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TMI Blog2015 (2) TMI 898X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of expenditure of Rs. 5,94,96,000/- under section 69C since no evidence were found at the time of search for incurring these expenses ignoring the fact that assessee itself has claimed these expenses while computing profits from sale of land." 2.1 "Whether, on facts and in the circumstances of the case and in law CIT(A) is justified in holding that provisions of section 40A(3) cannot be applied to expenses of Rs. 5,94,96,000/- as provisions of section 40A(3) are not applicable to block proceedings, when these provisions were invoked by the assessing officer not in block proceedings but in proceedings for assessment under section 153C of the income tax act." 3 "Whether, on facts and in the circumstances of the case and in law, CIT(A) is justified in holding that provisions of section 2(22)(e) of the income tax act are not applicable to in present case as advances received by the assessee from MIs Kalpana Struct Con Private Limited are commercial transactions without appreciating that there are enough evidences to show that transaction are in the nature of loans and advances only"." 3. The Revenue for the assessment year 2009-10, has taken following grounds :- "Whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounted cash of Rs. 10.65 crore was received in the land deal with M/s. Iconic Realtors Ltd. The AO has noticed that page no. 221 to 229 of Annexure A-1 seized from the office of Shri Madan Kolambekar contained details of various land transactions made by the Jai Corp Group of cases through Shri Madan Kolambekar and details of payment made in cash. On page No. 221, the name of M/s. Pathik Constructions is appearing against which an amount of Rs. 10,65,00,000/- dated 16.01.2008 is shown. This page alongwith other incriminating evidences collected during the course of search prove , this fact that M/s. Pathik Constructions has received Rs. 10.65 crore in cash against the land deal with M/s. Iconic Realtors Ltd. Page No. 229 of Annexure A-l shows the land deal at Rs. 1421.5 lakh. In the ledger register; page No. 111 of Ledger folio No.92, the total payments received for this plot are shown at Rs. 356 lakhs. Thus, there was a difference of Rs. 1065 lakh which was appearing at page No, 221 of Annexure A-1. When the seized documents were confronted to Shri Ajit Thumer, one of the key partners of the assessee firm in Q. No. 13 he has confirmed that this transaction was taken place by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.02.09. The documents found during the course of search in case of Shri Madan Kolambekar and in the case of Shri Sandeep Totade were confronted with the assessee and the statement of Shri Ajit Thumer and Shri Chaturbhai Thumer were recorded who have admitted that as per the sale agreement, the consideration of this land deal was shown only at Rs. 3.25 crore but actually the plot was sold for Rs. 14.20 crore and the difference was received in cash. Both the partners of the firm have admitted this fact and the other documents as per Annexure 0-2 filed with the assessment order also shows that the cheque payment was made of Rs. 2.22 crore and Rs. 5,94,96,000/- was cash transaction. When confronted during the course of search, these were categorically admitted by the assessee by both the partners of the firm. However, later on, the assessee has retracted the statement by alleging that it was under pressure and harassment from the Authorized Officer. The retraction of statement as discussed above was without any basis and was not accepted by the AO and also rejected by the undersigned. 3.4 Before me, the AR of the appellant has submitted that certain unaccounted cash expenses were i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has declared an amount of Rs. 2,31,90,000/- consisting of Rs. 1,95,00,000/- on account of discussion made in para 5 of the assessment order and Rs. 36,90,000/- (14,60,000 + 22,30,000) totaling to Rs. 2,31,90,000/- which shows that unexplained expenditure of Rs. 36,90,000/- has been declared by the assessee. Similarly, while computing the unaccounted cash, the AO has arrived at the figure of Rs. 11,98,80,000/- at page 13 of the assessment order and not allowing the credit of Rs. 5,94,96,000/- cash payments as per the provisions of section 40A(3).Similarly, it is noticed that the assessee has revised its return on 21.10.10 and declared additional income of Rs. 3,05,00,000j- but credit of the same was also not allowed while computing the undisclosed income. The AO has argued that since the assessee has stated that unexplained expenditure was incurred it is covered under the proviso to section 69C w.e.f. 01.04.99 where it is held that any unexplained expenditure which has been deemed to be the income of the assessee, has been made non-deductible expenditure under any head of income. The AO has relied on the statement of the assessee recorded during the course of search but it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt/ separate addition of Rs. 5,94,96,000/- not to be made u/s. 40A(3). In totality of the facts and circumstances, the AO is directed to allow the credit of Rs. 36,90,000/-, Rs. 3,05,00,000/- and Rs. 5,94,96,000/- and the balance addition is confirmed. The ground of appeal is partly allowed" 6. The AO has also made addition of Rs. 1,14,63,383/- on account of deemed dividend u/s.2(22)(e) of the Act. From perusal of the balance-sheet of M/s. Kalpana Struct Con Pvt. Ltd., the AO has noticed that the company has