2010 (4) TMI 677 - AT - Income Tax

Deemed Dividend - addition under section 2(22)(e) Assessee is the managing director of M/s Doshi Housing Ltd. (DHL for short) was having substantial holdings of shares therein whereby any advances or loans received by him from the said company would invite application of section 2(22)(e) of the Act - Assessee was acquiring the property for and on behalf of DHL Though some such properties were held in his name on certain others only power of attorney was obtained - Assessee had become the owner of the land with the company s money and having shown capital gains therefrom it could not be said that there was no benefit received by him from the money or advance received from DHL - Hon ble Apex Court in the case of Navnit Lal C Javeri v. K.K.Sen (1964 -TMI - 49340) held that the intention of considering loans/advances received by an interested shareholder as the deemed dividend was to quell the mischief of taking substantial Loans or advances instead of receiving pay out through dividends so as to avoid payment of tax In the present case there is no intention to evade tax - Decided in favor of assessee.

Issues Involved:
1. Deletion of additions made by the Assessing Officer under section 2(22)(e) of the Income-tax Act, 1961.
2. Whether the advances paid by M/s Doshi Housing Ltd. (DHL) to the assessee were driven by business consideration or deemed as dividend.
3. Legality of bifurcation of ownership and development to reduce stamp duty under Tamil Nadu Stamp Act, 1974.
4. Whether rental advance paid by DHL to the assessee constitutes deemed dividend.

Issue-wise Detailed Analysis:

1. Deletion of Additions under Section 2(22)(e):
The primary grievance of the Revenue was the deletion of additions made by the Assessing Officer under section 2(22)(e) on account of advances paid by DHL to the assessee. The Assessing Officer contended that these advances should be considered as deemed dividends. However, the Commissioner (A) found that these transactions were driven by business considerations and not for the personal benefit of the assessee.

2. Advances Driven by Business Consideration or Deemed Dividend:
The assessee, managing director of DHL, received advances for acquiring land for DHL's development projects. The Assessing Officer argued that these advances were for personal benefit, invoking section 2(22)(e). The assessee countered that the advances were for business purposes, to reduce registration costs under the Tamil Nadu Stamp Act, 1974. The Commissioner (A) supported the assessee, noting that the advances were used immediately for land payments, and the transactions were part of DHL's business operations. The Tribunal affirmed that the advances were motivated by business considerations and not deemed dividends.

3. Legality of Bifurcation of Ownership and Development:
The Assessing Officer claimed that bifurcating ownership from development circumvented the Tamil Nadu Stamp Act, 1974, causing loss to the State Exchequer. The assessee argued that this practice was customary and legally permissible to reduce costs. The Commissioner (A) agreed, citing the Hon'ble Jurisdictional High Court's decision in Park View Enterprises v. State of Tamil Nadu, which supported bifurcation to lower stamp duty costs. The Tribunal upheld this view, stating that the transactions were legally and commercially motivated.

4. Rental Advance Constitutes Deemed Dividend:
The Assessing Officer included a rental advance of Rs. 19,89,000/- paid by DHL to the assessee as deemed dividend. The assessee argued it was a security deposit for leasing his property to DHL. The Commissioner (A) found it to be a lease advance, not attracting section 2(22)(e). The Tribunal agreed, finding no evidence to rebut the Commissioner (A)'s conclusion.

Conclusion:
The Tribunal upheld the Commissioner (A)'s decision, affirming that the advances received by the assessee from DHL were business transactions and not deemed dividends under section 2(22)(e). The appeal by the Revenue was dismissed.

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