The DCIT, Central Circle-3, Surat V. Shri Kanaiyalal B.Patel, Surat

ITSSA 502/AHD/2011

• Counselvise Citation: [2015] 122 COUNSELVISE.COM (IT) 0799 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s)
• Appeal Type: Income Tax (Search & Seizure) Appeal
• Pronouncement Date: 17-07-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 14-07-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 17-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIMALENDU VERMA
• Assessee Lawyers: R B SHAH
• Keywords: Capital asset; Deemed dividend; Assessment record

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT AND SHRI S. S. GODARA, JUDICIAL MEMBER IT(SS)A NO. 502/AHD/2011 / ASSESSMENT YEAR: 2006-07 DCIT, CENTRAL CIRCLE-3, SURAT VS. SHRI KANAIYALAL B PATEL, GHANTIWALA COMPOUND, NR A S MOTORS, A K ROAD, SURAT PAN : ADQPP 0309 J / // / (APPELLANT) / // / (RESPONDENT) REVENUE BY : SHRI VIMALENDU VERMA, CIT-DR ASSESSEE(S) BY : SHRI R.B. SHAH, AR ! '#$/ // / DATE OF HEARING : 14/07/2015 %& ! '#$ / // / DATE OF PRONOUNCEMENT: 17/07/2015 '( '( '( '(/ // / O R D E R PER G.D. AGRAWAL, VICE PRESIDENT: THIS IS AN APPEAL FILED BY THE REVENUE AND IS DIREC TED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME-TAX (APPEAL S)-II, AHMEDABAD DATED 15.06.2011, PERTAINING TO ASSESSMENT YEAR 200 6-07. 2. IN THIS APPEAL BY THE REVENUE FOLLOWING GROUNDS ARE RAISED:- 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DEL ETING THE ENTIRE ADDITION OF RS.92,26,132/- AND RS.14,04,020/- MADE U/S 2(22)(E) OF THE INCOME TAX ACT, 1961. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOL DING THAT THE ADVANCES RECEIVED BY THE ASSESSEE FROM THE COMPANY CONCERNED ARE IN THE NATURE OF CAPITAL ADVANCES BUT DOES NOT FALL UNDE R THE AMBIT OF LOANS AND ADVANCES AND THEREFORE THE PROVISIONS OF SECTI ON 2(22)(E) OF THE ACT SHALL NOT APPLY IGNORING THAT THE SAID SECTION DOES NOT ACKNOWLEDGE ANY SUCH PRIME CLARIFICATION. IT(SS)A NO. 502/AHD/2011 DCIT VS. SHRI KANAIYALAL B PATEL FOR AY 2006-07 2 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE A.O. 4. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE CIT( A) BE SET ASIDE AND THAT OF THE A.O. BE RESTORED TO THE ABOVE EXTENT. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A N INDIVIDUAL. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER NOTICED THAT THE ASSESSEE RECEIVED THE LOAN OF RS.14,04,020/- FROM M ANISH MULTI PACKFILMS PVT LTD (MMPPL) AND RS.92,36,132/- FROM MANISH PACK AGING PVT LTD (MPPL). THE ASSESSEE IS HOLDING MORE THAN 10% SHAR ES IN BOTH THE COMPANIES. THEREFORE, THE ASSESSING OFFICER TREATED THE ABOVE AMOUNTS AS DEEMED DIVIDEND U/S 2(22)(E) OF THE INCOME-TAX ACT. ON APPEAL, THE CIT(A) DELETED THE ADDITION WITH THE FOLLOWING FINDINGS:- 6.2 DETERMINATION OF THE NATURE OF THE PAYMENTS MA DE BY BOTH THE COMPANIES TO THE APPELLANT GROUNDS OF APPEAL NO.1 AND 2: NOW AS REGARDS THE SECOND ISSUE REGARDING THE DETER