K. Siva Prasad, Hyd, Hyderabad V. ACIT, Circle-2(2), Hyd, Hyderabad

ITA 796/Hyd/2016

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 6977 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 6 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2021
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB-B
• Assessment Year: 2010-2011
• Appeal Filed On: 26-05-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ROHIT MAJUMDAR
• Keywords: Salary income; Proportionate interest; Deemed dividend; Onus to prove
• Section: 143(3); 142(1); 2(22)(e); 43; 48

Judgement Text

ITA Nos.796 & 797/Hyd/2016 1 IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ B ‘ Bench, Hyderabad (Through Video Conferencing) Before Shri S.S. Godara, Judicial Member AND Shri Laxmi Prasad Sahu, Accountant Member O R D E R Per S. S. Godara, J.M. These two assessees’ appeals for A.Y. 2010-11 arise from the Commissioner of Income Tax (Appeals)-5, Hyderabad’s separate orders; both dated 30.12.2015, in case No.0651 and 0652/2014- 15/CIT(A)-5, involving u/s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 [in short, ‘the Act’]. Heard both the parties. Case files perused. 2. Both these assessees raise identical sole substantive ground challenging correctness of learned lower authorities’ action ITA No.796/Hyd/2016 Assessment Year: 2010-11 K. Siva Prasad, Hyderabad. PAN : AJYPK9595P. ACIT, Circle – 2(2), Hyderabad. (Appellant) (Respondent) ITA No.796/Hyd/2016 Assessment Year: 2010-11 P. Vishwanath Reddy, Hyderabad. PAN : AKDPP9853F ACIT, Circle – 2(2), Hyderabad. (Appellant) (Respondent) Assessee by: Shri T. Chaitnaya Kumar Revenue by : Sri Rohit Majumdar Date of hearing: 30/11/2021 Date of pronouncement: 06/12/2021 ITA Nos.796 & 797/Hyd/2016 2 making section 2(22)(e) deemed dividend addition(s) of Rs.55,18,000/- and 26,90,000/-; respectively. 3. The CIT(A)'s identical detailed discussion affirming the Assessing Officer’s addition to this affect reads as under: 2. The Facts: The appellant individual is the Director of M/ s. E. Mug Technologies Ltd. In the return of income, he is showing income from salary from the company as one of the directors. During the relevant accounting period, Assessing Officer observed that the assessee received an amount of Rs.55.18 lakhs as loans and advances from the company E-Mug Technologies Ltd. on various dates. The corresponding ledger account as submitted during the appellate proceedings is as follows: ITA Nos.796 & 797/Hyd/2016 3 2.2 The Assessing Officer specified that the ass esse is one of the directors and also holding 25% of the shareholding of the company. Further, it was observed that the Company is having accumulated profits for the year under consideration and also the company did not declare any dividend for the financial year. Thus, the AO had invoked the provisions of deemed dividend i.e. Section 2(22)(e) and treated Rs.55.18 lakhs which was received as loans and advances from the company as deemed dividend. 3. Grounds of Appeal: Assailing the order of the Assessing Officer and aggrieved with the additions made by the AO, assessee filed this appeal, with following grounds: "1. The assessment order made on 06.03.2013 u/s 143(3) the Asst.Commissioner of Income tax, Circ1e-2(2) is erroneous in the facts and circumstances of the case. 2. The ACIT ought to have not considered the plea that the funds utilized from the company is for the purpose of purchasing land and not for the utilization of the directors for their own purpose. 3. The ACIT while treating the entire amount of'Rs.55.18 lakhs as deemed dividends bad law as the directors are returned the entire amount by drawing it for the purpose of purchase of land only. Hence, there is no question arise that accumulated profits are utilized for the purpose of their own. 4. It is kindly brought to the notice of the learned CIT (A) that the company has declared the dividend for the subsequent year 2011-12 and paid the taxes accordingly. If the deemed dividend considered for this year will cause genuine hardship of the company for out of accumulated profits. 5. In alternative, during the course of assessment proceedings, the appellant pleaded the Assessing Officer, that the amounts used from the company is to be treated as running account for the purpose of utilizing it as loan and the proportionate interest is to be charged on the loan account basing on the following case laws. Case Laws: Non-charging of interest on debit balances in running account of Directors Constitutes perquisites (i) CIT Vs V.M.Salgoacar and Brothers Pvt. Ltd. (Kar) 198 ITR 738 (ii) CIT Vs C.KUlandaivelu konar (Mad) 100 ITR 629 (iii) CIT Vs. Gurdial Singh (Del) 100 Taxman 507. 