DCIT, Bangalore V. Shri. N.S. Narendra, Bangalore

ITA 557/BANG/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80766 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 6 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 18-11-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 25-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR K SHANKAR PRASAD J
• Assessee Lawyers: H S HAMBU SHARMA
• Keywords: Deemed dividend
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI ABRAHAM P GEORGE , ACCOUNTANT MEMBER ITA NO. 557 / BANG/20 1 3 (ASSESSMENT YEAR: 2009 - 10 ) DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 11( 3) , BANGALORE. APPELLANT VS. SHRI N.S.NARENDRA, NO.10 & 11, FIREPRO HOUSE, SERVICE ROAD, INDIRANAGAR, BANGALORE - 5600 08 . RESPONDENT PAN:ABTPS5001R APPELLANT BY: DR. K.SHANKAR PRASAD, JCIT(DR) . RESPONDENT BY: SHRI H.S HAMBU SHARMA , CA. DATE OF HEARING : 18 / 11 /2014 . DATE OF PRONOUNCEMENT: 21 /11/2014. O R D E R PER SMT. P.MADHAVI DEVI, JM : THIS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A) - I , BANGALORE, DATED 28 / 0 1/2013 FOR THE ASSESSME NT YEAR 2009 - 10. THE REVENUE IS AGGRIEVED BY THE ORDER OF THE CIT(A) IN DELETING THE ADDITION MADE BY THE AO U/S 2(22)(E) OF THE INCOME - TAX ACT, 1961[HEREINAFTER REFERRED TO AS 'THE ACT'] OF A SUM OF RS.3,59,95,832/ - . ITA NO .557/BANG/2013 S HRI N.S.NARENDRA. PAGE 2 OF 6 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, AN INDIVIDUAL, FILED HIS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2009 - 10 ON 25/03/2010 DECLARING A TOTAL INCOME OF RS.1,77,27,090/ - . DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, THE ASSESSING OFFICER OBSERVED THAT THE A SSESSEE HAS AVAILED THE BENEFIT OF A HOUSING LOAN OF RS.3.50 CRORES AND THE ADVANCES AMOUNTING TO RS.1,89,95,832/ - FROM M/S.FIREPRO SYSTEMS PVT. LTD., OF WHICH HE IS A MANAGING DIRECTOR AND WAS HAVING SUBSTANTIAL INTEREST IN THE SAID COMPANY. HE ALSO OBSE RVED THAT M/S.FIREPRO SYSTEMS PVT. LTD., HAS ADEQUATE ACCUMULATED PROFITS DURING THE ASSESSMENT YEAR. THEREFORE, HE ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE TO EXPLAIN AS TO WHY THE HOUSING LOAN AS WELL AS ADVANCES SHOULD NOT BE BROUGHT TO TAX AS DEEMED DI VIDEND U/S 2(22)(E) OF THE ACT IN THE HANDS OF THE ASSESSEE. THE ASSESSEE FILED A REPLY ON 23/12/2011 CLAIMING THAT THERE IS NO DEEMED DIVIDEND TAXABLE U/S 2(22)(E) OF THE ACT IN THIS CASE. THE AO WAS HOWEVER, NOT CONVINCED WITH THE ASSESSEE S CONTENTION AND HELD THAT THESE TWO AMOUNTS WHICH ARE ADVANCED TO THE ASSESSEE OUT OF ACCUMULATED PROFITS OF THE COMPANY ARE DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. HE, ACCORDINGLY, BROUGHT IT TO TAX. 3. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFOR E THE CIT(A) WHO DELETED THE ADDITION. AGGRIEVED BY THE RELIEF GIVEN BY THE CIT(A), THE REVENUE IS IN APPEAL BEFORE US. ITA NO .557/BANG/2013 S HRI N.S.NARENDRA. PAGE 3 OF 6 4. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDER OF THE AO WHILE THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UP ON THE ORDER OF THE CIT(A). THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO FILED WRITTEN SUBMISSIONS BEFORE THE TRIBUNAL ALONG WITH THE COPIES OF THE DECISIONS ON WHICH HE HAS PLACED RELIANCE UPON. 5. HAVING REGARD TO THE RIVAL CONTENTIONS AND TH E MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE IS A MANAGING DIRECTOR OF M/S.FIREPRO SYSTEMS PVT. LTD., HOLDING MORE THAN 10% OF VOTING POWER AND DURING THE RELEVANT FINANCIAL YEAR ENDING 31/3/2009, THE ASSESSEE - RESPONDENT HAD RECEIVED HOUSING LOAN OF RS. 3.5 CRORES AND ALSO ADVANCES OF RS.1,89,95,832/ - FROM THE SAID COMPANY . BEFORE THE CIT(A), THE ASSESSEE HAD EXPLAINED IN DETAIL THAT HE OWNED AN APARTMENT BEARING NO.53 (NEW NO.501), IN EMBASSY CROWN, AGA ABBAS ALI ROAD, BANGALORE WHICH WAS OCCUPIED BY HI M FOR HIS RESIDENCE AND THAT M/S.FIREPRO SYSTEMS PVT. LTD., TO MEET THE DIRE NEEDS OF FINANCE , APPROACHED THE BANKER I.E. CANARA BANK, CANTONMENT BRANCH IN THE YEAR 2002 TO SANCTION A LOAN OF ABOUT RS.5 CRORES AS WORKING CAPITAL AND T HE BANK TOOK INTO ACCO UNT THE FINANCIAL AFFAIRS OF THE COMPANY AND AGREED TO SANCTION THE LOAN BUT WANTED THAT A COLLATERAL SECURITY IN THE FORM OF MORTGAGE OF AN IMMOVABLE PROPERTY OF SUBSTANTIAL VALUE TO FURTHER STRENGTH ITS SECURITY. IN VIEW OF THE SAME, THE ASSESSEE, BEING THE MANAGING DIRECTOR, OFFERED HIS HOUSE AS A ITA NO .557/BANG/2013 S HRI N.S.NARENDRA. PAGE 4 OF 6 COLLATERAL SECURITY APART FROM HIS PERSONAL GUARANTEE AND THEREAFTER THE BANK APPROVED THE LOAN AND ALSO FURTHER LOAN S TOTALING TO THE EXTENT OF RS.266.45 CRORES. AS AGAINS T M/S.FIREPRO SYSTEMS PVT. LTD. GET TING CREDIT FACILITY FROM BANKS AND OTHERS AS ON 31/3/2009 OF RS.266.45 CRORES, BASED ON COLLATERAL SECURITY OF IMMOVABLE PROPERTIES AND PERSONAL GUARANTEE OF THE ASSESSEE , M/S.FIREPRO SYSTEMS PVT. LTD., HAD ADVANCED THE HOUSING LOAN AS WELL AS THE ADVANCE S AND THEREFORE IT WAS FOR THE BUSINESS PURPOSE S AND NOT FOR ANY BENEFIT TO THE ASSESSEE AND HENCE IT CANNOT BE TREATED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. THE CIT(A) HAD CALLED FOR A REMAND REPORT FROM THE AO ON THE SAID EVIDENCE FILED BY THE ASS ESSEE AND AFTER CONSIDERING THE REMAND REPORT HAD HELD THAT THE FACTS IN THE ASSESSEE S CASE ARE SIMILAR TO THE FACTS OF THE CASE BEFORE THE HON BLE CALCUTTA HIGH COURT IN THE CASE OF PRADIP KUMAR MALHOTRA VS. CIT (2011) 338 ITR 538)(CAL.) WHEREIN UNDER SI MILAR CIRCUMSTANCES, IT WAS HELD THAT ADVANCES GIVEN FOR BUSINESS PURPOSES OF THE ASSESSEE CANNOT BE TREATED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. THE RELEVANT PORTION OF THE JUDGMENT HAS BEEN EXTRACTED BY THE CIT(A) AT PAGE 23 OF HIS ORDER. FURTHE R, THE CIT(A) HAS ALSO CONSIDERED THE DECISION OF THE ITAT, CHENNAI BENCH, IN THE CASE OF SMT.G.SREEVIDYA WHEREIN IT WAS HELD IF THE BENEFICIAL SHAREHOLDER HAVING SUBSTANTIAL INTEREST IN THE COMPANY OFFERS PERSONAL GUARANTEE AND COLLATERAL GUARANTEE FOR TH E BENEFIT OF THE COMPANY, THE ITA NO .557/BANG/2013 S HRI N.S.NARENDRA. PAGE 5 OF 6 ADVANCES OR LOANS GRANTED BY THE COMPANY CANNOT BE TREATED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. FOR READY REFERENCE, THE RELEVANT PORTIONS OF THE ABOVE DECISIONS ARE REPRODUCED HEREUNDER: (I) PRADIP KUMAR MALHOTRA VS. CI T (2011) 338 ITR 538)(CAL.): AFTER HEARING THE LEARNED COUNSEL FOR THE PARTIES AND AFTER GOING THROUGH THE AFORESAID PROVISIONS OF THE ACT, WE ARE OF THE OPINION