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2016 (10) TMI 221 - ITAT DELHI

2016 (10) TMI 221 - ITAT DELHI - TM - Deemed dividend addition u/s 2(22)(e) - whether the amounts received by the assessee was neither advances or the loan, but was mere advances in the nature of deposit made by the three companies for their business requirement? - Held that:- In the instant case, sum advanced to the assessee by the three companies were purely on commercial consideration and was business advance as such, same cannot be treated as deemed dividend u/s 2(22)(e) of the Act, hence we .....

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ch, one thing is more than apparent that the assessee is in the business of sale and purchase of land. Further, the aforesaid land was acquired by the assessee for the purpose of its business and it had not acquired such land for the purpose of investment, hence evenif it is assumed that land in this sector was not part of the deal with such companies, it would not alter the nature of transaction from business to investment. It is settled law that nature of transaction has to be seen at the time .....

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vour of assessee - I.T.A. No. 5722/DEL/2011 AND I.T.A. NO. 996/DEL/2014 - Dated:- 19-8-2016 - SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER For The Assessee : Sh. CS Aggarwal, Sr. Adv. and Sh. RP Mall, Adv. For The Department : S h. FR Meena, Sr. DR ORDER PER H.S. SIDHU, JM Assessee has filed these two Appeals against the separate Orders dated 5.10.2011 and 13.1.2014 respectively passed by the Ld. Commissioner of Income Tax (Appeals)-XXIII, New Delhi pertaining to assess .....

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n aggregate addition of ₹ 40,61,517/- as deemed income u/s 2(22)(e) of the Income Tax Act. 2. In doing so he has failed to appreciate that the amounts received by the assessee was neither advances or the loan, but was mere advances in the nature of deposit made by the three companies for their business requirement, which deposits were made by them, in order to enable them to participate in the project (undertaken by the assessee) between the assessee and Landmark Apartments Pvt.Ltd. 3. Tha .....

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siness transaction is highly misconceived and is contrary to factual matrix available on record and supported by memorandum of understanding as well as resolution passed by the assessee companies before making the advances by way of deposits of the amounts with the assessee for the purposes of their business. 4. That the learned Commissioner of Income Tax (Appeals) has further erred in sustaining a disallownace of ₹ 4,08,800/- being the business loss suffered by the assessee in the course .....

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o. 996/Del/2014 (AY 2008-09) read as under:- 1 That the learned Commissioner of Income Tax, (Appeals), New Delhi has erred both in law and on facts in sustaining penalty of ₹ 14,75,850/- u/s 271(1)(c) of the Act on the following additions/disallowances made in the order of assessment: Sr. No. Particulars of additions/disallowances Amount (Rs.) i) Disallowance of business loss on sale of land by holding the same as capital loss 2,93,070 ii) Addition on account of deemed dividend in respect .....

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rder of assessment u/s 143(3) of the Act, the penalty levied and sustained is per se without jurisdiction. 1.2 That the learned Commissioner of Income Tax, (Appeals) has failed to appreciate that it was not a case where any fact had been incorrectly disclosed by assessee but was a case where a conclusion which was not in agreement with the claim of the assessee was arrived in the order of assessment and hence there could be no valid basis to hold that assessee is liable for penalty u/s 271(1)(c) .....

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g that loss of ₹ 4,08,800/- represents capital loss and not business loss has clearly brought out that the contention of the appellant that this piece of land was purchased by him from Smt. Kesar Devi for his clients M/s Selene Construction Pvt. Ltd. And M/s Juventus Estates Pvt. Ltd. Was false is also incorrect, contrary to facts and any case could not have been made a basis to sustain the penalty in the light of the settled judicial position that no penalty under section 271(1)(c) of the .....

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e deleted. It be further held that the order of penalty dated 25.03.2013 was barred by limitation and not in accordance with law and appeal of the appellant may kindly be allowed. 3. The brief facts of the case are that assessee is an individual and derive income from salary, business of real estate, capital gain, house property, other sources and agriculture. For the year under consideration, assessee has filed the return of income on 29.09.2008 declaring an income of ₹ 35,13,02,662/-. In .....

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e instant assessment year and accordingly it filed a letter dated 26.08.2010 wherein it prayed that the expenses claimed in AY 2008-09 of ₹ 13 crores be treated as withdrawn, and returned income be kindly increased by including the said sum. After going through the records, AO has completed the assessment u/s. 143(3) of the I.T. Act vide his order dated 26.11.2010 and made the various additions. 4. Against the assessment order dated 26.11.2010, assessee appealed before the Ld. CIT(A), who .....