MINATION OF THE NATURE OF THE PAYMENTS MADE BY BOTH THE COMPANIES TO THE APPE LLANT, IT IS SEEN THAT BOTH THE COMPANIES WERE USING THE LAND AND FACTORY BUILDING OF THE APPELLANT ON RENTAL BASIS AND AS A PART OF BUSINESS RESTRUCTU RING, IT WAS DECIDED THAT THE SAID COMPANIES WOULD PURCHASE THE RESPECTIVE PR OPERTIES FROM THE APPELLANT, FOR WHICH BOTH THE COMPANIES HAD ENTERED INTO AGREEMENTS WITH THE APPELLANT AND HAD MAY PAYMENTS TOWARDS TRANSFER OF THE RESPECTIVE PROPERTIES. IT IS FURTHER SEEN THAT THESE AGREEMENTS HAVE EVEN BEEN NOTARIZED BY A NOTARY PUBLIC. DURING THE COURSE OF APPELLATE PROCEEDINGS ON VERIFICATION OF THE ASSESSMENT RECORDS, IT IS SEEN THAT THE A.O. HAD MA DE INQUIRIES EVEN WITH THE RESPECTIVE NOTARY PUBLIC FOR VERIFYING THE GENUINEN ESS OF THE AGREEMENTS AND IN RESPONSE TO THE SAME THE NOTARY PUBLIC HAVE ALSO CONFIRMED THE SAME BY FURNISHING THEIR CONFIRMATIONS AND NOTARY RECORDS O F THE YEAR UNDER CONSIDERATION SHOWING THE DATE OF EXECUTION, PURPOS E OF THE AGREEMENTS AND THE SIGNATURES OF THE PARTIES INVOLVED. IT(SS)A NO. 502/AHD/2011 DCIT VS. SHRI KANAIYALAL B PATEL FOR AY 2006-07 3 FURTHER, ON VERIFICATION OF THE ORIGINAL ASSESSMENT RECORDS OF MPPL, IT IS ALSO SEEN THAT THE AGREEMENT FOR TRANSFER OF LAND AND FA CTORY BUILDING AS EXECUTED BETWEEN MPPL AND THE APPELLANT WAS EVEN SUBMITTED D URING THE COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS IN THE CASE OF MPPL , WHICH WAS MUCH PRIOR TO THE DATE OF SEARCH AND THIS FACT FURTHER ESTABLI SHES THAT THE SAME IS NOT AN AFTER-THOUGHT. IT IS SIGNIFICANT TO NOTE THAT EVEN THE A.O. IN HER ASSESSMENT ORDER IN PARA 5 ON PAGE NO.4 HAS MENTIONED: HOWEVER, IN THE INSTAN T, THE SUM OF RS.20 LACS AND RS.69 LACS HAVE NOT BEEN TO THE ASSESSEE BY THE COMPANIES MMPPL AND MPPL RESPECTIVELY IN ORDER TO ENTER INTO ANY TRANSA CTION ON BEHALF OF COMPANIES OR FOR THE BENEFIT OF THE COMPANIES. ACTUALLY, THE AFORESAID SUMS ARE IN THE NATURE OF S ALE CONSIDERATION PAID IN ADVANCE BY COMPANIES TO THE ASSESSEE FOR THE PURCHA SE OF LAND OWNED BY THE ASSESSEE. HERE THE BENEFIT ACCRUING TO THE ASSESSEE FROM BOTH THE TRANSACTIONS AND HAD THE TRANSACTIONS MATERIALIZED, HE WOULD HAV E EARNED LONG TERM CAPITAL GAIN FROM THE SAME AND ACCEPTED THAT THE S AID PAYMENTS CAN BE SAID TO BE CAPITAL ADVANCES, WHICH ESTABLISHES THAT THE SAID PAYMENT ARE NOT IN THE NATURE OF LOANS OR ADVANCES AS IS REQUIRED BY S ECTION 2(22)(E) OF THE ACT. HERE, IT IS PERTINENT TO NOTE THAT AS PER THE PROVI SIONS OF SECTION 2(22)(E), ONLY PAYMENTS MADE BY A COMPANY TO ITS SHAREHOLDER WHICH ARE IN THE NATURE OF LOANS OR ADVANCES CAN BE TREATED AS DEEMED DIVID END AND PAYMENTS MADE OTHERWISE IN ORDINARY COURSE OF BUSINESS AND FOR AN Y OTHER BUSINESS TRANSACTION WHICH DO NOT CONSTITUTE THE PAYMENT AS LOAN OR ADVANCE, WOULD NOT FALL WITHIN THE PURVIEW OF SECTION 2(22)(E) OF THE ACT. IN THE PRESENT CASE, IT IS AMPLY ESTABLISHED AND EV