THAT THE PHRASE BY WAY OF ADVANCE OR LOAN APPEARING IN SUB - SECTION (E) MUST BE CONSTRUED TO MEAN THOSE ADVANCES OR LOANS WHICH A SHARE HOLDER ENJOYS FOR SIMPLY ON ACCOUNT OF BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDIN G NOT LESS THAN TEN PER CENT OF THE VOTING POWER; BUT IF SUCH LOAN OR ADVANCE IS GIVEN TO SUCH SHARE HOLDER AS A CONSEQUENCE OF ANY FURTHER CONSIDERATION WHICH IS BENEFICIAL TO THE COMPANY RECEIVED FROM SUCH A SHARE HOLDER, IN SUCH CASE, SUCH ADVANCE OR LO AN CANNOT BE SAID TO BE A DEEMED DIVIDEND WITHIN THE MEANING OF THE ACT. THUS, FOR GRATUITOUS LOAN OR ADVANCE GIVEN BY A COMPANY TO THOSE CLASSES OF SHAREHOLDERS WOULD COME WITHIN THE PURVIEW OF SECTION 2(22) BUT NOT TO THE CASES WHERE THE LOAN OR ADVANC E IS GIVEN IN RETURN TO AN ADVANTAGE CONFERRED UPON THE COMPANY BY SUCH SHAREHOLDER. IN THE CASE BEFORE US, THE ASSESSEE PERMITTED HIS PROPERTY TO BE MORTGAGED TO THE BANK FOR ENABLING THE COMPANY TO TAKE THE BENEFIT OF LOAN AND IN SPITE OF REQUEST OF THE ASSESSEE, THE COMPANY IS UNABLE TO RELEASE THE PROPERTY FROM THE MORTGAGE. IN SUCH A SITUATION, FOR RETAINING THE BENEFIT OF LOAN AVAILED FROM VIJAYA BANK IF DECISION IS TAKEN TO GIVE ADVANCE TO THE ASSESSEE SUCH DECISION IS NOT TO GIVE GRATUITOUS ADVANCE TO ITS SHAREHOLDER BUT TO PROTECT THE BUSINESS INTEREST OF THE COMPANY. (II) ASST.CIT VS. G.SREEVIDYA ( ITA NO.1270/MAD/2011 DATED 28/06/2012 ) : 7. IN ORDER TO ATTRACT THE PROVISIONS OF SECTION 2(22)(E), THE IMPORTANT CONSIDERATION IS THAT THERE SHOULD BE LOAN/ADVANCE BY A COMPANY TO ITS SHAREHOLDER. EVERY AMOUNT PAID MUST MAKE THE COMPANY A CREDITOR OF THE SHAREHOLDER OF THAT AMOUNT. AT THE SAME TIME, IT IS TO BE BORNE IN MIND THAT EVERY PAYMENT BY A COMPANY TO ITS SHAREHOLDERS MAY NOT BE LOAN/ADVANCE. IN THE PRESENT CASE, THE AMOUNT WAS WITHDRAWN BY THE ASSESSEE FROM ITA NO .557/BANG/2013 S HRI N.S.NARENDRA. PAGE 6 OF 6 THE COMPANY ONLY TO MEET HER SHORT TERM CASH REQUIREMENTS. BY VIRTUE OF OFFERING PERSONAL GUARANTEE AND COLLATERAL SECURITY FOR THE BENEFIT OF THE COMPANY, THE LIQUIDITY POSITION OF THE ASSESS EE HAD GONE DOWN. IN THE STRICT SENSE IF IT IS TO BE CONSTRUED THE AMOUNT FORWARDED BY THE COMPANY TO THE ASSESSEE WAS NOT IN THE SHAPE OF ADVANCES OR LOANS. THE ARRANGEMENT BETWEEN THE ASSESSEE AND THE COMPANY WAS MERELY FOR THE SAKE OF CONVENIENCE ARISIN G OUT OF BUSINESS EXPEDIENCY. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, IT IS NOT APPROPRIATE TO HOLD THAT THE AMOUNT WITHDRAWN BY THE ASSESSEE PARTAKES THE CHARACTER OF DEEMED DIVIDEND UNDER THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. WE FIND THAT THE FACTS OF THE CASE BEFORE US ARE SIMILAR TO THE FACTS OF THE CASE BEFORE THE HON BLE CALCUTTA HIGH COURT AS WELL AS BEFORE THE TRIBUNAL IN THE CASE OF SMT. G.SREEVIDYA. THEREFORE, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A) WHIC H IS IN CONSONANCE WITH THE SAID PRECEDENTS. 6. IN THE RESULT, THE REVENUE S APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 21 ST OF NOVEMBER, 2014. SD/ - SD/ - (ABRAHAM P GEORGE) (SMT. P.MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER EKSRINIVASULU COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME - TAX APPELLATE T RIBUNAL BANGALORE