6. Any other ground / grounds that may be urged at the time of appeal hearing.” Thus, the only grievance of the assessee, is the addition made u/s 2(22)(e) of the Act. 4. Submission of the Appellant: The appellant submitted that the amount transferred from the company to director's account only to purchase of the property. Thus, transactions were only business transactions and the amount transferred and utilized for the business purpose, it was contended: "The appellant here is an individual also director of E-Mug Technologies is deriving income from salary from the Company as director and for the assessment year 2010- 11, the appellant filed his return of income on 28.10.2010 admitting an income of Rs.12, 71,404/ - after claiming deductions. The Assessing Officer issued notice u/s 143(2) and 142(1) requiring the appellant to furnish the details regarding the amount received from E-Mug Technologies. In this regard it is submitted that, during the course of assessment proceedings the appellant explained before the Assessing Officer that The Board of Directors of the company passed a resolution ITA Nos.796 & 797/Hyd/2016 4 dated 04.04.2009 mentioning that the Board of Directors to use 1 utilize the funds of the company for purchase of the land 1 property at Gachibotuli for further expansion of the company business operations and it also submitted that the same amount was collected from the land owner in same assessment year and remitted to the company account. Without considering the appellant submissions the Assessing Officer completed the assessment by applying the provisions of section 2(22}(e) of the I.T.Act on the ground that amount transferred from company an amount of Rs.55, 18,0001 - was treated as a deemed dividend u/ s 2(22)(e) of the I.T.Act and added as income of the appellant and determined the total of Rs.67,89,4001- as against income admitted ofrs.12, 71,404/-. It is also submitted before the Hon'ble Commissioner of Income Tax (Appeals) that the amount transferred from the company to director's account only to purchase of the property at Gachibowli. And the amount received was paid as advance to Land Owner for purchase of the property. As per the oral agreement the amount payable to land owner in cash only at initial stage of advances the balance amount payable in cheque at the time of registration therefore the Directors of the Company on personnel Guarantee. Therefore the directors received amount from company and paid to land owner. Subsequently the directors of the company received information that against said property some legal proceedings and other litigations are pending in that circumstances the directors of the company with great difficulty collected the advance amount from the land owner and transferred same to the company. Therefore, the appellant praying before the Hon'ble Commissioner of Income Tax (Appeals) submitted that the above said transactions was only business transaction, the amount transferred and utilized for the business purpose only therefore the application of section 2(22)(e) is not applicable as per the provisions of the I.T.Act, it is also submitted that the appellant also relying on the decision in the case of Shantilal Kumar Vij Vs. A CIT in ITA No.A06/ Asr/2009 dated 20.09.2012". 5. The Decision: Before dealing with the contentions of the appellant, it is necessary to have a look at the general scheme and the relevant provisions of the Act. Sec. 2(22)(e) of the Act. 5.1 The Statute: Dividend is an income under the Income-tax Act, 1961. The term 'dividend' is inclusively defined in section 2(22), vide five clauses, (a) to (e). These clauses primarily provide for treatment of certain distribution or payments, by the company, as dividend to the extent of the accumulated profits of the company. Clause (e) provides for payment of certain loans and advances by a company to a certain category of shareholders or for e benefit of this category of shareholders, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (popularly referred to as "deemed dividend"). This clause reads as under: e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as he said concern) or any payment by any such company on behalf, or for- the individual benefit, of any such. shareholder, to