITS, WHEREVER IT OCCURS IN THIS CLAUSE, SHALL NOT INCLUDE CAPITAL GA INS ARISING BEFORE THE 1ST DAY OF APRIL, 1946, OR AFTER THE 31ST DAY O F MARCH, 1948, AND BEFORE THE 1ST DAY OF APRIL, 1956. 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, 1 [BUT SHALL NOT, WHERE THE LIQUIDATION IS CONSEQUENT ON THE COMPULSORY ACQUISI TION OF ITS ITA 1947 TO 1949/08 469/09 :- 19 - : UNDERTAKING BY THE GOVERNMENT OR A CORPORATION OWNE D 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 Y EAR IN WHICH SUCH ACQUISITION TOOK PLACE]. 2 [ EXPLANATION 3. FOR THE PURPOSES OF THIS CLAUSE, ( A ) CONCERN MEANS A HINDU UNDIVIDED FAMILY, OR A FI RM OR AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUALS OR A COMPANY ; ( B ) A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL IN TEREST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY TIM E DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS TH AN TWENTY PER CENT OF THE INCOME OF SUCH CONCERN ;] 11. IT IS SEEN THAT SECTION 2(22)(E) OF THE ACT TALKS ABOUT DEEMED DIVIDEND WHICH WE HAVE ALREADY DISCUSSED IN EARLIER PART OF THE ORDER AND AS TO WHAT ARE THE INGREDIENTS OF A DEEMED DIVI DEND. WHAT WE HAVE BEEN ABLE TO UNDERSTAND IS THAT THE WORD DIVI DEND IN ITS ORDINARY CONNOTATION MEANS THE SUM PAID TO OR RECEIVED BY A SHAREHOLDER PROPORTIONATE TO HIS SHARE HOLDING IN A COMPANY OUT OF THE TOTAL SUM DISTRIBUTED. AS STATED ABOVE, THE DEFINITION OF WO RD DIVIDEND IS ENUMERATIVE AND NOT EXHAUSTIVE. EVERY AMOUNT RECEI VED BY A SHAREHOLDER CANNOT BE TREATED AS A DIVIDEND. THE EXPRESSION USES TWO PARTS (I) ACCUMULATED PROFITS; AND (II) DISTR IBUTION THEREOF. ACCUMULATION DOES NOT MEAN THE MERE EXISTENCE OF PR OFITS, EVEN FOR A LENGTHENED PERIOD, HOWEVER, THEY ARE EMPLOYED, BUT IT CONNOTES THE AFFIRMATIVE GATHERING OF THESE PROFITS, OR AS MAY B E SELECTED INTO A MEASURED OR MEASURABLE HEAP AND ALLOCATED TO A NAME D RESERVE FUND, ITA 1947 TO 1949/08 469/09 :- 20 - : WHATEVER ITS NATURE MAY BE. GENERALLY, ACCUMULATE D PROFITS, SIGNIFIES THAT FIRSTLY, THERE MUST HAVE BEEN PROFITS IN EARL IER YEARS AND SECONDLY, THAT AMOUNTS OUT OF SUCH PROFITS HAVE BEEN ACCUMULA TED FROM TIME TO TIME, WITH THE RESULT THAT THERE IS SOME AMOUNT OF ACCUMULATED PROFITS IN POSSESSION OF THE COMPANY JUST BEFORE THE COMMEN CEMENT OF THE ACCOUNTING YEAR. SO, IN A WAY, ACCUMULATED PROFITS MEANS COMMERCIAL PROFITS AND NOT ASSESSEES INCOME. WE NEED NOT TO GO IN DETAIL IN THIS ASPECT BECAUSE IN THE CASES IN HAND, THERE IS NO DI SPUTE WITH REGARD TO THE FACT THAT ASSESSEE COMPANY HAD ACCUMULATED PROF ITS IN ITS HANDS. 12. THE SCOPE OF DEEMED DIVIDEND HAS BEEN WIDENED WIT H EFFECT FROM 1.4.1988 FOR AND FROM ASSESSMENT YEAR 1988-89. IT IS A DEEMING PROVISION WHICH ASSUMES THE EXISTENCE OF THE FACT A LTHOUGH DOES NOT REALLY EXIST. IT MEANS THAT THE COURTS OR TRIBUNA L MUST ASSUME THAT SUCH A STATE OF AFFAIRS EXISTS AS REAL, AND SHOULD IMAGINE AS REAL THE CONSEQUENCES AND INCIDENTS WHICH INVARIABLY FLOW TH EREFROM, AND GIVE EFFECT TO THEM. THE DEEMING PROVISION IS INTENDED TO ENLARGE THE MEANING OF A PARTICULAR WORD OR TO INCLUDE MATTERS WHICH OTHERWISE MAY OR MAY NOT FALL WITHIN THE MAIN PROVISION BUT AT THE SAME TIME THIS LEGAL FICTION CANNOT BE EXTENDED FURTHER OR IN TERPRETED AS TO GO BEYOND THE LEGISLATURES INTENTION IN CREATING THE FICTION BECAUSE LEGAL FICTIONS ARE CREATED ONLY FOR A DEFINITE PURPOSE AN D THEY ARE LIMITED TO ITA 1947 TO 1949/08 469/09 :- 21 - : THE PURPOSE FOR WHICH THEY ARE CREATED AND SHOULD N OT BE EXTENDED BEYOND THEIR LEGITIMATE FIELD. THESE HAVE TO BE CAR RIED OUT IN ITS LOGICAL CONCLUSION, BUT THAT MUST BE WITHIN THE FRAMEWORK O F THE PURPOSE FOR WHICH THEY ARE CREATED. THE PAYMENTS BY WAY OF LO ANS OR ADVANCES ETC., TO THE SHAREHOLDER OR A COMPANY TO TAKE SUCH PROVISION APPLIED ARE TREATED AS TAXABLE DIVIDEND TO THE EXTENT OF TH E ACCUMULATED PROFITS OF THE COMPANY. IN ORDER THAT SUCH LOANS O R ADVANCES MAY BE TREATED AS DEEMED OF WHICH THE CONDITIONS APPLI ED ARE MENTIONED IN THE EARLIER PART OF THIS ORDER. FOR READY REFERENC E, WE REPRODUCE SECTION 2(22)(E) OF THE ACT AS UNDER: 2(22)DIVIDEND INCLUDES . ( 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 TH E 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 B EING 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 CO NCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN T HIS CLAUSE REFERRED TO AS THE SAID CONCERN)] OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEF IT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE CO MPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS ; 13. A BARE READING OF THE ABOVE SECTION EVINCES THAT AN Y LOAN OR ADVANCE MADE TO A SUBSTANTIAL SHAREHOLDER OR TO A C ONCERN IN WHICH ITA 1947 TO 1949/08 469/09 :- 22 - : SUCH SHAREHOLDER HAS SUBSTANTIAL INTEREST AND THE C OMPANY ITSELF HAS ACCUMULATE PROFITS, IT IS DEEMED AS A DIVIDEND. TO ATTRACT THIS PROVISION, THE PAYMENT IS TO BE MADE BY WAY OF AN A DVANCE OR LOAN. SUCH AN ADVANCE OR LOAN HAS TO BE MADE AS THE CASE MAY BE, EITHER TO A SHAREHOLDER, BEING THE BENEFICIAL OWNER OF SHARES NOT LESS THAN 10% OF THE VOTING POWER OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTI AL INTEREST. THIS SECTION DEFINES THE AMBIT OF EXPRESSION DIVIDEND. ALL PAYMENTS BY WAY OF DIVIDEND HAVE TO BE TAXED IN THE HANDS OF RE CIPIENT OF THE DIVIDEND NAMELY, THE SHAREHOLDER. ACCORDING TO U S THE ASSESSING OFFICER HAS MISDIRECTED HIMSELF IN TREATING THE REN TAL ADVANCE AS AN ADVANCE IN THE MANNER IN WHICH IT IS USED IN THE DE FINITION OF SECTION FOR DEEMED DIVIDEND. ACTUALLY THIS AMOUNT DOES N OT CONSTITUTE SUCH AN ADVANCE BUT IS ONLY A SECURITY DEPOSIT RECEIVED FROM THE GROUP CONCERN TO WHOM THE PROPERTY WAS LEASED OUT. ANY S ECURITY DEPOSIT TAKEN FROM A TENANT IS DEFINITELY A CURRENT LIABILI TY OF THE CONCERNED PERSON. THE CONTENTION OF THE LD.DR THAT WHEN TAK ING AN ADVANCE RENT IS A NORMAL BUSINESS PRACTICE THEN