EN CROSS VERIFIED THAT THE PAYMENTS MADE BY BOTH THE COMPANIES TO THE APPELLAN T ARE NOT IN THE NATURE OF LOANS OR ADVANCES BUT THE SAME ARE MADE TOWARDS TRANSACTIONS IN THE ORDINARY COURSE OF BUSINESS FOR PURCHASE OF LAND AN D FACTORY BUILDING BY THE RESPECTIVE COMPANIES FROM THE APPELLANT. HERE IT IS IMPORTANT THAT NATURE OF PAYMENT AT THE TIME OF MAKING PAYMENT IS RELEVANT A ND IMPORTANT AND IT IS IRRELEVANT WHETHER TRANSACTION WAS MATERIALIZED OR NOT. FURTHER, THE CIRCUMSTANCES UNDER WHICH THE DEALS HA VE BEEN CANCELLED ALSO STAND JUSTIFIED BEING SUPPORTED BY DOCUMENTARY EVID ENCES, SINCE, THE APPELLANT HAS BEEN ABLE TO SHOW WITH DOCUMENTARY EV IDENCE THAT AFTER ENTERING INTO THE AGREEMENT FOR PURCHASE OF LAND AN D FACTORY BUILDING, THE COMPANY MMPPLS TURNOVER, NET PROFIT AND NET CURREN T ASSETS FELL CONSIDERABLY, WHICH COMPELLED IT TO CANCEL THE AGRE EMENT ON ACCOUNT OF FINANCIAL PROBLEMS. SIMILARLY, THE COMPANY MPPL AF TER ENTERING INTO AN IT(SS)A NO. 502/AHD/2011 DCIT VS. SHRI KANAIYALAL B PATEL FOR AY 2006-07 4 AGREEMENT FOR PURCHASE OF LAND AND FACTORY BUILDING , DECIDED TO PURCHASE A WINDMILL OF RS.3.60 CRORES AND THEREFORE, AS A MATT ER OF BUSINESS EXPEDIENCY TO AVOID LIQUIDITY CRUNCH, TOOK A DECISION TO CANCE L THE PURCHASE AGREEMENT AND CONTINUE TO USE THE PROPERTY ON RENT. THEREFORE, I AM OF THE CONSIDERED VIEW THAT THE PAY MENTS MADE BY THE COMPANIES MPPL AND MMPPL TO THE APPELLANT DO NOT FA LL WITHIN THE AMBIT OF SECTION 2(22)(E) OF THE ACT BEING NOT IN THE NAT URE OF LOANS OR ADVANCE AND THENCE, THE SAME CANNOT BE TAXED AS DEEMED DIVIDEND . THE APPELLANTS CASE IS COVERED BY THE DECISION OF CHENNAI BENCH OF ITAT IN THE CASE OF ACIT V. HARSHAD V. DOSHI (2011) 9 TAXMA N 48 (CHENNAI) WHEREIN IT HAS BEEN HELD THAT ADVANCE GIVEN BY A CO MPANY TO ITS DIRECTOR AND SHAREHOLDER FOR OBTAINING DEVELOPMENT RIGHTS OF LAN D AND LEASEHOLD RIGHTS OF PROPERTY WOULD NOT FALL UNDER THE MISCHIEF OF SECTI ON 2(22)(E). FURTHER, EVEN THE CHANDIGARH BENCH OF ITAT IN THE CASE OF DCIT VS . LAKRA BROS. (2007) 106 TTJ (CHD) 250 HAS HELD THAT ADVANCES MADE DURIN G THE ORDINARY COURSE OF BUSINESS FOR BUSINESS EXPEDIENCIES DO NOT CONSTI TUTE LOAN FOR THE PURPOSE OF SECTION 2(22)(E) AND CANNOT BE TAXED AS DEEMED DIVI DEND. MOREOVER, THE FACT THAT THE APPELLANT HAD A FREE BA LANCE OF RS.26,36,062/- IN HIS CITI BANK ACCOUNT BEFORE RECEIVING THE CHEQUE O F RS.20,00,000/- FROM MMPPL ALSO ESTABLISHES THAT EH APPELLANT HAD NO REQ UIREMENT TO BORROW A LOAN FROM THE COMPANY AND THAT THE CAPITAL ADVANCE WAS RECEIVED FOR SALE OF PROPERTY AND NOT FOR HIS INDIVIDUAL BENEFIT. NOW, AS REGARDS THE A.O.S OBSERVATION THAT WHY THE LEDGER ACCOUNTS PERTAINING TO THE LAND TRANSACTION WERE MERGED WITH THOSE OF UNSECURED LOAN, I AM OF THE OPINION THAT THE NATURE AND CHARACTER O F PAYMENTS MADE BY A COMPANY ARE VERY IMPORTANT IN EXAMINING WHETHER A P AYMENT MADE BY A COMPANY FALLS U/S 2(22)(E) OR