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TMI Blog2010 (4) TMI 677X X X X Extracts X X X X X X X X Extracts X X X X ..... ces or loans received by him from the said company would invite application of section 2(22)(e) of the Act. In addition to being the managing director of DHL, assessee was also partner in various constructions firms viz. a) Sanghvi & Doshi Construction, b) Mahalakshmi Builders, c) Doshi Construction, d) Doshi & Doshi, e) Shree Siddachal Construction f) Sri Mahalakshmi Construction and g) Mahalakshmi Foundations. DHL was a company which was engaged in the business of property development. Other firms mentioned above in which assessee was a partner, were also in the related business only. During the course of assessment proceedings, from the Balance sheet filed by DHL for the relevant previous year, it was noted by the Assessing Officer that their Schedule showing sundry creditors, reflected assessee to have obtained an advance of Rs. 3,87,53,235/-. A rental advance of Rs.19,89,000/- was also seen. 3. Assessee was queried as to why provisions of section 2(22)(e) should not be applied and the above sums considered as deemed dividend in his hands. Response of the assessee was that all the advances received were for acquiring land which was to be developed by DHL and the decision to ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the sum of Rs.3,59,44,112/- out of total advance of Rs.3,87,53,232/- and rental advance of Rs.19,89,000/- received by the assessee from DHL were deemed dividend under section 2(22)(e) of the Act. 5. Challenging the above before Commissioner (A) assessee made submissions as summarized hereunder: (i) 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. Whatever be the nature of holding, they were handed over to DHL for development. Only on an understanding that land will be developed by DHL, acquisition of the property was made by the assessee and therefore assessee was only a tool in the business conducted by DHL (ii) There was no intention to circumvent the provisions of Tamil Nadu Stamp Act. Bifurcation of ownership and development was a legally permitted tax planning methodology. (iii) Hon'ble Jurisdictional High Court had in the case of Park View Enterprises v. State of Tamil Nadu (189 ITR 192) had held that registering authorities before whom undivided land was being conveyed could not compel production of agreement for construction and im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. According to him funds were transferred with a clear understanding that it should be utilized to develop property which was to be handed over to DHL for development. From the statement of accounts relating to the advance, learned Commissioner (A) found that the money, as soon as ft was received, were disbursed by the assessee to the land owners, in a sequence which did not show up any gap. Learned Commissioner (A) also found strength in the argument of the assessee that DHL had entered into proxy ownership of land so as to bring down the cost of stamp duty for the prospective buyers and the managing director was the best option available with it for such proxy. Holding that section 2(22)(e) being a deeming provision had to be construed strictly, Commissioner (A) was of the opinion that the advances given by DHL to the assessee were purely business transactions done by the said company for commercial expediency which took it out of the purview of section 2(22)(e) of the Act, Vis-a-vis the finding of the Assessing Officer that assessee had shown capital gains with regard to properties at Aspirin Garden, Vanagaram and Vengaivasal, learned Commissioner (A), after verification of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al interest, in an indirect manner also fell within the scope of section 2(22)(e) of the Act. Reliance was placed on the decisions of the Honble Apex Court in the case of L.Alagusundaram Chettiar v. CIT (252 ITR 893); CIT v. B.M.Kharwar (72 ITR 603) and that of Hon'ble Gujarat High Court in the case of Ravindra D.Amin v. CIT (208 ITR 815). (iv) For the immediately preceding assessment year also, assessee had shown capital gains on Pallikaranai land which was purchased by him with the money received from DHL and hence assessee was getting benefit therefrom. (v) There was nothing to show that the land was handed over to DHL and nowhere in the document it was mentioned that the property belonged to DHL or assessee was holding the land on behalf of DHL, Even if it is considered that there was a business practice of bifurcating ownership and development, in order to reduce the incidence of stamp duty, since such a method caused loss to the exchequer, it should not be allowed, (vi) The quantum of benefit is not relevant and once assessee has got some benefit, section 2(22)(e) has to be applied. (vii) By following a procedure where ownership is held by managing director and devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e advances received from DHL were for acquiring properties for their projects in Aspirin Garden, Vadapalani, Tambaram, Vanagaram, Vengaivasal and Villivakkam. Out of these only the properties of Aspirin Garden and Vengaivasal, the registration of documents fell in the relevant previous year. In the case of Tambaram project the land was yet to be registered. According to him power of attorney registered in the assessee's name would not make the assessee owner of the property and the understanding all along was that assessee was holding the property in the business interest of DHL and not that of the assessee himself. Reliance was also placed on