the extent to which the company in either case possesses accumulated profits; ITA Nos.796 & 797/Hyd/2016 5 These loans or advances to the specified shareholders or for the benefit of such shareholders or to the concerns in which such shareholders are substantially interested, are therefore taxable as dividend. Such dividend is not subject to the dividend distribution tax u/s 115-0, and is therefore a taxable income, not exempt u/ u/s 10(34) of the Act. The provision lays down any payment by a closely-held company by way of advance or loan to a shareholder who comes in the category described in that subclause or to a concern in which such shareholder has a substantial interest. Deemed dividend under this sub-clause would be to the extent to which the company in either case possesses accumulated profits. It is immaterial whether such payment represents any part of the assets of the company or otherwise. The shareholder referred to here should be beneficial owner of shares holding not less than ten per cent of the voting power. It is held that provisions in cl. (e) of section 2(22) of the 1961 Act are within the legislative competence of Parliament under entry 54 of List I of Schedule VII of the Government of India Act, 1935 and corresponding entry 82 of List I of Schedule VII of the constitution and do not contravene fundamental rights under Article 19(1)(1) and 19(1)(g) of the Constitution [Navnital C. Javeri vs. K.K. Sen, AAC (1965) 56 ITR 198 (SC) affirming Navnitlal C. Javeri vs. K.K. Sen, AAC (1963) 48 ITR 451 (Born). S. Kumaraswami vs. ITO (1961) 43 ITR 423 (Mad) and K.M.S. LakshmanaAiyer vs. Addl. ITO (1960) 40 ITR 469 (Mad) followed]. 5.2 Applicability of section 2(22)(e) to the present case: i. There is no dispute that the company M/ s. E-MUG Technologies P Ltd, is a private limited company in which the public are not substantially interested. ii. Further, the assessee is admittedly a shareholder and one of the directors of that company. He is having shareholding of more than 10%. iii. It is also beyond controversy that at all material times, the company possessed "accumulated profits'" in excess of the amount which the assessee-shareholder was paid during the previous year. As per audited statement of accounts and balance sheet as at 31.03.2009, the accumulated profits of the company amounted to Rs. 5,39,61,927 while from 13th May, 2009, to 24th Nov., 2009, the assessee received by cheque from time to time from the company payments aggregating Rs. 26,90,000 by way of loan or advance form the company. Thus, all the factual conditions for raising the statutory fiction created by ss. 2(22){e) have been satisfied in the instant case. 5.3 It was submitted by the assessee in the written submission that the amount was transferred on various dates from the company to director for the purpose of purchase of property at Gachibowli. It is also argued that the amount received was paid as advance to land owner for the purchase of property. Subsequently, because of some dispute, the said amount was refunded back to the company through the director. Thus, it was claimed that the transactions were only business transactions and the amount transferred and utilized for the business purpose. Hence, Section 2(22){e) cannot be imposed. The AO categorically mentions that as per the books of accounts of E-Mug Technologies Ltd. and also the ledger account reproduced in the above paragraph, clearly indicate that the amount was transferred as loans and advances. The relevant narration of the transaction clearly mentions "K. Siva Prasad towards Director loan". ITA Nos.796 & 797/Hyd/2016 6 Further, the argument of the assessee is that the amount was received as advance for purchase of land is not supported by any documentary evidence. In the return: submissions during the appellate proceedings, the appellant only contended that It was an oral agreement. The Assessing Officer clearly mentions that the assessee has not filed any evidence proving that the amount was given towards advance for purchase of land by the company such as sale deed, location, SY No., extent of land, name and address of the party, payment of advance details, etc. Further, it is noticed that there are multiple transactions and the amount was received over a period of time starting from 13th May, 2009 to 26th December, 2009. Thus, for the purchase of a single land there are thirteen times the payments were made which is unbelievable. Thus, I do not agree with the contention of the assessee that the amount was transferred to director in the normal course of business by the company which is a software company. Further the transaction, as recorded In the books of account, is a loan and hence the provisions of Section 2(221 'e, is correctly invoked by the Assessing Officer. 