WHY SUCH D EPOSIT WAS NOT GIVEN BY THE ASSESSEE-COMPANY TO ITS DIRECTORS WHEN THEY TOOK IT ON LEASE FROM THEM. WE ARE AFRAID, THIS SUBMISSION SU PPORTS THE CASE OF THE ASSESSEE AND NOT THAT OF THE DEPARTMENT WHEN THE PROVISIONS OF ITA 1947 TO 1949/08 469/09 :- 23 - : SECTION 2(22)(E) ARE CLOSELY SCRUTINIZED IN ITS PRO PER PERSPECTIVE IT BECOMES AXIOMATIC THAT THIS SECTION EXCLUDES ANY AD VANCE OR LOAN MADE IN THE ORDINARILY COURSE OF BUSINESS. THE PA YMENT MENTIONED IN THIS SECTION HAS TO BE IN THE NATURE AN ADVANCE OR LOAN, THE WORD ADVANCE WILL TAKE ITS COLOUR FROM THE MEANING OF THE WORD LOAN TO A SHAREHOLDER. IN THE GIVEN CASE, THE AMOUNT PAID BY MSPIPL TO THE ASSESSEE COMPANY IS NOT A LOAN OR AN ADVANCE IN THE SENSE IN WHICH IT IS INTENDED, NOR THE ASSESSEE COMPANY IS A SHAREHOL DER IN M/S MSPIPL. NO LOAN OR ADVANCE HAS BEEN GIVEN BY M/S MSPIPL OR THE ASSESSEE COMPANY TO SHRI V. AYYADURAI OR TO HIS SON SHRI V.A SHIVA WHO ARE THE BENEFICIARY OWNERS OF SHARES HAVING 10% VOTING POWE R IN BOTH THE COMPANIES. NO SUCH PAYMENT BY M/S MSPIPL ON BEHAL F, OR FOR THE INDIVIDUAL BENEFIT OF THESE DIRECTORS HAS BEEN MADE . SO, CLEARLY, THE CONDITIONS AS LAID DOWN IN THIS SECTION ARE NOT AT ALL SATISFIED. THE CONDITIONS LAID DOWN IN THIS SECTION CAN BE SUMMARI ZED AS UNDER: (A) TH E RE SHOULD BE A PAYMENT (B) BY A CLOS E LY- H E L D C OMPANY (C) BY WAY OF ADVAN CE OR LOAN (D ) T O A SHAREHOLDER WHO I S THE BENEF ICI AL OWN E R OF SHAR ES H O LD I NG NOT LESS THAN 1 0 % OF VOTING POW E R (E) T O ANY C ON CE RN (WHI C H INCLUDES COMP A NI E S) IN W H I C H S U C H S H A REHOLDE R H O LD S M ORE TH A N 20 % B E N E F IC I A L I N TERE S T (F) AN Y PAYMENT BY T H E C LOS E LY-HELD C OMPANY ON B E H ALF O F O R F O R TH E INDIVIDU A L BEN E FIT OF SUCH SHAREHOLD E R . ITA 1947 TO 1949/08 469/09 :- 24 - : 14. NO PAYMENT WHATSOEVER HAS BEEN FOUND TO HAVE BEEN M ADE TO THE DIRECTORS BY THESE COMPANIES FOR THEIR INDIVIDU AL BENEFITS AND THE LEASE ARRANGEMENTS BETWEEN THE ASSESSEE-COMPANY AND ITS DIRECTORS AND SO ALSO BETWEEN THE ASSESSEE-COMPANY AND M/S MS PIPL WERE CLEARLY EXECUTED ON COMMERCIAL EXPEDIENCY. SUCH TR ANSACTIONS INTER SE SISTER CONCERNS, WHICH ARE PURELY BASED ON BUSINESS EXPEDIENCY AND ARE PERMITTED AS HAS BEEN HELD BY M/S S.A.BUILDERS VS CIT, 288 ITR 1. WHATEVER TRANSACTIONS ARE EXECUTED DURING THE ORDIN ARY COURSE OF BUSINESS CANNOT BE GIVEN EXTENDED MEANING OF DEEME D DIVIDEND. IT IS THE INTENTION OF THE PARTIES WHICH MATTERS AND N OT THE INFERENCE OF THE ASSESSING OFFICER. A LOAN OR ADVANCE GIVEN FO R INDIVIDUAL BENEFITS OF SHAREHOLDERS ONLY HAS TO BE TREATED AS DEEMED D IVIDEND. THERE ARE NUMEROUS DECISIONS IN THIS CONNECTION WHICH HAV E BEEN LISTED BY THE LD. CIT(A) IN THE ABOVE EXTRACTED PORTION OF HI S ORDER, THEREFORE, THERE IS NO NEED TO REPEAT THEM. THE GIST OF THE A BOVE DECISIONS IS THAT PAYMENTS MADE IN THE ORDINARY COURSE OF BUSINE SS ARE NOT LIABLE TO BE TREATED AS A DEEMED DIVIDEND . THERE IS A DIFFERENCE BETWEEN A DEPOSIT, LOAN AND AN ADVANCE. ANY ADVANCE RECEIVE D AS DEPOSIT BY AN ASSESSEE IN CONNECTION WITH THE LEASING OUT OF THE PROPERTY CANNOT PARTAKE THE CHARACTER OF A LOAN OR ADVANCE WITHIN T HE MEANING OF SECTION 2(22)(E) OF THE ACT AND THUS CANNOT BE TRE ATED AS DEEMED ITA 1947 TO 1949/08 469/09 :- 25 - : DIVIDEND. THEREFORE, WE ARE FULLY IN AGREEMENT WITH THE FINDING OF THE LD. CIT(A) IN THIS REGARD. 15. LIKEWISE, WHEN THERE IS NO DISPUTE WITH REGARD TO T HE FACTS OF THE REMAINING AMOUNT OF EXPENDITURE INCURRED TO THE EXTENT OF ` 27,200/- BY THE ASSESSEE TOWARDS ROC FEES, AT THE TIME OF ITS INCORPORATION WHICH WAS BORNE BY M/S MSPIPL, ON BEH ALF OF THE ASSESSEE-COMPANY, THAT TOO CANNOT BE TAXED IN THE H ANDS OF THE COMPANY AND IT IS AN UNDISPUTED FACT THAT THIS AMOU NT IS ALSO IN THE TOTAL SUM OF ` 7,54,098/-. THEREFORE, WE CAN SAFELY HOLD THAT TH E PROPERTY SITUATED AT T.NAGAR WHICH WAS LEASED OUT TO A SISTER CONCERN WAS DONE DURING ITS ORDINARY COURSE OF BUSINESS AND IN FURTHERANCE OF ITS OBJECTS MENTIONED IN THE MEMORANDUM OF ASSOCIA TION WHICH ARE AS UNDER: ( A ) T O L E T, LEASE AND SUB - LEASE FULLY FURNISHED, FULLY E QUIPP E D PREMISES TOGETHER WITH ALL EASEMENTS, APPU R T E N A N C ES, WHAT E VER BELONGING TO AND HERETO ENJOYED BY TH E C OMP A NY AND TO FIT UP THE PREMISES WITH COMPUTERS, FURNITUR ES, FITTING S, FI X TURES, INFRASTRUCTURES, APPURTENANCE S AND E FFE C TS . (B) T O TAKE ON L E ASE AND SUB-LEASE FLATS AND B U I LDING S, AP A RTMENTS AND TO PROVID E FOR THE CONVENIENC E S CO MM O NLY PROVIDED IN FLATS, SUITES, RESIDENTIAL AND BUSINES S C E NT E R S . 16. WHEN THIS PROPERTY WAS TAKEN ON LEASE BY THE ASSES SEE- COMPANY IT WAS UNFURNISHED. FOR FURNISHING THE SAM E, A SIGNIFICANT ITA 1947 TO 1949/08 469/09 :- 26 - : AMOUNT WAS INVESTED BY THE ASSESSEE-COMPANY AND THE REAFTER ONLY IT WAS RELEASED TO M/S MSPIPL. THE ASSESSING OFFICER HAS NOT FOUND THE MONTHLY LEASE RENT AND SECURITY DEPOSIT RECEIVED/RE CEIVABLE BY THE ASSESSEE-COMPANY TO BE UNREASONABLE WHEN COMPARED W ITH MARKET RATES. THE PERUSAL OF THE LEASE AGREEMENT ALSO REV EALS THAT THE IMPUGNED PAYMENT CONSTITUTES A RECEIVABLE SECURITY DEPOSIT AND NOT ADJUSTABLE AGAINST MONTHLY RENT. THE RATIO LAID D OWN IN THE CASE OF CIT VS P.K. ABUBUCKER (SUPRA) RELIED ON BY THE ASSE SSING OFFICER IN WHICH RENT ADVANCE HAS BEEN HELD TO BE DEEMED DIVID END IS ACTUALLY DISTINGUISHABLE ON FACTS BECAUSE IN THAT CASE, THE ASSESSEE HAD RECEIVED RENTAL ADVANCE FOR USING TOWARDS THE CONST RUCTION OF A PROPERTY WHICH WAS TO BE SUBSEQUENTLY LEASED OUT TO THE PARTIES MAKING THE PAYMENT OF THE ADVANCE. THEREFORE, THAT RECEIPT DEFINITELY CONSTITUTES AN ADVANCE IN THE SAME SENSE IN WHICH T HE TERM LOAN HAS BEEN IN THIS SECTION. IN THE GIVEN CASE, THE ASSESSEE HAS LEASED A FURNISHED PROPERTY AFTER TAKING IT ON LEASE AND AFT ER SPENDING A SUBSTANTIAL AMOUNT OF MONEY OUT OF ITS OWN SOURCES. MOREOVER, IT IS A REFUNDABLE SECURITY