TMI Blog2008 (5) TMI 322X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts of the case are that return declaring total income of Rs. 5,64,330 was filed on 24-10-2000. The assessee is a practising doctor and he is also a director in M/s. Shivani Hospital (P.) Ltd., wherein his wife, who is also a doctor, is another director. The assessment in this case was completed under section 143(1) on 15-1-2001. Later, it was gathered by the Assessing Officer that assessee has received advance from the company M/s. Shivani Hospital (P.) Ltd. Therefore, it was considered that the case is covered by the provisions of section 2(22)(e) of the Act. Accordingly, reasons were recorded and notice under section 148 was issued on 30-3-2005 and served upon the assessee. In response thereto, it was replied that return originally filed on 24-10-2002 may be treated as the one filed in response to notice under section 148. 4. The Assessing Officer noted while completing the assessment under section 143(3) in the case of M/s. Shivani Hospital (P.) Ltd. for the assessment year 2002-03 that assessee had received payments totalling to Rs. 21,12,500 from the company. It was recorded in the accounts of the company under the head "Advances recoverable in cash or in kind or value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructed his residence on the said plot of land and is enjoying the benefit of the whole plot. In response to query raised by the Assessing Officer it was replied to the Assessing Officer that advance was given by the company to the assessee for purchasing land for constructing a Nursing Home as the present premises of the company is rented one. The advance is in the nature of loan and therefore, outside the purview of section 2(22)(e) of the Act. The Assessing Officer; however, did not accept the explanation. He held that to the extent there is accumulated profit of Rs. 2,23,574 in the company, advance so given to the assessee is deemed dividend within the meaning of section 2(22)(e) of the Act. The assessee is holding more than 10 per cent share in the company and company is not the one in which public is substantially interested. He, accordingly, made an addition of Rs. 2,23,574. 6. Before the ld. CIT(A), reopening of the assessment was challenged but it was upheld by him on the ground that original assessment was completed under section 143(1) and therefore, provisions of section 148 are clearly applicable. Regarding treating the sum of Rs. 2,23,574 as deemed dividend, the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividend to the extent of Rs. 2,23,574 has escaped assessment which is sufficient for the purposes of issuance of notice under section 148(1). This ground of assessee is dismissed. 11. As regards addition of Rs. 2,23,574 before us, the learned A.R. for the assessee submitted that money was paid by the company to the assessee for purchase of land on which company intended to construct a Nursing Home which at present was in the rented house. Accordingly, advance was given to the assessee, Dr. S.K. Mishra, who purchased the land for a sum of Rs. 70,01,000 on 14-11-1998 from one Shri P.N. Kaul. A house is already constructed thereupon on the land measuring 1770 sq. yard. The payments were made according to the schedule as per agreement made with Shri P.N. Kaul. However, copy of the sale deed is in the possession of the Department as a consequence of search and seizure operation. In the absence of original sale deed, it would not be possible to transfer the half portion of the land to the company. In fact, there is no ulterior motive of the assessee not to pay the taxes. The deal has been honest both in the case of assessee and Shri P.N. Kaul and company and assessee. The land to be tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one should look at totality of the transaction as a whole to take a view whether it makes a commercial sense and not to give any importance to each step which may be otherwise legally valid. 13. In the rejoinder, the learned A.R. for the assessee submitted that there is no colourable device and in fact there is no ulterior motive to evade tax. The Department has not proved that assessee had an intention to evade taxes by entering into such a transaction. He submitted that it is a business transaction and therefore, would fall beyond the scope of section 2(22)(e) of the Act. 14. We have considered the rival submissions and perused the material on record. The facts which are undisputed are that assessee, along with his wife who is also a doctor, are directors in the company M/s. Shivani Hospital (P.) Ltd. There is no other person as shareholder. All the decisions are, therefore, taken by them together. It is also undisputed fact that assessee has received advance from the company and ostensibly this advance was for purchase of land. The land was to be purchased in the name of assessee and it was left at the discretion of the assessee as to when he would transfer the land to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land value i.e., Rs. 35,00,000 as and when required by the First Party and the advance will be interest-free. 7. That if the Second party decides not to take the land on lease then the First party shall be liable to refund the advance taken by him within six months from the date of receipt of the said intention of the Second party in writing failing which First party will be liable to pay interest @ 15 per cent per annum from the expiry of the date of six months. In witness whereof the parties of this Agreement have put their respective signatures upon this on the day, month and year as already mentioned herein above, without undue influence, coercion, bar and pressure etc." 15. A reading of this MoU dated 24-3-1999 indicates that (i) discretion is left with first party i.e., the assessee to execute the lease deed. But when such lease deed in favour of the company would be executed is not specified; (ii) it is also not laid down as up to what period company will wait for the assessee for executing the lease deed, (iii) the valuation of the land is not made vis-a-vis the amount of advance given so as to know whether advance given was equivalent to the value of the land company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic ingredients of a genuine and real commercial transaction. The MOU is not registered. There is no stipulation as to when the assessee will return the money or when he will execute the lease deed. There is also no stipulation as to when company would start constructing Nursing Home. There is no material to show that any step has been taken for arranging finance or for submitting papers to the appropriate authorities for constructing Nursing Home thereon. Merely because sale deed between Shri P.N. Kaul and assessee is in possession of the Department, it cannot be considered to be an impediment in initiating construction of the Nursing Home or initiating the process of defining the terms of lease deed or registering the lease deed. There is no material to show a semblance of a genuine transaction for purchase of land for the purposes constructing Nursing Home on the plot. As a matter of fact, the plot already has a residential house thereon which is used now by the assessee for his residence and the plot vacant is enjoyed by him being adjacent to or part of the constructed house. 18. Now, we refer to certain authorities including those cited by the parties with regard to deemed di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o as to avoid payment of tax on accumulated profits. This was the main reason for enacting section 2(22)(e) of the Act: 20. The ITAT Mumbai in the case of Jhamu U. Sughand v. Dy. CIT [2006] 99 ITD 1, held that the main object of provisions of section 2(22)(e) of the Act is to treat the loan granted by a closely held company to any of its shareholders in the same manner as it treats dividend distributed by it to them. One exception to the provisions is that the term "dividend" does not include any advance or loan made by the company to a shareholder in the course of its business and the lending of money as a substantial part of the business of the company. 21. In the case of CIT v. P.K. Abubucker [2003] 259 ITR 507 (Mad.) the facts were that assessee Shri P.K. Abubucker was the Managing Director of a company and had substantial interest therein. He also owned a property individually. The company was using that property as godown. It was destroyed in fire. It was required to be reconstructed. It was agreed by the company with assessee that after reconstruction six flats would be taken on lease by the company. For the purposes of construction of the new building, the company advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a part of the assets by way of advance would come within the mischief of the section. In this case, there was an advance made by the company to the assessee by the transfer of goods. The Tribunal had found that by such transfer, a benefit had accrued to the assessee. The value of the iron rods received by the assessee could, therefore, be treated as dividends under section 2(22)(e)." 23. In Indo Tech Electric Co. v. Dy. CIT [2006] 99 ITD 325 (Chennai), it was held that Assessing Officer has the duty to find out the real intention of the parties to an agreement which prima facie appears different than what is shown on its face. In this regard, we refer to relevant portion of the head notes from that decision as under: "It is the duty of the Assessing Officer to tax the right person for the right amount and to discover the true state of affairs. The agreement to be read in accordance with its construction when there is no doubt regarding the intention, but that the authorities have the right to go behind the documents to find out the real intention of the parties has always been recognised. This rule presupposes that in a given case, the real intention of the parties to the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such as "dubious device", "subterfuge", "colourable transactions", etc. The proper way to understand the observations in McDowell [1985] 154 ITR 148 (SC) regarding tax evasion, read as a whole and in perspective, is to hold that all commercial arrangements and documents or transactions have to be given effect to, even though they result in a reduction of the tax liability, provided that they are genuine, bona fide and not colourable transactions. The Supreme Court in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 has held that even if the transaction is genuine and even if it is actually acted upon, if the transaction is entered into with the intention of tax avoidance, then the transaction would constitute a colourable device." 25. The Hon'ble Gujarat High Court in the case of Banyan Berry v. CIT [1996] 222 ITR 831 held that the Hon'ble Supreme Court in the case of McDowell Co. Ltd. said that every action or inaction on the part of the tax payer which results in reduction of tax liability is to be viewed with suspicion but where arrangement is so made only for the purpose of not paying the taxes then it would fall in the category of colourable device. In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 the 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; but "dividend" does not include- (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company; Explanation 2.- The expression "accumulated profits", in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall ..... 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