paper book page 14 which is a letter written by M/s Doshi Construction in which assessee is a partner to DHL where the matter regarding transfer of property, negotiation and finalization have been clearly mentioned. Attention was also brought to minutes of the board of directors of DHL placed at page 15 whereby advance payments for purchase of property through Mr. Harshad V.Doshi was authorised and sufficient amounts directed to be transferred. All in all, according to him, these were pure business transactions and were not in the nature of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee would attract section 2(22)(e) of the Act for deeming it as dividend in his hands. Assessee's contention is that business of DHL was property development and in order to reduce the stamp duty incidence upon the ultimate customers, it was very much necessary to bifurcate the ownership of the land from the development or construction of the flats therein. Short point made by the assessee is that if DHL itself held the ownership of the land as well as development rights therein, on sale of flats or proposed flats, ultimate customer would have had to pay stamp duty on both cost of land and proposed construction cost of the flat. In so far as this argument of the assessee is concerned he is absolutely right. Schedule I of Indian Stamp Act, 1899 corrected upto Tamil Nadu Act 31 of 2004 mentions at clause (i) of item No.5 as under:- (i) If relating to construction of a house or building including the multi-unit house or building by the vendor on land sold by such vendor and containing stipulation that such land together with such house or building or multi-unit house or building so constructed shall be held either individually or jointly by the vendee of such land,- (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y would clearly show that the intention of DHL was only business purpose and it had no intention to give any loan or advance, which was not motivated by business consideration. If we look at the capital gains shown by the assessee in his returns, which has been strongly relied on by the Revenue in support of its case, for assessment year 2003-04 etc. capital gains was Rs.13,198/-; for assessment year 2004-05 it was only Rs.5,92,167/- ; for assessment year 2005-06 it was only Rs.4,10,583/- and for the assessment year 2006-07 which is the impugned assessment year, it was Rs.6,28,380/- and for succeeding assessment year 2007-08 it was for a land not retatable to any of the advances received. If we look at capital gains break up for the impugned assessment year 2006-07 there are two properties involved one is Ayanavaram land on which a short term capital gains of Rs.4,20,267/-has been shown and on Pallikaranai land long term capital gains of Rs.2,08,113/- has been shown. The projects of DHL namely AspirinGarden, Vadapalani, Tambaram, Vanagaram, Villivakam and Vengaivasal does not appear in the capital gains computation. So assessee's contention that long term capital gains at Least for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wnership and development rates, so as to reduce the incidence of stamp duty would be unlawful, we are afraid we cannot accept. It is for the reason that if an assessee by arranging its own affairs in a manner, intended to keep itself competitive, in a fiercely competitive market had adopted a course that would reduce the tax incidence to the ultimate customer through perfectly legal means, it would not warrant a conclusion that there was anything unlawful in adopting such means. 11. Before parting with the issue, it would be inappropriate if we do not discuss decisions relied on by the learned Departmental Representative. In the case of CIT v. B.M.Kharwar (72 ITR 603), the Hon'ble Apex Court was dealing with the issue whether taxing authorities could proceed based on substance of the matter, ignoring the legal character of the transaction. True, it was held by the Hon'ble Apex Court that Revenue was entitled to do that. But here there is nothing which could be called as substance of the matter or there is no transactions which require to go by its legal character which could lead to a conclusion that the amounts advanced to the assessee by DHL was nothing but deemed dividend. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cker would not help the Revenue in any manner. Coming to the last of the decisions relied on by learned Departmental Representative which is that of L. Alagusundaram Chettiar v. CIT (252 ITR 893) of the Hon'ble Apex Court, there a company had advanced large amounts to one of its employes who in turn advanced such amounts to its managing director There was an admission by the said managing director that he was obtaining the Loan through such employee and it was due to this reason the Hon'ble Apex Court held the amount to have been rightly treated as deemed dividend. There was no commercial expediency or business purpose in such transactions, which is not the case here, when assessee received the funds from DHL Though section 2(22)(e) of the Act has undergone a number of amendments, the precursor to such provision was section 2(6A)(e) of the 1922 Act and when the constitutional validity of such section was questioned, Hon'ble Apex Court in the case of Navnit Lal C Javeri v. K.K.Sen (56 ITR 198) held at paragraph 13 of its order as under: 13. In dealing with Mr. Pathak's argument in the present case, let us recall the relevant facts. The companies to which the impugned section applie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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