NOT AND PAYMENTS MADE BY A COMPANY THROUGH A RUNNING ACCOUNT IN DISCHARGE OF ITS EXISTING DEBT S OR AGAINST PURCHASE OR FOR AVAILING SERVICES, COULD NOT BE TREATED AS DEEM ED DIVIDEND FOR THE PURPOSE OF SECTION 2(22)(E). THUS, IN THE PRESENT CASE ONC E IT IS ESTABLISHED THAT THE PAYMENTS MADE BY BOTH THE COMPANIES TO THE APPELLAN T ARE IN THE ORDINARY COURSE OF BUSINESS TOWARDS TRANSACTION OF PURCHASE OF CAPITAL ASSETS, IT GETS IMMATERIAL AS REGARDS THE RECORDING OF THE SAME IN A COMMON RUNNING CURRENT ACCOUNT. THIS VIEW IS SUPPORTED BY THE DECI SION OF THE MUMBAI BENCH OF ITAT IN THE CASE OF NH SECURITIES LTD. V. DCIT (2007) 11 SOT 302 (MUM) WHEREIN IT HAS BEEN HELD THAT THE DEEMING PRO VISIONS OF SECTION 2(22)(E) APPLY ONLY WHERE THE COMPANY PAYS TO THE S HAREHOLDER AN AMOUNT AS ADVANCE OR LOAN AS SUCH AND NOT IN ANY OTHER CONT EXT. THE LAW DOES NOT PROHIBIT BUSINESS TRANSACTIONS BETWEEN RELATED CONC ERNS AND THEREFORE IT(SS)A NO. 502/AHD/2011 DCIT VS. SHRI KANAIYALAL B PATEL FOR AY 2006-07 5 PAYMENTS MADE IN THE ORDINARY COURSE OF BUSINESS CA NNOT BE TREATED AS LOANS AND ADVANCES, EVEN THOUGH THE SAME IS THROUGH A MUT UAL, OPEN AND CURRENT ACCOUNT. THUS, THERE IS NO MERIT IN THE SAID REASON ING OF THE A.O. THEREFORE, IN VIEW OF THE ABOVE DISCUSSION, I HOLD THAT THE PAYMENTS MADE BY THE COMPANIES MPPL AND MMPPL ARE IN THE ORDINARY CO URSE OF BUSINESS AND ADVANCE TOWARDS BUSINESS TRANSACTION OF PURCHAS E OF LAND AND FACTORY BUILDING AND THE SAME ARE NOT IN THE NATURE OF LOAN S OR ADVANCES. THUS, THE A.O. HAS ERRONEOUSLY TREATED THESE BUSINESS PAYMENT S AS LOANS AND ADVANCES AND TAXED THEM AS DEEMED DIVIDEND U/S 2(22)(E) OF T HE ACT. ACCORDINGLY, THE ADDITION OF RS.92,26,132/- AND RS.14,04,020/- AS MA DE BY THE A.O. IN RESPECT OF DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT IS DELET ED. IN THE RESULT, GROUNDS OF APPEAL NO.1 AND 2 ARE ALLOWED. 4. THE REVENUE, AGGRIEVED WITH THE ORDER OF THE CIT (A), IS IN APPEAL BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL PLACED BEFORE US. THE CIT(A) HAS RECORDED THE FINDING THAT THE AMOUNTS RECEIVED BY THE ASSESSEE FROM THE ABOVE TWO COMPANIES WERE NOT THE LOANS, BUT WERE THE PART CONSIDERATION RECEIVED FROM PROPOSED SALE OF P ROPERTIES TO THOSE TWO COMPANIES. THE AGREEMENTS TO SALE WERE DULY NOTARIZ ED BY THE NOTARY PUBLIC AND THE ASSESSING OFFICER HAS ALREADY MADE T HE INQUIRY FROM NOTARY PUBLIC DURING THE ASSESSMENT PROCEEDINGS AND THE NO TARY PUBLIC HAVE CONFIRMED THE EXECUTION OF THE DOCUMENT AT THE RELE VANT TIME. MOREOVER, THE CIT(A) HAS ALSO RECORDED THAT DURING THE COURSE OF THE ORIGINAL ASSESSMENT PROCEEDINGS OF MPPL, THE AGREEMENT FOR T RANSFER OF LAND AND FACTORY BUILDING EXECUTED BETWEEN MPPL AND THE ASSE SSEE WAS SUBMITTED. THIS ASSESSMENT PROCEEDINGS WAS MUCH PRIOR TO THE D ATE OF PRESENT ASSESSMENT PROCEEDINGS. IN VIEW OF THESE FACTS, TH E CIT(A) ARRIVED AT THE CONCLUSION THAT THE