5.4 During the appellant proceedings stage, the appellant entirely relied on the decision in the case of Shri Shantilal Kumar Viz ITA NoA06j ASRj2009 dated 20.09.2012. The facts of the said case is entirely different. In that case the account between the proprietorship concern of the assessee i.e. M/ s. Shital International and the company M/ s. Shital Fibres Ltd is mutual, open and current in nature. There are more than 200 entries. Sometimes there is a debit balance and in the latter part there is huge credit balance. Therefore the Tribunal held that no part of running account could be treated as loan as the account is moving one and the balance reflected in that running account is momentary in nature and subject to frequent charges. Thus it was held that a running account maintained by two concerns even if they are related concerns does not fall within the purview of section 2(22)(e) of the Act as entries therein are in the normal course of the business which cannot be treated as loans. The present case is distinctly different from the facts of the case of Sh. Shital Kumar Vij, Prop. M/ s. Shital International (supra). There are two business entities and there are several mutual transactions between them. Thus, I hold that the ratio decided in the above case is not applicable to the assessee. 5.5 Further, let us decide 'what does constitute a Loan or Advance'. The term "Loan or Advance" has not been defined under the Income Tax Act, 1961. Basically, the Loan or Advance must create the relationship of 'lender' and 'borrower' and not merely that of a 'debtor' and 'creditor'. A relationship of 'lender' and 'borrower' will generally be created when there is an outgoing or flow of money from the company to the shareholder. In the matter of Dr. FredieArdheshir Mehta vs. Union of India [1991j 70 Compo Cas. 210 (Born) held that: Loan means an advance of money, upon the understanding that it shall be paid back, and it mayor may not carry interest. A credit sale resulting in a Book Debt does not amount to a loan. Therefore, only an actual payment of money by the company, upon the understanding of its repayment, shall be termed as loan. [CIT Panaji-Goa Vs. Parle Products Ltd. (2011) 196 Taxmann 62 (Born) followed] In the matter of CIT Vs. Raj Kumar (2009) 181 Taxmann 155 (Delhi) held that: The usual attributes of a loan are that it involves positive act of lending coupled with the acceptance by the other side of the money as loan as loan there is an obligation of repayment. In the present case the transfer of money from company to assessee has all these attributes of loan. ITA Nos.796 & 797/Hyd/2016 7 5.6 Exceptions to the applicability of section 2(22)(e): There are statutory exceptions by which payments are not to be treated as dividend, such as: any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where money-lending is a substantial part of the business of the company. [Sub-clause (ii)]. The onus to prove that (i) lending of money is substantial part of the business of the company and (ii) advance or loan had been made in the ordinary course of business is on the assessee [Walchand& Co. vs. CIT(1975) 100 ITR 598 (Born)]. The company's business is not money lending and it could not be said that the loans had been advanced by the company in the ordinary course of its business. Thus, it will not be covered under the exception clauses provided in by Sec. 2(22)(e) (i) to (v). 5.7 Another argument contended during the appellate proceedings that the amount so received as loan is entirely squared off during the accounting year itself. I rely on the following judgments and hold that such argument is not material while invoking the provisions of Section 2(22)(e) of the Act. 5.7.1 Duration of loan is not material: Section 2(22)(e) does not say that in order to come in the category of deemed dividend, loan should be of particular minimum duration. A loan for few days would be within its ambit [Walchand & Co. Ltd. Vs. CIT (1975) 100 ITR 598 (Bom)]. 