DEPOSIT AND THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IS NOT APPLICABLE TO THE CASE IN HAND. THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS M/S NANDLAL KILACHAND INVESTMENT LTD(SUPRA) HAD AN OCCASION TO DEAL WITH EXACTLY ITA 1947 TO 1949/08 469/09 :- 27 - : SIMILAR PAYMENT. THE TRIBUNAL HAS DISTINGUISHED TH E SAME FROM LOANS AND ADVANCES WHEN THE SECURITY DEPOSIT TO THE TUNE OF ` 3.30 CRORES WAS RECEIVED BY THE ASSESSEE IN CONNECTION WITH LEA SING OUT OF A BUILDING. AFTER DISCUSSING SECTION 2(22)(E) OF THE ACT IN THE CONTEXT OF THE PROVISIONS OF RBI ACT, 1934 AND COMPANIES ACT, 1956, FINALLY HELD THAT SECURITY DEPOSIT RECEIVED IN SUCH CIRCUMSTANCE S DOES NOT FALL IN THE CATEGORY OF DEEMED DIVIDEND. THE LEGISLATURE HAS NOT USED IN ITS WISDOM THE WORD DEPOSIT IN THIS SECTION ALONGWITH LOANS AND ADVANCES. THUS, THIS PROVISION IS NOT ATTRACTED FO R SECURITY DEPOSITS RECEIVED BY AN ASSESSEE IN THE NORMAL COURSE OF ITS BUSINESS ACTIVITY. CONSEQUENTLY, WE DO NOT FIND ANY REASON TO INTERFER E WITH THE IMPUGNED FINDING OF THE LD. CIT(A) AND CANNOT ALLOW THIS APPEAL OF THE REVENUE. I.T.A.NO. 1948/MDS/2008(A.Y 2005-06) 17. THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) DATED 23.7.2008. IN THIS APPEAL, FOLLOW ING GROUNDS HAVE BEEN RAISED: 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO LAW AND FACTS OF THE CASE. 2.1. THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE U/S 2( 22)(E) OF THE ACT BY THE ASSESSING OFFICER ON THE G ROUND THAT AO HAS NOT LEGALLY JUSTIFIED IN CLASSIFYING THE REN TAL SECURITY DEPOSIT RECEIVED BY THE ASSESSEE AS AN RENTAL ADVAN CE WITHIN ITA 1947 TO 1949/08 469/09 :- 28 - : THE MEANING OF SEC. 2(22)(E) OF THE ACT. 2.2 THE LD. CIT(A) FAILED TO APPRECIATE THE FACT TH AT IN THE LEASE AGREEMENT ENTERED INTO BY THE ASSESSEE IT WAS DEARL Y MENTIONED THAT M/S MILLENNIUM SOFTWARE PRODUCTIONS INDIA PVT. LTD. ( M/S MSPIPL) HAS TO PAY RENT IN ADDITION TO T HE ADVANCE OF RS. 9LAKHS. 2.3. THE LD. CIT(A) FAILED TO APPRECIATE THE FACT T HAT M/S MSPIPL WAS A CLOSELY HELD COMPANY IN WHICH PUBLIC W ERE NOT SUBSTANTIALLY INTERESTED AND THAT IT POSSESSED HUGE ACCUMULATED PROFIT AT THE TIME WHEN THE RENTAL ADVANCE WAS GIVE N BY M/S MSPIPL TO THE ASSESSEE AND THEREBY THE CONDITIONS L AID DOWN IN SEC. 2(22)(E) WERE SATISFIED IN THE ASSESSEE'S C ASE. 2.4 THE LD. CIT(A) FAILED TO APPRECIATE THE FACT TH AT THE ASSESSEE HAS NOT GIVEN ANY DEPOSIT TO ITS DIRECTORS SHRI V. AYYADURAI AND SHRI V.A. SHIVA WHILE TAKING THE PROP ERTY ON LEASE, THOUGH THE ASSESSEE CLAIMED THAT MAKING/RECE IVING DEPOSIT IS A COMMON BUSINESS PRACTICE. 2.5. THE LD. CIT(A) IN HIS ORDER THOUGH HELD THAT T HE PAYMENT MADE BY THE ASSESSEE AS RENTAL SECURITY DEPOSIT, F AILED TO DISTINGUISH WHY THE SAID PAYMENT SHOULD NOT BE TREA TED AS RENTAL ADVANCE. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING IT IS PRAYED THAT THE ORDER OF THE LEAR NED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE R ESTORED. 18. THE FACTS OF THIS YEAR ARE EXACTLY IDENTICAL TO THE FACTS OF EARLIER ASSESSMENT YEAR EXCEPT THE AMOUNT OF RENT ADVANCE R ECEIVED WHICH IS ` 9 LAKHS IN THIS CASE. THEREFORE, ON THE BASIS OF SIMILAR REASONINGS AND ARGUMENTS, WE DISMISS THIS APPEAL OF THE REVENU E ALSO. ITA 1947 TO 1949/08 469/09 :- 29 - : I.T.A.NO. 1949/MDS/08(A.Y 2006-07) 19. THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) DATED 23.7.2008. THE GROUNDS RAISED IN THIS APPEAL ARE AS UNDER: 1 . THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO LAW AND FACT S O F THE CASE . 2.1 . THE LD . C!T(A) ERRED IN DELETING THE FOLLOWING ADDITIONS OF ` 8 . 6 5 C R O RE S, BEING THE ADDITION MADE U /S 2 ( 22) ( E) OF THE IT . AC T BY THE ASSESSING OFFI C E R O N THE GROUND THAT AO HAS NOT LEGALLY JUSTIFIED IN CLA SSIFY I NG THE SAME W I T HIN T H E MEANING OF SECTION . 2(22)(E) OF TH E ACT . I. ADDITION ON ACCOUNT OF RENTAL ADVANCE ` 12,00,000 II. ADDITION ON ACCOUNT OF FURTHER ADVANCE RECEIVED FROM SISTER CONCERN ` 7,24,164 III. ADDITION ON ACCOUNT OF ADVANCE RENT ` 12,00,000 IV. ADDITION ON ACCOUNT OF UNRECORDED CASH PAYMENT ` 1,50,00,000 V. ADDITION ON ACCOUNT OF PAYMENT MADE TO SHRI AYYADURAI TOWARDS PURCHASE OF LAND ` 84,10,500 VI ADDITION ON ACCOUNT OF PAYMENT MADE TOWARDS PURCHASE OF LAND ` 6,00,04,931 2 . 2 THE LD . C!T(A) FAILED TO APP RECIATE THE FACT THAT I N THE LEASE AGREEME NT ENTERED I NTO BY THE ASSESSEE IT W A S CL EA R L Y MENTIONED THAT M /S MIL L E NNIUM S O F TWAR E PRODUCTIONS I ND IA P VT . LTD . ( M / S MSP I P L) HA S T O PAY R ENT IN ADD I TION TO THE ADVANCE OF ` 12 L AKHS . 2 .3. TH E L D . C IT(A) FAILED TO APPRECIATE THE FA C T THAT M /S M S PIP L W AS A CLOSELY H EL D COMPANY I N WHICH PUBLIC WERE NOT SUBSTANTIALLY I NTERESTED A N D TH A T IT POSSESSED HUGE ACCUMULAT E D PROFIT AT THE TIME WHEN THE RENTAL ADVANCE W AS G I VEN BY M / S MSPIPL TO THE ASSESSEE AND THEREBY THE CONDITIONS LAID D O W N IN S E C. 2( 22)(E) WERE SATISFIED IN THE ASSESSEE'S CASE . 2 . 4 TH E LD. CI T(A) FAIL E D TO APPREC I ATE THE FAC T THAT THE ASSES S EE H A S NOT GIVEN ANY DEPOS I T TO ITS DIRECTORS SHRI V . AYYADURAI AND SHRI V . A. SH I VA WHILE TAK I NG THE PROPERTY ON ITA 1947 TO 1949/08 469/09 :- 30 - : LEASE , THOUGH THE ASSES S EE C LAIME D T H AT MAK I NG / RE C E IVI NG DEPOSIT I S A C OMMON BUSINESS PRACTICE . 2.5 . T HE LD . C!T(A ) IN H I S ORDER THOUGH HELD THAT THE PAYMENT MA D E BY THE ASSESSEE AS RENTAL SECURITY DEPOSIT, FAILED TO DISTI N GUISH WHY THE SAID PAYMEN T SHOULD NOT BE TREATED A S RENTAL ADVANCE . 2.6. THE LD. CIT(A) FAILED TO NOTE THAT SHRI V.AYYADURA I AND SHRI V.A SHIVA, DIRECTORS OF THE ASSESSEE-COMPANY W HO WERE HOLDING MORE THAN 20% OF SHARE IN THE ASSESSEE-COMP ANY TRANSFERRED THEIR RESPECTIVE SHARE IN A COLLUSIVE TRANSA CTIO N W I TH THE SOLE INTENTION TO ESCAPE THE MISCHIEF O F PROVISION O F SE CTION 2 (22)(E) OF THE IT ACT . 2 . 