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40,61,517/- by invoking section 2(22)(e) of the Act: (Ground No. 1-3) 2.1 In so far as the first issue is concerned, the learned A.O. has held that the amounts received by the assessee and credited in the accounts of the respective companies named above represents loan and is thus a deemed dividend within the meaning of section 2(2)(e) of the Income Tax Act. 2.2 That apart from the sequence of events (enclosed as Annexure-A), the facts in brief in respect of the said issue is stated as under: 2 .....

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ss which was credited to the respective accounts in the books of the assessee. The amounts advanced by the aforesaid three companies are as under: S.No. Name of the company from which advance was received in the regular course of business Sum advanced in the regular course of business Addition made u/s 2(22)(e) only to the extent of the accumulated profits. i Prama Project Solution Pvt. Ltd. ₹ 39,50,000 ₹ 22,28,293 ii Prama Marketing Pvt. Ltd. ₹ 18,60,000 ₹ 18,60,000 iii .....

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urce of earning with reasonable returns. 24.05.2007 Assessee and M/s Prama Marketing Pvt. Ltd. 119 - 121 For investing surplus funds into a project which would be a good source of earning with reasonable returns. 24.05.2007 Assessee and M/s Sanyog Estate Pvt. Ltd. 144-146 For acquiring a commercial space for establishing business center and is looking out for a property suitable for a business center in New Delhi/Gurgaon in commercial location. 2.6 It would be seen from the aforesaid MOUs with M .....

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investment in the project and it was for the aforesaid purpose aforesaid companies has advanced the sum of ₹ 39,50,000/- and ₹ 18,60,000 respectively. 2.7 That the assessee had further submitted that, the assessee had entered into a Memorandum of Understanding on 20.01.2007 with M/s Landmark Apartments Pvt. Ltd. to join hand to establish I.T. Park/Call Centre as a project and it was stated in the agreement with M/s Landmark Apartments Pvt. Ltd. that assessee has sufficient funds avai .....

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ts Pvt. Ltd. on 07.05.2009 (page 199). 2.8 Further, from the perusal of the MOU between assessee and M/s Sanyog Estate Pvt. Ltd. placed at pages 144-146 of PB, it would be seen that sum of ₹ 5,00,000/- has been advanced to the assessee to search out a place in New Delhi/Gurgaon for opening a business centre in commercial location and the price of the property should not exceed ₹ 1,00,00,000/- i.e. sum of ₹ 5,00,000/- advanced was for the purpose of giving advance for the purcha .....

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aforesaid companies during the course of business on their behalf and as such, such advances received is outside the ambit of section 2(22)(e) of the Act. In support the aforesaid submission, that the amount received by assessee is business advance and is not a loan, the assessee had furnished the following evidence: (i) In respect of the credit in the account of M/s Prama Project Solution Pvt. Ltd: a. Copy of Memorandum of Understanding (MOU) executed on 24.05.2007 (pages 104 - 106). b. Copy o .....

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es 123-134). d. Copy of the Auditors Report alongwith audited Balance Sheet as on 31.03.2008 (Pages 135-143). (iii) Similarly in respect of M/s Sanyog Estates Pvt. Ltd.: a. Copy of Memorandum of Understanding (MOU) executed on 24.05.2007 (pages 144 - 146); b. Copy of the account of M/s Sanyog Estates Pvt. Ltd. in the books of assessee (Page 147). c. Shareholding pattern of M/s Sanyog Estates Pvt. Ltd. (Page 148) d. Copy of the Auditors Report alongwith audited Balance Sheet as on 31.03.2007 (Pag .....

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tion cannot be held to be business and hence he made the addition by invoking section 2(22)(e) of the Act to the extent of the accumulated profits by such companies. 5. The Finding of the learned AO while holding that sum received is deemed dividend in respect of sum received from aforesaid three companies are as under: 5.1 The learned AO has rejected the claim of the assessee in the case of M/s Sanyog Estates Pvt. Ltd. on the ground that, in fact on examining the balance sheet of the assessee f .....

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med dividend u/s 2(22)(e) is computed to the extent of accumulated profits amounting to ₹ 73,224/- and the said amount is added to the total income of the assessee . 5.2 In the case of M/s Prama Marketing Pvt. Ltd. the same has been rejected on the ground that, here also the only argument which has been advanced by the assessee during the course of these proceedings is that the transactions were a part of business transaction with M/s Prama Marketing Pvt. Ltd. As part of submission on 26.1 .....

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d there is no specific transaction which is mentioned herein. The MOU has no legal value as it is not registered or notarized and is therefore a plain piece of paper which does not add any legal credence to the claim of the assessee. As can also be seen from the copies of accounts which are produced above there is not a single transaction between the assessee and M/s Prama Marketing Pvt. Ltd. apart from the give and take of the said loan of the advances. As such the claim of the assessee that th .....