5.7.2 Repayment of loan is not material: As soon as loan is advanced to shareholder by closely held company from accumulated profits statutory fiction under section 2(22)(e) becomes operative and such loan is deemed to be dividend. Such loan does not cease to be deemed dividend on account of any subsequent event. Even if the loan is repaid by the shareholder in the same previous year, the statutory fiction arising at the time of giving loan by the company does not cease to be operative. Such a loan would be taxed as deemed dividend even if repaid in the same previous year [Smt. Tarulata Shyam vs. CIT 1977 CTR (SC) 275: (1977) 108 ITR 345 (SC) affirming Tarulata Shyam vs. CIT (1971) 82 ITR 485 (Cal)]. " 5.8 Further, it is also argued that the assesse was not benefitted by the above mentioned loan transactions. With respect to this argument, I rely on the observation of Hon'ble High Court in the case of CIT vs. T.P.S.H. Selva Saroja (Deed.) (2000) 244 ITR 671 (Mad). It was held: what was advanced by the company to the shareholder was only a loan and it does not become the property of the shareholder and once the loan was advanced, it is liable to be treated as dividend to the extent of the accumulated profits provided other conditions prescribed under s. 2(22)(e) are satisfied. . 5.9 Further, in ground no.5, the assessee relied upon following cases; (i) CIT Vs V.M.Salgoacar and Brothers Pvt. Ltd. (Kar) 198 ITR 738 (ii) CIT Vs C.KUlandaive1u konar (Mad) 100 ITR 629 (iii) CIT Vs. Gurdial Singh (Del) 100 Taxman 507 and argued that that the amounts used from the company may be treated as running account for the purpose of utilizing it as loan and the proportionate interest is to be charged on the loan account. These decisions were rendered in a different context on the taxability of perquisites uls 17(2). Hence, these decisions are not applicable to present set of facts. ITA Nos.796 & 797/Hyd/2016 8 5.10 One parts with this case with the observations of hon'ble Supreme court in the case of Smt. Tarulata Shyam vs. CIT 1977 CTR (SC) 275: (1977) 108 ITR 345 (SC). The Supreme court while confirming the additions made ul s 2(22)(e) held: There is no scope for importing into the statute words which are not there. Such importation would be, not to construe, but to amend the statute. Even if there be a casus omissus, the defect can be remedied only by legislation and not by judicial interpretation. The intention of the legislature is primarily to be gathered from the words used in the statute. Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however, great the hardship may appear to the judicial mind to be. 6. Thus, I hold that the AO is justified. in treating Rs.55.18 lakhs as deemed dividend in accordance with the provisions of Section 2(22)(e) and accordingly, ground no.2 to 5 set out in grounds of appeal are dismissed. " There is hardly any dispute that the very reasoning has been adopted in the latter appeal as well. 4. Learned counsel vehemently contended during the course of hearing that both the lower authorities have erred in law and on facts in making the impugned deemed dividend addition pertaining to land purchase advances which are in the nature of a routine business transactions only. We find no merit in the assessees' instant stand since they have not placed on record the copy of the corresponding material which could indicate a routine business account, and more so that suggesting the company to have sought to utilize these sums for land purchase transactions. It is made clear that there is no dispute between about the accumulation of profits so as to be eligible to deeming fiction u/s 2(22)(e) of the Act. We thus affirm both the learned lower authorities' action making the impugned deemed dividend addition in these assessees' cases. 5. No other ground has been pressed before us. ITA Nos.796 & 797/Hyd/2016 9 6. These assessees’ appeals are dismissed in above terms. A copy of this common order be placed in respective case files. Order pronounced in the Open Court on 6 th December, 2021. Sd/- Sd/- (LAXMI PRASAD SAHU) ACCOUNTANT MEMBER (S.S. GODARA) JUDICIAL MEMBER Hyderabad, dated 6 th December, 2021. TYNM/sps Copy to: S.No Addresses 1 K. Siva Prasad, Hyderabad, C/o. T. Chaitanya Kumar, Advocate, Flat No.102, Gowri Apartments, Urdu Lane, Himayatnagar, Hyderabad. 2 P. Vishwanath Reddy, Hyderabad, C/o. T. Chaitanya Kumar, Advocate, Flat No.102, Gowri Apartments, Urdu Lane, Himayatnagar, Hyderabad. 3 The Asst.Commissioner of Income Tax, Central Circle – 2(2), Hyderabad. 4 CIT (A)-5, Hyderabad 5 Pr.CIT-5, Hyderabad 6 DR, ITAT Hyderabad Benches 7 Guard File By Order