The Banglore Bench of Income Tax Appellate Tribunal (ITAT) directed the AO( Assessing Officer ) to delete the additions made by him as the disputed transaction comes outside the ambit of the Section 2(22)(e) of Income Tax Act, 1961.
The appeal is filed by the assessee, Smt. Rinku Chakraborthy, against the order passed by the Id. CIT(A) – VI, Bangalore dated 30/01/2024 for the assessment year 1995-96. The assessee is said to have raised 11 grounds but on the basis of grounds no. 6 to 9, wherein it was alleged that the CIT(A) erred in confirming the order of the AO by sustaining the addition on account of deemed dividend u/s 2(22)(e) of the Act, whereas the transaction between the assessee and shareholder was in the nature of commercial transactions.
The facts are said to be like this, the assessee is an individual and declared her income under the head ‘salary, house property’ and ‘other sources’. The assessee being a director and shareholder in the company viz, DTDC Ltd. The assessee along with other 5 Directors has received a loan and advance amounting to Rs. 39,60,000/-, which was shown by the company as an advance for the purchase of property. The share of the assessee in the account of such loans and advances stands at Rs. 6,60,000/- only.
The date in which the loan and advance was given to the director was 28/03/1995 whereas the agreement was entered between the directors and the company dated 21/11/2995, wherein, it was agreed that the company shall purchase ground floor and shall take on lease 1st and 2nd floor in the building to be constructed by the Directors.
As per the assessee, such amount of loans and advances was given by the company for commercial purposes and, therefore, the same cannot be made subject to the addition on account of deemed dividend u/s 2(22)(e) of the Act.
However, the AO disagreed with the contention of the assessee on the reasoning that there was no agreement between the assessee and the company at the time of giving such advance dated 20/3/1995. As such, the advance given by the company was simple advance without having any element of commercial transaction. Thus, the AO treated the sum of Rs. 6,60,000/- as deemed dividend u/s 2(22)(e) of the Act and added to the total income of the assessee.
Aggrieved, assessee preferred an appeal before the CIT (A), which upheld the order of the AO.Being aggrieved by that the assessee appealed before the ITAT.
Shri Shambu Sharma, H, C.A, for the assessee claimed that “ As per the AR, the transaction for acquiring the building has actually taken place between the assessee and the company on a later date which was not disputed by the Revenue. Therefore, considering the commercial element in the disputed transaction, the provision of deemed dividend specified under section 2(22)(e) of the Act cannot be attracted”.
The contentions of the assessee are summarized as under:
i. There was a property owned by the directors jointly having value of ₹ 60 lakhs approximately which was required to be constructed at a further cost of ₹ 55 lakhs aggregating to ₹ 125 lakhs. .
ii. After construction of the property, the ground floor was to be purchased by the company. Likewise, the 1st floor and 2nd floor was to be taken by the company on lease from its directors.
iii. The advance given by the company was to be adjusted against the sale of ground floor and if any excess remains there, such excess was to be treated as rental deposits towards the 1st and 2nd floor which was to be taken by the company on lease. Such sale value of the ground floor was worked out at ₹ 8,87,500.00 dated 22 July 1996 and such rental deposits was worked out at ₹ 30,72,500.00 only on a later date.
The assessee inorder to support his claims of commercial transactions also submitted the receipts of the money given by the company to the directors, proposed agreement, minutes of the meetings of the Board of Directors. Subsequently the assessee has also entered into an agreement dated 21 November 1995.
However, the AO represented by Shri Subramanian S, CIT (DR) disagreed with the contention of the assessee on the reasoning that the advances were given by the company dated 28 March 1995 whereas the agreement was entered dated 21-11-1995. As such during the intervening period from 28-3-1995 and 20-11-1995, the amount in question was a simple advance without any business/ commercial connection.
Furthermore, the transaction between the assessee along with the directors and the company was not at the arm length because it was not a normal business transaction. It is for the reason that the company has advanced money 31.60% of the total cost of the project which is significant enough claimed the respondent.
The AO also observed that the documents i.e. receipt of money, proposed agreement, actual agreement, minutes of the Board of Directors cannot be the factor to hold that the transaction in question was commercial in nature in the given fact and circumstances. It is also important to note that the directors including the assessee in the present case were acting in dual capacity as director and in personal capacity. As such there was no reason for the directors which prevented them to enter into the formal agreement at the time of giving the advances and therefore the money receipts, proposed agreement, minutes of the Board of Directors cannot be ignored while deciding the issue whether there was a commercial element between the transaction discussed above. Thus, we hold that there was a commercial transaction between the directors and the company.
According to the Karnataka High Court in the case of Smt. Jamuna Vernekar v. Dy. CIT [IT Appeal No. 43 OF 2013, dated 10thFebruary, 2021], it was held that the Tribunal was not justified in law in holding that the amount received in lieu of Security Deposit and Lease Rentals were loans or advances within the meaning of section 2(22)(e) of the Act. Likewise, the Delhi High Court in CIT v. Raj Kumar observed that Trade advances which are in the nature of money transacted to give effect to a commercial transaction would not fall within the ambit of the provisions of Section 2(22)(e) of the Act.
The ITAT Bench of Shri Waseem Ahmed,Accountant Member and Shri Soundarajan K, Judicial Member held that in view of the above contentions it is held that the transaction in dispute was a commercial transaction and therefore it comes out of the ambit of the provisions of Section of 2(22)(e) of the Income Tax Act,1961. Accordingly, the findings of the of CIT-A was set aside and the directed the AO to delete the addition made by him.
The appeal filed by the assessee was allowed.
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