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credence to the claim of the assessee. As can also be seen from the copy of accounts which has been produed above that there is not a single transaction between the assessee and M/s PPSPL apart from the give and take of the said loan/advances which further establishes no such business transaction took place later also. As such the claim of the assessee that this is a business deal lacks basis entirely and judicial decision cited by the assessee (Smt. Nigam Chawla vs. ITO, 28 SOT 503) is not onl .....

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ily upheld by the learned CIT(A) without appreciating the factual substratum of the case. In fact the finding of the A.O. that no business transaction had been undertaken by the assessee was upon overlooking the facts on record i.e. the assessee had entered into a development transaction on 20.01.2007 with Landmark Apartments Pvt. Ltd. which was also stated in the Memorandum of Understanding entered between the assessee and the aforesaid two creditor companies (see page 105 and 120 of Paper book .....

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contributed the amount for the project undertake by the assessee with Landmark Apartments Pvt. Ltd. It is submitted that, in the instant case, the learned A.O. has failed to comprehend that the amount received was an advance but not a loan. He has also failed to comprehend that, had it been a case of loan interest would have normally been paid or charged by the company who had allegedly advanced the loan. It is submitted that sum received by the assessee from such companies was advance and was .....

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submits that the Hon ble Delhi High Court in the case of CIT vs. Raj Kumar reported in 318 ITR 462, has taken a view on the interpretation of section 2(22)(e) of the Income Tax Act that, every advance is not a loan when received by a shareholder and cannot be treated to be deemed dividend. In the aforesaid judgment, Hon ble High Court at page 483 has held as under: This court in Raj Kumar s case extensively referred to the report of the Taxation Enquiry Commission and the speech of the Finance .....

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the said background is kept in mind, it is clear that sub-clause (e) of section 2(22) of the Act, which is in parimateria with sub-clause (e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in the manner that they assist the shareholders in avoiding the paym .....

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On the other hand, in its widest meaning of term advance may or may not include lending. The word advance if not found in the company of or in conjunction with a word loan may or may not include the obligation of repayment. If it does, then it would be a loan. Thus, arises the conundrum as to what meaning one would attribute to the term advance . The rule of construction to our minds which answers this conundrum is noscitur a sociis. The said rule has been explained both by the Privy Council in .....

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(P) Ltd. HC (Delhi) 173 Taxman 407 b. CIT vs Raj Kumar HC (Delhi) 181 Taxman 155 c. CIT vs Creative Dyeing and Printing (P) Ltd. HC (Delhi)184 Taxman 483 d. CIT vs Sunil Sethi ITA 569/2009 HC (Delhi) e. CIT vs Arvind Kumar Jain ITA 589 of 2011 (30 September 2011) f. CIT vs. International Land Development Pvt. Ltd. 1296/2011 & 1297/2011 dated 02.02.2012 HC (Delhi) g. Atul Mittal in ITA No. 3863/Del/2002 (ITAT Del). h. Nigam Chawala 2009 28 SOT 503 10. It is further submitted that from the per .....

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addition, the evidence furnished by the assessee has been rejected on arbitrary grounds. In the face of the documentary evidence, the claim of the assessee could not have been rejected without any positive and tangible material to rebut the same. The findings of the learned A.O. and CIT(A) both are based on mere conjectures, unsupported by any evidence without prejudice, no adverse findings could have been recorded by the authorities based on mere suspicion. It is settled law that, no addition c .....

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ules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a Court of law, but there the agreement ends; because it is equally clear that in making the assessment under sub-s. (3) of s. 23 of the Act, the ITO is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under s. 23(3). ii) 37 ITR 151(SC) Omar S .....

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dence and partly on suspicions, conjectures or surmises and if it does anything of the sort, its findings, even though on questions of fact, will be liable to be set aside by this Court. iii) 26 ITR 736 (SC) Dhirajlal Girdharilal v CIT, Bombay When a Court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the Court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of .....

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tled to interfere. v) AIR 1977 SC 796 Krishnand vs. State of Madhya Pradesh vi) AIR 1974 SC 171 Jayadayal Poddar vs. Mst Bibi Hazra vii) 242 ITR 133 (Ker CIT vs. K. Mahim Udma 11. In the instant case it would be seen that the learned A.O. has completely erred in holding that the amount was received by the assessee as loan, despite the fact that necessary evidence to support that the amount was advanced to the assessee by the company in which it was the shareholder was supported by the documentar .....