given loans/advance of Rs. 1,14,63,383/to M/s. Pathik Construction for AY 08-09 and Rs. 2,06,66,690/- for the AY 09-10. The AO has also observed that Mrs. Nirmala Thumar has 10% share of the company and substantial interest in the firm because she is beneficiary and entitled to 23% of the income of the firm. It was also noted that M/s. Kalpana Struct Con Pvt. Ltd. is not a company in which public are substantially interested. The AO has also observed that the loan given to the assessee is not in the ordinary course of business of the company because lending is not the business activity of the company. Accordingly, a show-cause notice was issued to the assessee to explain why ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its P & I account as 'Interest paid on Loan' in AYs. 2008-09 and 2009-10. Similarly, these amounts of interest have been shown as income in the P & L account of KSCPL as 'Interest received* on Loan' for AYs. 2008-09 and 2009-10. Copies of these documents are enclosed herewith as Annexure -3. Even the copy of ledger accounts (enclosed with your letter dated 25.11.2011) of the assessee in the books of KSCPL, such interest entries have been passed on 31.03.2008 and 31.03.2009 in the books of KSCPL wherein the following has been clearly mentioned in this regard - 'Interest received Loan'. Such amounts have been advanced by KSCPL to the assessee prior to 21.01.2008 also as it can be seen from the ledger account of the assessee in the books of KSCPL, but all of sudden this 'Agreement of Finance' is appearing on 21.01.2008. This raises doubts about authenticity and genuineness of this agreement itself. This agreement appears to be an attempt on the assesee's part to divert attention from substance and actual nature of these transactions and give them a different colour. Even, the contents of the Agreement of Finance suggest and further strengthens t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report was also given to the assessee for his comments. The AR of the appellant has submitted its reply in response to the remand report which is also reproduced as under: "1. In point 2 of the report the AD mentions to have asked the assessee to show cause with relation to deemed dividend. However, the issue regarding the application of section 2(22)(e) was not raised during the assessment and thus an opportunity to represent the matter should have been given on the basis of natural justice. 2. In point 3.1 of the report, the AO has mentioned that all of a sudden. this Agreement of Finance ("Agreement") is appearing on January 21, 2008. In this regard, we wish to inform you that there were many correspondences between the parties in the form of letters apart from the personal meetings in accordance with the clauses of the Agreement. As per the AO's request, the said letters were submitted with the AO on November 30 2011 which are submitted. The Agreement was produced in original before the AO as per his request. On perusal of the agreement the following points should be noted: a. The Agreement of Finance is a notarized and a stamped agreement. b. The Agreement is duly s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ledger account of the firm in the books of the company proves this fact that loans/advances were received by the firm on the basis of Finance Agreement, i.e. for business purposes. The interest was paid, TDS was deducted and commission was to be paid at the final sale/purchase deal of the land. Now, the question arises whether the provisions of section 2(22)(e) are applicable if the loan is taken for business purposes. In the remand report, the AO has strongly rejected the arguments of the" appellant that it is not a business transaction. But, on the other hand, the AR of the appellant has relied on the Finance Agreement and ledger account in the books of the company that it was a business transaction clearly recorded in the books of account that loan was received to invest in the land and the interest was paid and commission was to be paid at the final sale of the land. The AO has argued that commission has not been reflected in the AYs. 08-09 & 09-10 but the AR of the appellant has submitted that during the year under consideration, the land was purchased and not sold, therefore, the question of showing any commission does not arise. From these facts it is clear that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 422 (SC). Section 2(22) has used the expression 'accumulated profits', whether capitalised or not. This expression tends to show that under section 2(22) it is only the distribution of the accumulated profits which are deemed to be dividends in the hands of the shareholders. By using the expression 'whether capitalised or not' the legislative intent clearly is that the profits which are deemed to be dividend would be those which were capable of being accumulated and which would also be capable of being capitalised. The amounts should, in other words, be in nature of profits which the company could have distributed to its shareholders. This would clearly exclude return of part of a capital to the company, as the same cannot be regarded as profit capable of being capitalised, the return being of capital itself. Profits mean only commercial profit - (Paper Book Page 24 to 35)". In view of the facts and circumstances of the case and decision of the Hon'ble Courts, it is held that the advance received by the assessee firm was purely a commercial transaction and the provisions of section 2(22)( e) is not applicable as per the decision of Hon'ble Courts. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; which the assessee has also claimed in its P & I account as 'Interest paid on Loan' in AYs. 2008-09 and 2009-10. Similarly, these amounts of interest have been shown as income in the P & L account of KSCPL as 'Interest received* on Loan' for AYs. 2008-09 and 2009-10. Copies of these documents are enclosed herewith as Annexure -3. Even the copy of ledger accounts (enclosed with your letter dated 25.11.2011) of the assessee in the books of KSCPL, such interest entries have been passed on 31.03.2008 and 31.03.2009 in the books of KSCPL wherein the following has been clearly mentioned in this regard - 'Interest received Loan'. Such amounts have been advanced by KSCPL to the assessee prior to 21.01.2008 also as it can be seen from the ledger account of the assessee in the books of KSCPL, but all of sudden this 'Agreement of Finance' is appearing on 21.01.2008. This raises doubts about authenticity and genuineness of this agreement itself. This agreement appears to be an attempt on the assesee's part to divert attention from substance and actual nature of these transactions and give them a different colour. Even, the contents of the Agreement of F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f KSCPL suggest so". Copy of the remand report was also given to the assessee for his comments. The AR of the appellant has submitted its reply in response to the remand report which is also reproduced as under: "1. In point 2 of the report the AD mentions to have asked the assessee to show cause with relation to deemed dividend. However, the issue regarding the application of section 2(22)(e) was not raised during the assessment and thus an opportunity to represent the matter should have been given on the basis of natural justice. 2. In point 3.1 of the report, the AO has mentioned that all of a sudden. this Agreement of Finance ("Agreement") is appearing on January 21, 2008. In this regard, we wish to inform you that there were many correspondences between the parties in the form of letters apart from the personal meetings in accordance with the clauses of the Agreement. As per the AO's request, the said letters were submitted with the AO on November 30 2011 which are submitted. The Agreement was produced in original before the AO as per his request. On perusal of the agreement the following points should be noted: a. The Agreement of Finance is a notarized and a stampe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce Agreement submitted before me and the ledger account of the firm in the books of the company proves this fact that loans/advances were received by the firm on the basis of Finance Agreement, i.e. for business purposes. The interest was paid, TDS was deducted and commission was to be paid at the final sale/purchase deal of the land. Now, the question arises whether the provisions of section 2(22)(e) are applicable if the loan is taken for business purposes. In the remand report, the AO has strongly rejected the arguments of the" appellant that it is not a business transaction. But, on the other hand, the AR of the appellant has relied on the Finance Agreement and ledger account in the books of the company that it was a business transaction clearly recorded in the books of account that loan was received to invest in the land and the interest was paid and commission was to be paid at the final sale of the land. The AO has argued that commission has not been reflected in the AYs. 08-09 & 09-10 but the AR of the appellant has submitted that during the year under consideration, the land was purchased and not sold, therefore, the question of showing any commission does not arise. From ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Urmila Ramesh [1998J 96 Taxman 533/230 ITR 422 (SC). Section 2(22) has used the expression 'accumulated profits', whether capitalised or not. This expression tends to show that under section 2(22) it is only the distribution of the accumulated profits which are deemed to be dividends in the hands of the shareholders. By using the expression 'whether capitalised or not' the legislative intent clearly is that the profits which are deemed to be dividend would be those which were capable of being accumulated and which would also be capable of being capitalised. The amounts should, in other words, be in nature of profits which the company could have distributed to its shareholders. This would clearly exclude return of part of a capital to the company, as the same cannot be regarded as profit capable of being capitalised, the return being of capital itself. Profits mean only commercial profit - (Paper Book Page 24 to 35)". In view of the facts and circumstances of the case and decision of the Hon'ble Courts, it is held that the advance received by the assessee firm was purely a commercial transaction and the provisions of section 2(22)( e) is not applicable as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,96,80,220/- Addition (11,98,80,000--5,96,80,220/-) Rs.6,01,99,780/- On addition made u/s 69C Rs.5,94,96,000/- Addition made u/s 22(e) Rs.1,14,63,383/- Total income Rs.19,14,26,643/- In view of the above, ld. DR contended that assessing officer has not made any separate addition of Rs. 36,90,000/ - and Rs. 3,05,00,000/- though he has discussed the issue in the assessment order These amounts were declared as income by the assessee himself. However in para 3.3 of the order CIT(A) has directed the assessing officer to allow credit of Rs. 36,90,000/ - and Rs. 3,05,00,000/ -. As explained above, the assessing officer has not made any addition of these two amounts while computing the taxable income. Hence there is no double addition of Rs. 36,90,000/ - and no non allowance of declared income of Rs. 3,05,00,000/-. Hence, submissions of the assessee taken before ClT(A) and reproduced in para 3.2 of the order of the CIT(A) is without basis. Hence these directions of the CIT(A) are without any basis and are required to be reversed. 