7 . THE LD . C I T (A) FAILED T O NOTE THAT THE TRANSFER O F SHARE WAS FI C TITIOU S AND T HE C ONDITIONS STIPULATED IN SEC . 2(22)(E) WERE FULFILLED. NO SATISFACTORY EXPL AN ATION WA S OFFERED BY THE A S SESSEE IN THIS R EGARD . 2 . 8 . THE LD . CIT( A ) F AILE D TO NO TE TH AT THE SHARES WERE TRANSFE R RE D T O TH E R ELAT IVE S OF T HE D IR E C TO R S WITHOUT ADEQUATE C ONSIDERATION . 2 . 9 . T HE LD . C IT(A) FAILED T O NOTE THAT THE C ONTR O L AND MANAGEMENT O F ASS E SSEE C OMPANY WERE WITH THE DIRECTORS ONLY EVEN AFTER THE SO C ALLED TRANSFE R O F S HARES . 2 . 1 0 . T HE L D . CIT(A) FAILED TO OBSERVE THAT THE SHARE O F THE ASSESSEE C O MP A N Y WE R E T R ANSFERRED ON FACE VALUE OF ` L LAKH WHEN THE A S SE S SEE C OMPANY H AD ASSET WORTH ` 7 CRORES , THEREBY EVADING TAX . 2 . 11 . T HE L D . C IT(A) FAILED T O OBSERVE THAT THE C UM ULATIVE REN T A L A DVANC E R E C E I VED F ROM THE SISTER CONCERN M/S . MSPIPL AS O N 31 . 3 . 2 006 ST O OD A T R S.3 0 , 00 , 0 0 0/- BUT THE O/B OF THE RENTAL ADVANCE AS ON 1 . 4 .2 005 W A S FOUND T O B E ` 18,00,000/- 2 . 1 2 . T HE L D . CIT(A) FAILED TO OBSERVE THAT THE PAYMENT OF ` 1 . 5 C RORE S WA S R OUTED THROUGH THE ASSESSEE COMPANY, IN WHICH SHRI V.AYYADURAI WAS O WN I N G MORE THAN 20% BENEFICIAL SHARE , HENCE THE SAID AMOUNT WA S AL S O TR E A T E D A S D EEMED DIVIDEND I N THE HANDS OF THE ASSESSEE . 2 .13. THE LD. CIT(A) FAILED TO OBSERVE THAT SINCE T HE PAYMENT OF ` 84,10,500 WAS ROUTED THROUGH THE ASSESSEE COMPANY I N WHICH SHRI V. AYYADURAI WAS OWNING MORE THAN 20% OF SHARE THE SAID AMOUNT WAS TREATED AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE COMPANY ON PROTECTIE BASIS AND IN THE HAND S OF SHRI ITA 1947 TO 1949/08 469/09 :- 31 - : V.AYYADURAI ON SUBSTANTIVE BASIS. 2 . 1 4 T HE LD . CIT(A) FAILED TO O BSERVE THAT S I NCE THE T RANSFER O F SH A RE OF TH E ASSESSEE COMPANY FROM SHRI V.AYYADURAI AND SHR I V . A . SHIVA TO THEIR R E L AT I VE S W . E.F . 0 1 /04/2005 WAS TREATED AS A FICTITIOUS TRANSACTION , T HE A . A . OBSERVED TH A T T HE ADVANCE OF RS . 6,00 , 04,931 /- C AME WITHIN THE AMBIT O F THE P R OV I SION S O F S E C.2( 22)(E) AND TAXED IT AS DEEMED DIV I DEND . 3. F O R THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT TH E TIME OF HEAR I N G I T I S P RAYED THAT THE ORDER OF THE LEARNED CIT{A) MAY BE S ET ASIDE AND THAT O F THE A SSE S S I NG OFFICER BE RESTORED . 20. THE FACTS OF THIS YEAR ARE ALMOST IDENTICAL TO THE FACTS OF EARLIER YEARS AND THE PAYMENTS ARE ALSO OF THE SAME NATURE AS HAS BEEN HELD IN EARLIER YEARS, THEREFORE, WE CANNOT ALLOW THIS APPEAL OF THE REVENUE AS WELL. FOR FURTHER CLARIFICATION, WE WOU LD NARRATE THE REASONS FOR ARRIVING AT THE ABOVE CONCLUSION. FOR THE YEAR ENDING 31.3.2006, THE ASSESSEE COMPANY FILED RETURN OF INC OME ON 30.11.2006 ADMITTING NIL INCOME. ON PERUSAL OF BOOKS OF ACCOU NT AND BANK ACCOUNT STATEMENT OF MSPIPL, IT WAS FOUND THAT ` 12 LAKHS WERE ADVANCED TO THE ASSESSEE ON 26.10.2005 AS BOTH THE DIRECTORS OF MSPIPL AS STATED ABOVE HELD MORE THAN 20% OF BENEFI CIAL SHARES IN BOTH THE COMPANIES AND MSPIPL WAS IN POSSESSION OF HUGE ACCUMULATED PROFITS, THE ASSESSING OFFICER HAS TREA TED THIS AMOUNT AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT AS AGAINST THE ASSESSEE HAS TREATED THIS AMOUNT AS SECURITY DEPOSIT MADE BY MSP IPL TO THE ASSESSEE COMPANY. THE FACTS OF THIS LEASE BY THE D IRECTORS TO THE ASSESSEE COMPANY ON FURTHER LEASE BY THE ASSESSEE C OMPANY AND ITA 1947 TO 1949/08 469/09 :- 32 - : MSPIPL OF THE SAME BUILDING AS TAKEN IN EARLIER PAR T OF THIS ORDER. LIKEWISE, THE ASSESSEE COMPANY HAD DEBITED BALANCE OF ` 7,27,124/- WHICH IS WORKED OUT AS UNDER: DEBIT BALANCE AS ON 31.3.06 : 22,72,028 LESS: ALREADY CONSIDERED UNDER PARA 3 ABOVE : 12,00,000 10,72,028 LESS: OPENING BALANCE AS ON 1.4.05 3,44,864 BALANCE DEBIT BALANCE : 7,27,164 21. THIS AMOUNT HAS ALSO BEEN FOUND TO BE HIT BY THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT AND HAS BEEN ADDED AS DEEMED DIVIDEND IN ASSESSEES HANDS. THE ASSESSEE COMPANY HAS ALSO RECEIVED ADVANCE RENT OF ` 12 LAKHS AS UNDER: DEBIT BALANCE AS ON 31.3.06 : 30,00,000 LESS: OPENING BALANCE AS ON 1.4.05 : 18,00,000 BALANCE DEBIT BALANCE : 12,00,000 22. THIS AMOUNT HAS ALSO BEEN ADDED U/S 2(22)(E) OF THE ACT DURING THE FINANCIAL YEAR 2005-06. MSPIPL GAVE ` 1.50 CRORES TO THE ASSESSEE COMPANY WHICH WAS UTILIZED BY SHRI V. AYYADURAI, DI RECTOR IN BOTH THE COMPANIES FOR PAYMENT AS SALE CONSIDERATION (ON-MON EY) AND THE SAME WAS TREATED AS DEEMED DIVIDEND IN THE HANDS OF SHRI V.AYYADURAI WHICH WAS ADDED AS DEEMED DIVIDEND ON PROTECTIVE BA SIS IN THE HANDS OF THE ASSESSEE COMPANY. ITA 1947 TO 1949/08 469/09 :- 33 - : 23. ON EXAMINATION OF SEIZED DOCUMENTS MARKED AS ANN/MPB/DOCS/S DATED 17.3.2006 IT WAS SEEN THAT AGR EEMENT WAS ENTERED INTO BETWEEN ONE SHRI RAJESH OF M/S JSR REA L ESTATE AND SHRI AYYADURAI, DIRECTOR ONLY BUT NOT IN THE NAME OF TH E ASSESSEE COMPANY FOR PURCHASE OF 37.38 ACRES OF LAND AT KOTTAIYUR VI LLAGE. THIS ADVANCE WAS PAID BY THE ASSESSEE COMPANY. THIS AMOUNT WAS ALSO ADDED U/S 2(22)(E) OF THE ACT. 24. ON PERUSAL OF THE SCHEDULES FORMING PART OF THE BAL ANCE SHEET, IT WAS SEEN THAT THE ASSESSEE HAD A DEBIT BALANCE OF ` 6,00,04,931/- ON ACCOUNT OF ADVANCE RECEIVED FOR LAND. THE TRANSFER OF SHARES WAS TREATED AS A FICTITIOUS ONE AND THE DIRECTORS OF B OTH THE COMPANIES HAD MORE THAN 20% BENEFICIAL SHARES OF BOTH THE COM PANIES, SO THIS AMOUNT WAS TREATED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT IN THE HANDS OF THE ASSESSEE COMPANY. AGAINST THESE ADDIT IONS, APPEAL WAS FILED BEFORE THE LD. CIT(A), WHO DELETED ALL THESE DELETIONS AND ALLOWED THE APPEAL OF THE ASSESSEE. NOW, THE REVENUE IS IN APPEAL. 25. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE P ERUSED THE ENTIRE RECORD. IN THE GIVEN CASE, THERE IS NO DI SPUTE WITH REGARD TO THE FACTS AND THE ASSESSEE COMPANY HAD ENOUGH ACCUM ULATED PROFITS. THERE IS NO DISPUTE REGARDING THE QUANTUM OF DEEMED DIVIDEND BUT THE ITA 1947 TO 1949/08 469/09 :- 34 - : DISPUTE IS REGARDING THE FACT THAT ASSESSEE CLAIMS THAT IT DOES NOT FALL IN THE MISCHIEF OF PROVISIONS OF SECTION 2(22)(E) OF T HE ACT. THE MAIN THRUST OF THE ASSESSEE IS ON THE NATURE OF THE MONE Y RECEIVED OR ADVANCED TO IT. IN SO FAR AS ADDITION OF ` 12,00,000/- ON ACCOUNT OF PAYMENT RECEIVED FROM THE SISTER CONCERN BY RENT DE POSIT/ADVANCE IS CONCERNED, IN VIEW OF OUR ABOVE DISCUSSION, THIS RE ND ADVANCE CANNOT BE ADDED IN THIS ASSESSEE-COMPANYS HANDS AND HAS C ORRECTLY BEEN DELETED BY THE LD. CIT(A). 26. LIKEWISE, ADDITION OF ` 7,24,164/- AS DEEMED DIVIDEND IN ANY CASE, IT IS A PAYMENT RECEIVED BY THE ASSESSEE-COMP ANY DURING THE YEAR FROM THE SISTER CONCERN. IT WAS ADDED ONLY BE CAUSE OF THE REASON THAT TRANSFER OF SHARES AS ON 1.4.2005 FROM THE DIR ECTORS TO THEIR RELATIVES WAS FOUND TO BE FICTITIOUS TRANSACTION BY THE ASSESSING OFFICER. BUT IT WAS FOUND BY THE LD. CIT(A) THAT THERE IS NO EVIDENCE TO SUPPORT THE ABOVE CONCLUSION IN THE HANDS OF THE ASSESSING OFFICER. WE HAVE ALSO FOUND NO COGENT EVIDENCE ON RECORD TO PROVE TH AT THE TRANSFER OF SHARES ON 1.4.2005 WAS REALLY FICTITIOUS. BUT CONTR ARY TO THIS, THE DOCUMENTARY EVIDENCE OF THE ASSESSEE SHOWS THAT THE TRANSFER OF SHARES WAS STRICTLY IN ACCORDANCE WITH LAW, SO THE GENUINITY OF THE TRANSFER OF SHARES CANNOT BE DOUBTED. FURTHER MORE , THE DIRECTORS HELD NOMINAL NUMBER OF SHARES IN ASSESSEE-COMPANY, SO S ECTION 2(22)(E) ITA 1947 TO 1949/08 469/09 :- 35 - : OF THE ACT CANNOT BE ATTRACTED. IN VIEW OF THE ABO VE MENTIONED LEGAL POSITION, THIS AMOUNT HAS ALSO BEEN CORRECTLY DELET ED BY THE LD. CIT(A). 27. REGARDING DELETION OF ` 12 LAKHS ADDED ON ACCOUNT OF DEEMED DIVIDEND, THE FACTS ARE THAT AS PER BALANCE SHEET AS ON 31.3.2006, THE CUMULATIVE RENTAL ADVANCED RECEIVED FROM THE SISTER CONCERN MSPIPL STOOD AT ` 30 LAKHS. OPENING BALANCE OF RENTAL ADVANCE AS ON 1.4.2005 WAS FOUND TO BE ` 18 LAKHS. FROM THIS, THE ASSESSING OFFICER INFERRED THAT THE ASSESSEE HAD RECEIVED A FRESH REN TAL ADVANCE OF ` 12 LAKHS. SINCE HE HAS HELD THE TRANSFER OF SHARES BY DIRECTORS TO THEIR RELATIVES WITH EFFECT FROM 1.4.2005 AS FICTITIOUS TRANSACTION, HE INVOKED SECTION 2(22)(E) OF THE ACT. 28. AFTER HEARING BOTH SIDES, IT WAS FOUND THAT THIS IS AN INADVERTENT ACTION OF THE ASSESSING OFFICER AS THIS VERY AMOUNT IS THE SUBJECT OF EARLIER ADDITION WHICH HAS BEEN DELETED BY US. THE REFORE, THE LD. CIT(A) HAS CORRECTLY DELETED THIS AMOUNT FROM ASSES SEE-COMPANYS HANDS. 29. THE NEXT ISSUE REGARDING THE DELETION OF PROTECTIV E ADDITION OF ` 1.5 CRORES ADDED U/S 2(22)(E) OF THE ACT IS BASED O N THE FACTS THAT MSPIPL HAS TRANSFERRED A SUM OF ` 1.5 CRORE TO THE ASSESSEE-COMPANY FOR UTILIZATION BY SHRI V. AYYADURAI FOR PURCHASING 70 ACRES OF LAND AT ITA 1947 TO 1949/08 469/09 :- 36 - : SRIPERUMBUDUR FROM TWO PERSONS NAMELY, SMT. S. RUKM ANI AND SHRI R.M GOVINDAN. THIS AMOUNT WAS ALSO ADDED U/S 2(22) (E) OF THE ACT IN THE HANDS OF SHRI V.AYYADURAI, AND ON PROTECTIVE BA SIS IN THE HANDS OF THE ASSESSEE-COMPANY. 30. AFTER HEARING BOTH SIDES, WE HAVE FOUND THAT THE DIRECTORS HELD LESS THAN 10% BENEFICIAL SHARES IN THE ASSESSE E-COMPANY DURING THE YEAR AND HENCE, PROVISIONS OF SECTION 2(22)(E) OF THE ACT CANNOT BE APPLIED AS STATED AND DISCUSSED IN EARLIER PART OF THIS ORDER. THEREFORE, THIS ADDITION HAS ALSO BEEN LEGALLY DELETED BY THE LD. CIT(A). 31. THE REVENUE HAS ALSO CHALLENGED THE DELETION OF AD DITION OF ` 84,10,500/- ADDED AS DEEMED DIVIDEND ON THE BASIS OF SEIZED DOCUMENT MARKED ANN/MPB/DOCS/S REFLECTING AGREEMENT ENTERED INTO BETWEEN ONE SHRI W. RAJESH OF M/S JSR REAL EST ATE AND SHRI V. AYYADURAI FOR THE PURCHASE OF 37.38 ACRES OF LAND A T KOTTAIYUR VILLAGE, SRIPERUMBUDUR. THIS ADVANCE WAS ALSO FOUND TO HAVE BEEN RECEIVED FROM MSPIPL IN WHICH SHRI V.AYYADURAI WAS HOLDING M ORE THAN 20% OF BENEFICIAL SHARES IN THE ASSESSEE COMPANY AND ITS S ISTER CONCERN. THIS WAS DONE ONLY BECAUSE THE TRANSFER OF SHARES TO THE RELATIVES OF THE DIRECTORS WAS FOUND TO BE FICTITIOUS BY THE ASSESSI NG OFFICER. THIS AMOUNT WAS BROUGHT TO TAX ON PROTECTIVE BASIS UNDER THIS SECTION. AS ITA 1947 TO 1949/08 469/09 :- 37 - : HELD ABOVE, THERE IS NO EVIDENCE TO HOLD THESE TRAN SACTIONS OF TRANSFER OF SHARES TO RELATIVES BY DIRECTORS AS FICTITIOUS; THEREFORE, THIS AMOUNT CANNOT BE ADDED EVEN ON PROTECTIVE BASIS IN THE HAN DS OF THE ASSESSEE-COMPANY. 32. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE PERUSA L OF BALANCE SHEET AS ON 31.3.2006, ALONGWITH ITS SCHEDULES, IT WAS FOUND THAT A CUMULATIVE SUM OF ` 6,00,04,931/- WAS SHOWN AS ADVANCE RECEIVED FROM THE SISTER CONCERN MSPIPL ON ACCOUNT OF PURCHA SE OF LANDS. BECAUSE THE TRANSFER OF SHARES OF THE ASSESSEE-COMP ANY FROM SHRI V.AYYADURAI AND SHRI V.A SHIVA TO THEIR RELATIVES W ITH EFFECT FROM 1.4.2005 WAS TREATED BY THE ASSESSING OFFICER AS FI CTITIOUS TRANSACTION, THE ASSESSING OFFICER WAS OF THE OPINION THAT THIS AMOUNT CAME WITHIN THE AMBIT OF SECTION 2(22)(E) OF THE ACT. IN THIS REGARD, PARA 4.6.2 OF THE LD. CIT(A)S ORDER IS RELEVANT AND WE EXTRACT T HE SAME HEREIN BELOW: 4.6.2 IN THE COURSE OF THE APPELLATE PROCEEDING T HE LEARNED ARS, WHILE VEHEMENTLY ASSAILING THE ADDITION OF ` 6,00,04,931/- AS THE DEEMED DIVIDEND, HAVE POINTED OUT THAT THE S AID SUM INCLUDED THE AMOUNTS OF ` 1,50,00,000/- AND ` 84,10,500/- WHICH WERE SEPARATELY ADDED BACK BY THE A.O. AS DEEMED DI VIDEND U/S.2(22)(E). THE LEARNED ARS, THEREFORE, CONTENDED THAT A DOUBLE ADDITION HAD TAKEN PLACE TO THAT EXTENT. REG ARDING THE BALANCE AMOUNT, THEY AVERRED THAT THE PROVISIONS OF SECTION 2(22)(E) OF THE I.T. ACT WERE NOT APPLICABLE TO THE SAME, BECAUSE DURING THE YEAR SHRI V. AYYADURAI AND HIS SON NO ITA 1947 TO 1949/08 469/09 :- 38 - : LONGER REMAINED BENEFICIAL OWNERS OF SHARES IN THE APPELLANT COMPANY CARRYING MORE THAN 10% OF VOTING POWER. THE LEARNED ARS HAVE ALSO