AGREEMENTS TO SALE WERE GENUINE AND THE AMOUNTS RECEIVED BY THE ASSESSEE FROM THESE TWO COMPANIES W ERE THE ADVANCE AMOUNT AGAINST THE PROPOSED TRANSFER OF THE RESPECT IVE PROPERTIES TO THOSE IT(SS)A NO. 502/AHD/2011 DCIT VS. SHRI KANAIYALAL B PATEL FOR AY 2006-07 6 TWO COMPANIES. AT THE TIME OF HEARING BEFORE US, T HESE FINDINGS OF FACTS RECORDED BY THE CIT(A) HAVE NOT BEEN CONTROVERTED B Y THE REVENUE; THEREFORE, THE LIMITED QUESTION IS WHETHER SECTION 2(22)(E) WOULD BE APPLICABLE IN RESPECT OF ALL THE AMOUNTS RECEIVED B Y THE SHAREHOLDER FROM THE COMPANY AGAINST THE SALE OF PROPERTY. WE FIND THAT THE HONBLE DELHI HIGH COURT HAS CONSIDERED THE ISSUE OF DEEMED DIVID END IN THE CASE OF CIT VS. CREATIVE DYEING & PRINTING (P) LTD, WHEREIN THE IR LORDSHIPS OF THE HONBLE DELHI HIGH COURT HELD AS UNDER:- HELD, DISMISSING THE APPEAL, THAT THE AMOUNTS ADVA NCED FOR BUSINESS TRANSACTION BETWEEN THE ASSESSEE-COMPANY AND P DID NOT FALL WITHIN THE DEFINITION OF DEEMED DIVIDEND UNDER SECTION 2(22)(E ). 6. THUS, AS PER HONBLE DELHI HIGH COURT IF THE AD VANCE IS FOR BUSINESS TRANSACTIONS, THEN IT WILL NOT FALL WITHIN THE AMBI T OF SECTION 2(22)(E). ADMITTEDLY, THE AMOUNTS RECEIVED BY THE ASSESSEE FR OM MANISH MULTI PACKFILMS PVT LTD (MMPPL) AND MANISH PACKAGING PVT LTD (MPPL) WAS AGAINST THE SALE OF THE ASSESSEES PROPERTIES. THE REFORE, IT CANNOT BE SAID TO BE COVERED WITHIN THE AMBIT OF SECTION 2(22)(E). S ECTION 2(22)(E) WOULD BE APPLICABLE WHEN THE PAYMENT BY THE COMPANY TO THE S HAREHOLDERS IS IN THE NATURE OF ADVANCE OR LOAN. WHEN THE ASSESSEE RECEI VED PART OF THE SALE CONSIDERATION FOR PROPOSED TRANSFER OF THE PROPERTY AS PER AGREEMENT TO SALE, THE AMOUNTS RECEIVED BY THE ASSESSEE CANNOT BE SAID TO BE ADVANCE OR LOAN BY THE COMPANY TO THE SHAREHOLDER. IT IS A BUSINES S TRANSACTION IN WHICH THE CAPACITY OF THE ASSESSEE IS SELLER OF THE PROPERT Y AND THE COMPANY IS BUYER OF THE PROPERTY. THE AMOUNT IS RECEIVED BY THE ASSESSEE IN THE CAPACITY OF SELLER OF THE PROPERTY IN PURSUANCE TO THE AGREEMENT TO SALE OF THE PROPERTY AND NOT AS A LOAN FROM THE SAID COMPAN Y. IN VIEW OF ABOVE AND RESPECTFULLY FOLLOWING THE DECISION OF HONBLE DELHI HIGH COURT IT(SS)A NO. 502/AHD/2011 DCIT VS. SHRI KANAIYALAL B PATEL FOR AY 2006-07 7 (SUPRA), WE DO NOT FIND ANY JUSTIFICATION TO INTERF ERE WITH THE ORDER OF THE CIT(A) WHICH IS SUSTAINED AND THE REVENUES APPEAL IS DISMISSED. 7. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 17 TH JULY, 2015 AT AHMEDABAD. SD/- SD/- (S. S. GODARA) JUDICIAL MEMBER (G.D. AGRAWAL) VICE-PRESIDENT AHMEDABAD; DATED 17/07/2015 BIJU T., PS '( ! ') *')' '( ! ') *')' '( ! ') *')' '( ! ') *')'/ COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ++ ' , / CONCERNED CIT 4. , ( ) / THE CIT(A) 5. )/0 ' , , / DR, ITAT, AHMEDABAD 6. 02 3 / GUARD FILE . '( '( '( '( / BY ORDER, TRUE COPY 4 44 4/ // / +5 +5 +5 +5 ( DY./ASSTT.REGISTRAR) , , , , / ITAT, AHMEDABAD