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nce of rebutting the evidence furnished by the assessee, the learned A.O. went wrong in concluding that the amount received by the assessee was a loan and was not a sum advanced by the companies for commercial dealing i.e. to make them enable to participate in the project undertaken by the assessee on his own behalf and also for the benefit of participators. Re: Business loss of ₹ 4,08,000/- 12. Apart from the aforesaid, learned AO has also made a disallowance of ₹ 4,08,000/- in resp .....

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been upheld by the learned CIT(A). 13. It is most respectfully submitted that in the instant case, learned AO/CIT(A) both have neither disputed the genuineness of the loss nor has disputed the fact that the assessee is engaged in Real Estate business, however, on arbitrary assumption it was held that aforesaid property was purchased as investment, as such, the loss on sale of land is capital loss. It is submitted that instant addition has been made purely on suspicion and no basis whatsoever has .....

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have heard both the parties and perused the relevant records available with us, especially the orders passed by the revenue authorities alongwith the Written Synopsis filed by the assessee as well as the case laws cited by him, as aforesaid. 8.1 Ground No. 1-3 relate to the addition made by the AO and sustained by the CIT(A) of a sum of ₹ 40,61,517/- by invoking section 2(22)(e) of the Act. From the perusal of the orders of the AO & CIT(A), paper book and written submissions filed by .....

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nt in M/s Landmark Apartments Pvt. Ltd. will be shared in the ratio of the investment. As such, aforesaid companies had advanced their surplus funds for making investment in the M/s Landmark Apartments Pvt. Ltd. However, AO held that the sum advanced by such companies are deemed dividend and not business transaction on the ground that MOU has no legal value and even the MOU is neither registered nor notorised. The aforesaid finding has been upheld by the CIT(A). We are of the opinion that the fi .....

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wrong in holding that MOU has no legal value as it is settled law that even the oral contract are binding. In the instant case, terms of the understanding are clearly stipulated and under the such terms sums have been advanced to the assessee. This understanding cannot be ignored. In fact it is not in dispute that under the MOU dated 20.01.2007 with M/s Landmark Apartments Pvt. Ltd., assessee has made investment with such company and since the venture did not materialize as such, such invested b .....

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ial location for a price not exceeding ₹ 1 crore and sum of ₹ 5 lac was given to the assessee as advance for the purchase of the property. However, AO held that apart from this transaction, assessee has not entered with any other transaction with such company. This finding of the AO has been upheld by the CIT(A). We are of the opinion that the findings of the authorities below is unsustainable as from the terms of the MOU it was clear that sum has been advanced to the assessee for se .....

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vs. Ambassador Travels (P.) Ltd. reported in [2009] 318 ITR 376 (Delhi) has held that if the transactions are normal business transactions, which were carried out during the course of the relevant previous year, they cannot be described as advances or loans, which form a distinct category of financial transactions and therefore the provisions of section 2(22)( e) of the Act were not at all applicable. Similarily in the case of CIT vs. Raj Kumar reported in [2009] 318 ITR 462 High Court of Delhi .....

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. HC (Delhi)184 Taxman 483 b. CIT vs Sunil Sethi ITA 569/2009 HC (Delhi) c. CIT vs Arvind Kumar Jain ITA 589 of 2011 (30 September 2011) d. CIT vs. International Land Development Pvt. Ltd. 1296/2011 & 1297/2011 dated 02.02.2012 HC (Delhi) e. Atul Mittal in ITA No. 3863/Del/2002 (ITAT Del). f. Nigam Chawala 2009 28 SOT 503 8.4 That since in the instant case, sum advanced to the assessee by the aforesaid three companies were purely on commercial consideration and was business advance as such, .....

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s entered into agreement with M/s Selene Constructions Pvt. Ltd. And M/s Juventus Estates Pvt. Ltd. for acquiring land on their behalf in sector 103 and 104 of Gurgaon for group housing, as such, in order to acquire land, in August 2007 it purchased land in revenue estate of village Pawala Khusrupur, Gurgaon for a sum of ₹ 65,62,500/- and also incurred other expenditure of ₹ 4,08,800/- hence, total expenditure incurred for the purchase of land was ₹ 69,71,300/-. Aforesaid land .....

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07 for a loss of ₹ 4,08,800/-. As the land was acquired for the purpose of business and not as investment, as such loss suffered on the sale of land was debited in the profit and loss account as business loss. This loss has been disallowed by the AO by holding that the purchase of this land was not part of business or linked to the deal with the M/s Selene Constructions Pvt. Ltd. And M/s Juventus Estates Pvt. Ltd. And this finding of the AO was also confirmed by the CIT(A), however CIT(A) .....

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