FURNISHED THE DOCUMENTARY EVIDENCES I N SUPPORT OF THE PAYMENTS MADE BY THE APPELLANT COMPANY TO IT S ERSTWHILE AUDITOR SHRI M. RAJKUMAR BY WAY OF ADVANCES FOR PUR CHASE OF LANDS AND ALSO IN SUPPORT OF THE FACT THAT THE SAID ADVANCE STOOD EMBEZZLED BY THAT AUDITOR THROUGH FORGERY AND FRAUD ULENT PRACTICE. IT WAS POINTED OUT BY THE LEARNED ARS THA T CRIMINAL PROCEEDINGS STOOD LAUNCHED BY THE APPELLANT COMPANY AGAINST SHRI M. RAJKUMAR IN THE APPROPRIATE COURT FOR RECOV ERY OF THE HUGE SUM OF MONEY ADVANCED TO HIM. EVIDENCES PERTAI NING TO ON-GOING LEGAL PROCEEDINGS HAVE ALSO BEEN FURNISHED BY THE LEARNED ARS IN THIS REGARD. THE ARGUMENTS PUT FORW ARD BY THE LEARNED ARS HAVE CAREFULLY BEEN EXAMINED AND I AM O F THE OPINION THAT ADVANCE OF MORE THAN ` 5 CRORES TO SHRI M. RAJKUMAR AND THE ALLEGED CLANDESTINE EMBEZZLEMENT O F THE FUND BY HIM HAS NO BEARING ON THE ADDITION MADE BY THE A.O. HOWEVER, THE A.O. IS FOUND TO HAVE ERRED IN LAW WHI LE RESORTING TO THIS ADDITION BECAUSE THERE IS NO COGENT EVIDENC E BROUGHT ON RECORD BY HIM TO PROVE THAT THE TRANSFER OF SHARES FROM SHRI V. AYYADURAI/ SHRI V.A. SHIVA TO THEIR RELATIVES WAS EXECUTED WIT H THE SOLE INTENTION OF DEFRAUDING THE REVENUE. SINCE IN THE PREVIOUS GROUNDS I HAVE ALREADY HELD THAT THE SHARE TRANSFERS ARE AMPLY EVIDENCED BY LEGAL DOCUMENTS, I AM OF THE CONSIDERED OPINION THAT THE CONDITIONS STIPULATED I N SECTION 2(22)(E) WERE NOT AT AL SATISFIED IN THE APPELLANT' S CASE DURING THE RELEVANT ACCOUNTING YEAR. I, THEREFORE, FIND NO JUSTIFICATION IN SUSTAINING THE ADDITION OF ` 6,00,04,931/- WHICH IS, ACCORDINGLY, DELETED. THE GROUND OF THE APPELLANT IN THIS REGARD THUS SUCCEEDS. 33. WE DO NOT FIND ANY INFIRMITY IN THIS FINDING OF THE LD. CIT(A) AND HENCE, UPHOLD THE SAME. 34. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DIS MISSED. I.T.A.NO. 469/MDS/09 (A.Y 2006-07) 35. THIS APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2006 -07 IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) DATED 30.1.2009. IN THIS ITA 1947 TO 1949/08 469/09 :- 39 - : CASE, THE ASSESSEE IS SHRI V. AYYADURAI, IS MANAGIN G DIRECTOR AS MENTIONED ABOVE. WHILE FRAMING THE ASSESSMENT, TH E ASSESSING OFFICER HAS MADE ADDITIONS WHICH WERE DELETED BY TH E LD. CIT(A) ON THE BASIS OF THE REASONS GIVEN IN EARLIER APPEALS A S WELL AS SOME ADDITIONAL REASONS. THE FOLLOWING ADDITIONS WERE MADE BY THE ASSESSING OFFICER : I) ADDITION OF ` 10 LAKHS AS ACCRUED INTEREST UNDER INCOME FROM OTHER SOURCES. II) TREATMENT OF ` 1.5 CRORES AS DEEMED DIVIDEND. III) TRATMENT OF ` 24,10,500/- AS DEEMED DIVIDEND. IV) TREATMENT OF ` 45,00,000/- AS DEEMED DIVIDEND. V) TREATMENT OF ` 3,74,000/- AS DEEMED DIVIDEND. VI) TREATMENT OF ` 1,56,000/- AS DEEMED DIVIDEND. VII) ASSESSMENT OF ` 1 LAKH RETURNED AS AGRICULTURAL INCOME AS INCOME FROM UNDISCLOSED SOURCES. 36. THE GROUNDS RAISED IN THIS APPEAL READ AS UNDER: 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO TH E FACTS AND CIRCUMSTANCES OF T HE CASE. 2.1. THE LEARNED CIT(A) ERRED IN DELETING THE ADDIT ION MADE ON ACCOUNT OF ACCRUED INTEREST UNDER 'INCOME FROM OTHE R SOURCES'. 2.2. THE LD. CIT(A) FAILED TO CONSIDER THE FACT THA T IT WAS CLEARLY MENTIONED IN THE DEED OF SALE, IN RESPECT OF ABHIRA MAPURAM PROPERTY, THE ASSESSEE RECEIVED ` I0 LAKHS AS INTEREST AND THE A.R. OF THE ASSESSEE HAD ADMITTED IN THE COURSE OF ASSES SMENT PROCEEDINGS THAT ` 10 LAKHS SHOULD BE TREATED AS INCOME OF THE ASSESSEE. 3.1 THE LD. CIT(A) ERRED IN DELETING AN AMOUNT OF ` 1.50 CRORES ( FOR PURCHASE OF LANDS AT SRIPERUMPUDUR) TREATED BY THE AO AS DEEMED DIVIDEND U/S 2(22)(E).OF THE ACT. 3.2. THE LD. CIT(A) FAILED TO CONSIDER THE FACT THA T THE ASSESSEE IN HIS STATEMENT, RECORDED DURING THE COURSE OF SEA RCH, STATED THAT THE SAID PAYMENT WAS MADE IN EXCESS OF AGREED ITA 1947 TO 1949/08 469/09 :- 40 - : CONSIDERATION FOR PROVIDING EXTRA FACILITIES BUT FA ILED TO ADDUCE ANY EVIDENCE IN SUPPORT OF HIS CLAIM. FURTHER, THE PART IES TO WHOM THE PAYMENTS WERE CLAIMED TO HAVE BEEN MADE DENIED HAVI NG RECEIVED THE SAID AMOUNT IN CASH. 3.3. THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THE F ACT THAT BOTH THE COMPANIES M/IS MADRAS MADURAI PROPERTIES PVT. L TD. (MMPPL) AND M/S MILLENNIUM SOFTWARE PRIVATE LIMITE D ( MSPL) ARE CONTROLLED BY THE ASSESSEE THIS TRANSACTION I .E ` 1.5 CRORES WITHDRAWN F ROM SPL AND ROUTED THROUGH MMPPL WAS TO BY PASS THE PROVISIONS OF SEC. 2(22)(E) OF THE IT ACT, 1961 . 3.4. THE LD. CIT(A) FAILED TO OBSERVE THAT THE SHAR ES OF MMPPL WERE TRANSFERRED TO RELATIVES OF THE ASSESSEE W.E.F . 1.4.2005, WHICH SHOWS THE INTENTION OF THE ASSESSEE TO CIRCUM VENT THE PROVISIONS OF SEC. 2(22)(E) OF THE IT ACT, 1961. 4.1. THE LD. CIT(A) ERRED IN DELETING AN AMOUNT OF ` 24,10,500( TRANSACTION WITH MR. RAJESH OF JSR REAL ESTATE) TRE ATED BY THE AO AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. 4.2. THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THE F ACT THAT BOTH THE COMPANIES M/S MADRAS MADURAI PROPERTIES PVT. LT D. (MMPPL) AND M/S MILLENNIUM SOFTWARE PRIVATE LIMITED (MSPL) ARE CONTROLLED BY THE ASSESSEE AND HIS SON AND THE PAYM ENT OF ` 84,10,500 WAS ROUTED THROUGH MMPPL FROM MPSL WAS TO BY PASS THE PROVISIONS OF SEC. 2(22)(E) OF THE IT ACT, 1961 . 4.3. THE LD. CIT(A) FAILED TO CONSIDER THAT THE AGR EEMENT WAS ENTERED INTO BETWEEN THE ASSESSEE AND THE JSR REAL ESTATE, HENCE THE TRANSACTION CLEARLY HITS THE PROVISIONS O F SEC. 2(22)(E) OF THE IT ACT, 1961. 4.4. THE LD. CIT(A) FAILED TO OBSERVE THAT THE SHAR ES OF MMPPL WERE TRANSFERRED TO RELATIVES OF THE ASSESSEE W.E.F . 1.4.2005, WHICH SHOWS THE INTENTION OF THE ASSESSEE TO CIRCUMVENT T HE PROVISIONS OF SEC. 2(22)(E) OF THE IT ACT, 1961. 