11. With regard to the deletion of addition made u/s.69C, the contention of ld. DR was that the assessee sold plot no 31 sector 47 Oronagiri dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business purpose. It may be noted that real nature of amounts advanced is loan and not business as claimed by the assessee. As per ld. DR, the assessee has not shared any the risk of, business with the assessee. The assessee has agreed to pay interest per anum and commission at the time of sale. M/s KSCPL is getting interest. Further as per this finance agreement, on termination of agreement, KSCPL will be getting the amount back. (PB-42 "term and validity"). Thus M/ s KSCPL has not shared the risk of loss. It is also not sharing profits. It is only entitled to commission if plot purchased with finance are sold for profit. 14. On the other hand, ld. AR relied on the findings recorded by CIT(A) and contended that the department was not justified in ignoring the entry in the same seized document which indicated payment of Rs. 5,94,96,000/- and at the very same time accepting cheque payment of Rs. 2,22,00,000/-. 15. We have considered rival contentions and carefully gone through the orders of the authorities below and also gone through the statement on oath of Shri Ajit G. Thumar recorded u/s.131 of the Act, dated 19-2-2009 during the course of survey u/s.133A of the Act in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07 is not reliable as he doubts the authenticity and credibility of the so-called MOU. The AO also found that the MOU was unsigned. About the unsigned MOU, it is not in dispute that the said document has been found and seized by the search party and it is not a document submitted by the assessee firm before the AO. Furthermore, when the other unsigned documents/papers particularly AnnexureO-2 found and/or seized can be admitted and taken as evidence, the said unsigned MOU should also be admitted as a whole and no different treatment can be meted out to the MOU alone. However, the facts and figures shown in the Annexure O-2 is further supported by:- i) the detailed statements recorded u/s.132 on 19.02.2009 from Shri Ajit Thumar and from Shri Chaturbhai Thumar on 01.05.2009(Q.No.13 to 20 and ii) also MOU stated above. 17. It is pertinent to mention that on 22.01.2009 (search date) the search party could come across only the unsigned MOU dtd. 20.04.2007 but the said draft MOU was signed by all the parties to the agreement on stamp paper of Rs. 100 issued to Jai Ganesh CHS on 19.04.2007. The AO himself in para 7.2.5 (page 11) of the assessment order, had stated that the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndelwal (2009) (177 Taxmann 450)(Del) ii) CIT Vs P 0 Abraham (349 ITR 442 - Ker.) iii) Dhanvarsha Builders & Developers Vs DClT (105 ITj 376(Pune ITAT)] 19. During the course of hearing, our attention was drawn to the land transaction in respect of Dronagiri plot was as per a Regd. TRIPARTITE agreement dt. 16.01.2008 between CIDCO, M/s Pathik Constructions and ICONIC REALTORS. In Para 7.2 of the asst. order (page 9 - last two lines) the AO has himself noted that "as per the MOU, the amount of Rs. 5,94,96,000 was to be paid to the respective members of the Society (i.e., Jai Ganesh Society) at the time final selling of the plot to another party or on or before 31.01.2008 whichever is earlier. Accordingly the cash payment made to the CHS was made directly by ICONIC REALTORS but on behalf of M/s Pathik Constructions so that the transaction can be completed expeditiously. Hence, taxing M/s Pathik Construction on this account does not arise as no payment has been made by the assessee firm in cash. Therefore, provisions of section 69C or 40A(3) are not applicable in the assessee firm's case. Accordingly, we do not find any infirmity in the order of CIT(A) deleting the addition of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive material on record. The ITAT Special Bench in the case of ACIT vs. Bhaumik Colours Pvt. Ltd. 118 ITD 1 held that provisions of section 2(22)(e) can be applied only in the hands of the beneficial and registered shareholder of the company which has given loan. Respectfully following the decision of Hon'ble jurisdictional High Court and ITAT Special Bench, as discussed above we do not find any infirmity in the order of the ld. CIT(A) for deleting the addition made u/s 2(22)(e) of the Act. 22. The CIT(A) has relied on the copy of the Finance Agreement and held that the loan in question was for business purpose. The ClT(A) further went through the matter and noted that the AO did not agree with this stand mainly because the "element of commission" mentioned in the agreement has not been reflected in the AYs 2008-09 and 2009-10. The CIT(A) himself looked into the facts in this connection (page 16 of CIT(A)'s order) and after due consideration has come to the conclusion that it is clearly a business transaction. In the following decisions it was held that Trade Advances do not fall within the ambit of provision of section 2(22)(e). - Trade Advances" do not fall within the ambit of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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