5.1. THE LD. CIT(A) ERRED IN DELETING AN AMOUNT OF ` 45,00,000 ( PAYMENT MADE FOR PURCHASE OF PROPERTY AT EAST ABHIR AMAPURAM, CHENNAI ) TREATED BY THE AO AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT 5.2. THE LD. CIT(A) FAILED TO NOTE THAT THE ASSESSE E DID NOT PRODUCE ANY EVIDENCE IN SUPPORT OF HIS CLAIM THAT T HE PAYMENT IN CASH WAS MADE TO MRS. JAYAKAR AND THIS LEADS TO CON CLUSION THAT ITA 1947 TO 1949/08 469/09 :- 41 - : MONEY SO WITHDRAWN FROM THE BANK ACCOUNT OF MSPL WA S UTILISED FOR THE PURPOSE NOT DISCLOSED TO THE DEPARTMENT. 5.3. THE LD. CIT(A) FAILED TO OBSERVE THAT THE ASSE SSEE DID NOT HAVE BALANCE TO MAKE SUCH PAYMENT, SINCE THE CREDIT BALANCE OF ` 60 LAKHS WAS ALREADY ADJUSTED IN THE TRANSACTION, T HE ASSESSEE HAD WITH MR. RAJESH OF JSR REAL ESTATE. 5.4. THE LD. CIT(A) OUGHT TO HAVE CONSIDERD THE FAC T THAT THE ASSESSEE HOLDS MORE THAN 10% OF BENEFICIAL SHARES O F MSPL IN WHICH PUBLIC ARE INTERESTED AND THE COMPANY HAD HUG E ACCUMULATED PROFIT OF ` 15 CRORES AND HENCE THE PAYMENT MADE BY MSPL, IN WHICH THE ASSESSEE HAS SUBSTANTIAL INTERES T, CLEARLY ATTRACTS THE PROVISIONS OF SEC. 2(22)(E) OF THE IT ACT, 1961. 6.1. THE LD. CIT(A) ERRED IN DELETING AN AMOUNT OF ` 3,74,000 ( AMOUNT RECEIVED FROM MSPL) TREATED BY THE AO AS DEE MED DIVIDEND U/S 2(22)(E) OF THE ACT. 6.2. THE LD. CIT(A) FAILED TO OBSERVE THAT THE ASSE SSEE DID NOT HAVE CREDIT BALANCE TO DRAW AMOUNT FROM MSPL AND TH E CREDIT BALANCE OF ` 60 LAKHS WAS ALREADY ADJUSTED AND SINCE THE ASSESSE E HOLDS MORE THAN 10 0 /0 OF BENEFICIAL SHARES OF MSPL IN WHICH PUBLIC ARE INTERESTED AND THE COMPANY HAD HUGE ACCUMULATED PROFIT OF ` 15 CRORES AND HENCE THE AMOUNT RECEIVED FROM MSPL, IN WHICH THE ASSESSEE HAS SUBSTANTIAL INTEREST, CLEARLY ATTR ACTS THE PROVISIONS OF SEC. 2(22)(E) OF THE IT ACT, 1961. 7. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING. IT IS PRAYED THAT THE ORDER OF THE LD. CI T(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 37. THE FIRST ISSUE IS REGARDING ADDITION OF ` 10 LAKHS AS INTEREST UNDER THE HEAD INCOME FROM OTHER SOURCES. THE FA CTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE HAD PAID ` 60 LAKHS TO SHRI JAYAKAR IN MARCH 2003 ON ACCOUNT OF PURCHASE OF PROPERTY AT AB HIRAMAPURAM. AN AMOUNT OF ` 10 LAKHS WAS ADJUSTED DURING THE PREVIOUS YEAR 200 5- 06 ON ACCOUNT OF INTEREST. THE ASSESSING OFFICER P ROPOSED TO ADD THIS AS INTEREST RECEIVED FOR THE ADVANCES GIVEN TO SHRI JAYAKAR. VIDE ORDER SHEET ENTRY DATED 20.12.2007, IT WAS STATED BY THE ASSESSEE THAT THIS ITA 1947 TO 1949/08 469/09 :- 42 - : TRANSACTION WAS NOTIONAL IN NATURE AND THE ASSESSEE HAD NOT RECEIVED ANY AMOUNT IN CASH OR THROUGH CHEQUE. THE ASSESSEE FOLLOWS CASH SYSTEM OF ACCOUNTING AND DOES NOT MAINTAIN ANY BOOK S OF ACCOUNT. WE HAVE FOUND THAT THE ASSESSEE HAS PAID ADVANCE OF ` 60 LAKHS TO SHRI JAYKAR HENRY WHICH WAS TRANSFERRED TO MSPL WHE REIN THE ASSESSEE IS A CREDITOR TO THE TUNE OF ` 60 LAKHS. M/S MSPL HAS PAID THE BALANCE AND REGISTERED THE PROPERTY IN ITS NAME. BUT THERE IS NO SUPPORTING EVIDENCE FOR TREATING ` 10 LAKHS AS INTEREST INCOME OF THE ASSESSEE PARTICULARLY WHEN THE TRANSACTION HAS CLEARLY NOT R ESULTED PRE-RECEIPT OF MONEY OR ANY BENEFIT BY THE ASSESSEE. THEREFORE , THIS AMOUNT CANNOT BE ADDED UNDER THE HEAD INCOME FROM OTHER S OURCES IN THE HANDS OF THE ASSESSEE AND HAS BEEN CORRECTLY DELETE D BY THE LD. CIT(A). 38. THE FOLLOWING PAYMENTS WERE MADE BY MSPIPL FOR PURC HASE OF 70 ACRES OF LAND AT SRIPERUMBUDUR FROM TWO PERSONS VIZ. SMT S. RUKMANI AND SHRI R.M GOVINDAN: W. MONEY ` 3,75,00,000 B. MONEY ` 1,50,00,000 ` 5.25.00,000 39. A SWORN STATEMENT OF ASSESSEE WAS RECORDED IN WHIC H HE STATED THAT THE AMOUNT OF ` 1.5 CRORE REPRESENTED EXTRA MONEY PAID IN CASH ITA 1947 TO 1949/08 469/09 :- 43 - : TO THE PARTIES WHO HAD AGREED TO PROVIDE EXTRA FACI LITIES LIKE TRACTORS, BOREWELLS, MOTORS, COMPOUND WALLS, STAFF QUARTERS E TC. BUT BOTH SMT S.RUKMANI AND SHRI R.M GOVINDAN DENIED HAVING RECEI VED ANY EXTRA MONEY OTHER THAN THE CONSIDERATION MENTIONED IN THE SALE DEED FOR ` 3.75 CRORES. THE ASSESSEE HAD MORE THAN 10% OF B ENEFICIAL SHARES OF MSPL AS ON 31.3.2006 MSPL HAD MORE THAN ` 10 CRORES AS CUMULATIVE PROFITS AND ASSESSING OFFICER HAS INVOKE D SECTION 2(22)(E) OF THE ACT . WHEN ASSESSING OFFICER WAS UNABLE TO VERIFY UTILIZATION OF THIS ` 1.5 CRORES FOR PAYMENT OF TWO SUMS, HE CONCLUDED T HAT THIS AMOUNT MAY HAVE BEEN UTILIZED BY THE ASSESSEE FOR S OME UNKNOWN REASON. THE LD. CIT(A) HAS CAME TO THE FOLLOWING C ONCLUSION: 16. I HAVE CONSIDERED THE SUBMISSIONS OF THE LD. AR. THE FACTS OF THE TRANSACTION AS BROUGHT OUT IN THE ASSESSMEN T ORDER AND THE SUBMISSIONS OF THE LD. AR ARE AS BELOW. I. MSPL PURCHASED LAND OF 70 ACRE AT SRIPERUMBUD UR FROM TWO PERSONS VIZ. MRS.S.RUKMANI AND SHRI R.M.GOVINDAN. THE CONSIDERATION MENTIONED ON THE SALE DEED IS ` 3.75 CRORES. ACCORDING TO THE APPELLANT WHO IS ALSO MD OF MSPL AND ADDITIONAL AMOUNT OF ` 1.5 CRORES WAS PAID IN CASH AS CONSIDERATION FOR PURCHASE OF THIS PROPERTY. THE SELLERS DENIED RECEIPT OF THIS AMOUNT. II. MSPL TRANSFERRED ` .1.5 CRORES BY CHEQUE TO MMPPL AND MMPPL DREW THIS AMOUNT FROM ITS BANK ACCOUNT BY CASH AND CLAIMS TO HAVE PAID IT TO THE SELLERS IN CASH. III. SHARES OF MMPPL WERE TRANSFERRED TO THE RELAVTIVES OF THE APPELLANT W.E.F.1.4.05 AND THE SHARE-HOLDING OF T H E AP P E LLANT IN M M PPL W AS 4 . 99 % DURING THE P E RIOD OF TRANSACTI ON . ITA 1947 TO 1949/08 469/09 :- 44 - : IV . MSPL A N D MMPP L HAVE ACCOUNTED THI S TRANS ACT IO N OF ` 1.5 CR OR ES BY APPROPR I ATE A C COUNT I NG ENT RIE S I N T H EI R BOOKS . 17. SECTION 2(22)(E) OF THE I.T.ACT 1961 DEFINES ' DIVIDEND' TO INCLUDE ANY PAYMENT BY A COMPANY IN WHICH THE PUBLI C ARE NOT SUBSTANTIALLY INTERESTED MADE BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES HOLDING NOT LESS THAN 10% OF THE VOTING POWE R OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST . 18 . M M P P L CL A IM S THA T TH I S A MOUNT WAS W I THD RAWN AND PA I D A S PAR T C O NSID ERA TI ON FO R P UR CHASE OF THE LAND FO R MSPL . THE A P PELLANT W H O I S A DIR E CT OR I N BOTH THE CO M PANIES H O LDS 4 . 99 % OF THE SHARE C AP I TAL OF MM P P L AT THE T I M E OF TH I S T R A NS A C T ION . TH E I SSU E T O B E DEC I DED IS W HE T HER THE PAY ME N T OF THE AMO U N T OF ` 1 . 5 C RORES B Y MMPPL TO T H E A PP E L LAN T (E V EN WITHOU T G OI NG INTO THE M E RITS OF WHETHER THE AMOUNT W A S PA I D AS PURCHASE CON SID ER ATI ON OR WAS SPENT BY THE APPELLANT F O R UNDISC L OSED P U R POS E S ) WOU L D ATTRA C T T H E P R OVISIONS OF S EC . 2 ( 22) (E) O F T HE A CT . S I NCE THE SHA RE HOLD ING OF T H E APPELLANT I N MMPPL I S LESS THAN 10 %, I AG R EE WITH T HE ID . A . R . T H AT THE P R OV I S I ONS OF SEC . 2 ( 22 )(E ) ARE N O T ATT RACTED I N THE I NSTAN T C ASE . THEREF OR E THE ADD I T I ON O F ` 1 . 5 C RO RES AS DEE ME D DIV I DEND U / S 2(22)(E ) I S N O T WARR ANTED AND I S DELETED. 40. AFTER CONSIDERING THE RIVAL SUBMISSIONS IN THE LI GHT OF THE REASONS GIVEN BY THE ASSESSING OFFICER AS WELL AS T HE LD. CIT(A), WE DO NOT FIND ANY VALID REASON TO INTERFERE WITH THE FIN DING OF THE LD. CIT(A) AND HENCE, CANNOT ALLOW THIS GROUND IN FAVOUR OF TH E REVENUE. 41. THE NEXT ISSUE RELATES TO ADDITION OF ` 24,10,500/- TREATED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. AN AGREE MENT WAS ENTERED INTO WITH M/S JSR REAL ESTATE AND THE ASSESSEE AND PAYMENT TO THE ITA 1947 TO 1949/08 469/09 :- 45 - : TUNE OF ` 84,10,500/- WAS MADE THROUGH BANK ACCOUNT OF MMPP L ROUTED THROUGH MSPL. IT WAS STATED THAT THE PROPER TY WAS REGISTERED IN THE NAME OF MMPPL AND PAYMENT WAS ALSO MADE BY T HAT COMPANY IN WHICH THE ASSESSEE HAD NO SUBSTANTIAL INTEREST A S HE HAS HELD 20% OF SHARES ON THE DATE OF TRANSACTION. 42. AFTER BOTH SIDES, WE HAVE FOUND FOLLOWING FACTS AS CULLED OUT BY THE LD. CIT(A) TO BE CORRECT. THESE FACTS ARE MENT IONED AT PAGE 12 OF THE LD. CIT(A)S ORDER: 1) AN AGREEMENT BETWEEN THE APPELLANT AND MR . W . RAJESH PROP : M/S JSR REAL ESTATE WAS EXECUTED ON 13 . 2 . 2006 FOR PURCHASE OF 37 . 38 ACRES OF LAND AT KOTTA I YUR VILLAGE AND PAYMENT OF RS . 84 , 10 , 500/- WAS MADE BY MMPPL TOWARDS PART PAYMENT BY CHEQUE NO . 8 0 1147 DAT E D 13 . 2 . 2006 DRAWN ON SOUTH INDIAN BANK LTD . 2) SEARCH AND SEIZURE ACTION U/S.132 WAS CONDUCTED ON 15.03.2006. 3) DURING THE SEARCH THE APPELLANT WAS ASKED TO FUR NISH DETAILS OF IMMOVABLE PROPERTIES HELD IN HIS NAME AN D IN THE NAME OF HIS WIFE, SON AND COMPANIES. IN RESPONSE, HE MENTIONED THE PROPOSAL TO PURCHASE 37.38 ACRES OF LAND IN KOTTAIYUR VILLAGE FROM MR.W.RAJESH OF M/S JSR REAL ESTATE FOR A CONSIDERATION OF ` 1,68,21 ,000/- FOR WHICH PART PAYMENT OF ` 84,1 0,500/- HAS ALREADY BEEN MADE ON 13.2.2006 AND THE PROPERTY IS IN THE NAME OF MMPPL (PAGE 3 OF SWORN STATEMENT DATED 15.03.2006). 4) MMPPL MADE THE BALANCE PAYMENT OF ` 84 , 10 . 500/- ON 4 . 5 . 2006 AND THE PROPERTY WAS REGISTERED ON 30 . 5 . 2006 IN THE NAME OF MMPPL . 5) SHARES OF MMPPL WERE TRANSFERRED TO THE RELATIVES O F THE APPELLANT WITH EFFECT FROM 1 . 4 . 2005 AND THE ITA 1947 TO 1949/08 469/09 :- 46 - : SHAREHOLDING OF THE APPELLANT IN THE COMPANY WAS 4 . 99 % DUR I NG THE PER I OD OF THE TRANSACTION . 43. IN VIEW OF THE LEGAL POSITION STATED ABOVE, THE ABO VE STATED FACTS WOULD NOT ATTRACT THE PROVISIONS OF SECTION 2(22)(E ) OF THE ACT AND HENCE, THE LD. CIT(A) HAS CORRECTLY DELETED THE IMP UGNED ADDITION. 44. THE NEXT ISSUE RELATES TO DELETION OF ` 45 LAKHS TREATED AS DEEMED DIVIDEND ON THE BASIS OF SEIZED MATERIAL WHI CH SHOWED THAT FOLLOWING PAYMENTS WERE MADE BY MSPL FOR PURCHASE O F PROPERTY AT NO.31, 3 RD STREET, EAST ABIRAMAPURAM, CHENNAI: W. MONEY ` 82,00,000 B. MONEY ` 55,00,000 45. THE ASSESSEE EXPLAINED THAT HE HAD ADVANCED TO MSP L ` 60 LAKHS ON 31.3.2005 WHICH WAS SHOWN AS LIABILITY AS ON 31.3.2006. ` 45 WAS PAID TO SHRI JAYAKAR HENRY THROUGH BEARER CH EQUES AND ENCASHMENT OF THE BEARER CHEQUES WAS DONE AND THE A SSESSEE OBTAINED CONFIRMATORY LETTER FROM MSPL. AFTER HEAR ING BOTH SIDES, WE FIND THAT THIS ADDITION IS NOT JUSTIFIED. THE ADDI TION ON ACCOUNT OF DEEMED DIVIDEND OF ` 24,10,500/- BASED ON THE TRANSACTION WITH SHRI RAJESH OF M/S REAL ESTATE, WERE CREDIT BALANCE OF T HE ASSESSEE OF ` 60 LAKHS IN MSPL WAS ADJUSTED BY THE ASSESSING OFFICER HAS ALREADY BEEN DELETED, CONSEQUENTLY, A CREDIT BALANCE OF ` 60 LAKHS WOULD BE ITA 1947 TO 1949/08 469/09 :- 47 - : AVAILABLE FOR ADJUSTMENT AGAINST THE DEBIT BALANCE. HENCE, ` 45 LAKHS EVEN IF IT IS CONSIDERED AS DEBIT BALANCE, THE ASSE SSEE WILL HAVE NET PROFIT WITH MSPL. SO PROVISIONS OF SECTION 2(22)( E) OF THE ACT WOULD NOT BE ATTRACTED IN ANY CASE IN VIEW OF THE ABOVE S TATED LEGAL POSITION. THIS AMOUNT HAS BEEN CORRECTLY DELETED BY THE LD. C IT(A). 46. THE OTHER ISSUE RELATES TO AN AMOUNT OF ` 3,74,000/- ADDED AS DEEMED DIVIDEND WHICH HAS BEEN DELETED BY THE LD. C IT(A). ON EXAMANTION OF BANK ACCOUNT OF MSPL, THE ASSESSING O FFICER NOTICED THAT ` 3,74,000/- WAS RECEIVED AS ADVANCE BY THE ASSESSEE FROM MSPL AS UNDER: DATE AMOUNT 09.06.2005 ` 1,00,000 10.06.2005 41,000 22.06.2005 2,18,000 24.06.2005 15,000 47. IT WAS STATED THAT ASSESSEE HAD CREDIT BALANCE OF ` 60 LAKHS AS ON 31.3.2005 WHICH WAS SHOWN AS LIABILITY ON 31.3.2 006 ALSO WITH MSPL AND CONSIDERING THE CREDIT BALANCE, THIS ADDIT ION CANNOT BE ADDED BECAUSE EVEN AFTER ADJUSTING ` 45 LAKHS ON ACCOUNT OF TRANSACTION WITH SHRI JAYAKAR HENRY, THERE WOULD ST ILL BE A CREDIT BALANCE OF ` 15 LAKHS WHICH IS MORE THAN THE ADVANCE RECEIVED O F ` 3,74,000/-. THEREFORE, THIS AMOUNT OF ` 3,74,000/- CANNOT BE ADDED ITA 1947 TO 1949/08 469/09 :- 48 - : IN THE HANDS OF THE ASSESSEE WHICH HAS BEEN CORRECT LY DELETED BY THE LD. CIT(A). 48. IN THE RESULT, THE APPEAL FILED BY THE REVENUE STAN DS DISMISSED. 49. TO SUMMARIZE THE RESULT, ALL THE APPEALS FILED BY T HE REVENUE STAND DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 12.11.2010. SD/- SD/- (ABRAHAM P GEORGE) ACCOUNTANT MEMBER ( HARI OM MARATHA ) JUDICIAL MEMBER DATED: 12 TH NOVEMBER, 10 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR