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TMI Blog2017 (11) TMI 1761X X X X Extracts X X X X X X X X Extracts X X X X ..... nushka Automobiles Pvt Ltd. and M/s Vinayaka Farms and Resorts (India) Pvt Ltd. (VFARPL), despite the fact that ShCharanjeet Nagpal was a shareholder holding 55.92% shares in the assessee company, 30% shares in TAPL and 49.50% shares in VFARPL i.e. was having substantial interest in the payee as well as payer companies ?". 2. "Whether on the facts and in the circumstances of the case, the CIT(A) was right in law and on facts in deleting the addition of Rs. 39,12,696/- made by the Assessing Officer on account of income from house property as per provisions of section 22 read with 23 of the Income Tax Act, 1961?" 3. Whether on the facts and in the circumstances of the case, the CIT(A) was right in law and on facts in deleting the addition of Rs. 13,75,355/- made by the Assessing Officer u/s 40A(2)(b) of the Income Tax Act, 1961?" 3.0 Apropos ground No. 1,the CIT(A) deleted the addition of Rs. 3,79,12,500/- made by the Assessing Officer u/s 2(22)(e) of the Income Tax Act, 1961 on account of the amounts / advances received by the assessee from M/s Tanushka Automobiles Pvt Ltd. and M/s Vinayaka Farms and Resorts (India) Pvt Ltd. (VFARPL), despite the fact that ShCharanjeet Nagpal w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s order on page 4 under para 2.2. However, the AO was not satisfied with the explanation of the assessee. He was of the opinion that if loan or advance is given to a concern (ie. HUF, a Firm, Association of person, Body of individual or a company) in which a share holder (being a person who is the beneficial owner of shares holding not less than 10% of the voting power) of the payer company (giving loan or advance) has substantial interest, then the provisions of section 2(22)(e) applicable to the concern receiving the loan/advance. Accordingly, the AO, vide 2.12 treated Rs. 3,69, 12,500/- and Rs. 10,00,000/- being advance/loan received by the assessee company from TAPL and VFARPL respectively (to the extent of their accumulated profits) as deemed dividend in the hands of the assessee company as per provisions of section 2(22)(e). 3.2 The assessee being aggrieved took the matter before the CIT(Appeals) and reiterated similar submissions. The Ld. CIT(A) deleted entire addition of Rs. 3,79,12,500/-, interalia observing as under - "5.3.2 The third and major argument on the issue of deemed dividend made by the AR of the appellant is that the Vinayaka Farms & Resorts (I) Pvt Ltd. is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend as discussed and elaborated in the preceding paragraphs. Thus, the same is not liable to be taxed in the hands of the appellant u/s 2(22)(e). In view of the above addition u/s 2(22)(e) made by the AO for an amount of Rs. 3,69,12,500/- being the amount received by the appellant from Tanushaka Automobiles Pvt Ltd is hereby deleted. 5.3.5 Thus, the appellant gets a relief of Rs. 3,79,12,500/- (Rs. 10,00,000/- plus 3,69,12,500/-) on grounds 1 to 4." 3.3 The Ld DR supported the assessment order. His submission was that the assessee company is a concern in which Shri Charanjeet Nagpal holds substantial shareholding and he is also a substantial shareholder in the lender companies M/s Vinayaka Farms & Resorts (I) Pvt Ltd and M/s Tanushaka Automobiles Pvt Ltd. As such, the assessee company is a concern in which one of the shareholder, ie. ShCharanjeet Nagpal, of the lender companies has substantial shareholding and, therefore, despite that the assessee company is neither a registered nor a beneficial shareholder in any of the lender company, provisions of section 2(22)(e) are fully applicable. In support of his contention, he brought to our notice order of Hon'ble Allahabad High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany is neither a registered nor a beneficial shareholder of the lender companies, the loan/advance received by the assessee company from these group companies could be taxed in its hand as "deemed dividend" within the provisions of section 2(22)(e). 3.6.1 The provisions of section 2(22)(e) came up for consideration before the Hon'ble Rajasthan High Court in the case of Hotel Hilltop (2009) 313 ITR 116. In this case the AO had added Rs. 10.00 Lac in the hands of Hotel Hilltop, a partnership firm, treating the amount received from Hiltop Palace Hotels (P) Ltd as deemed dividend being a "payment to a concern" which satisfied the condition of shareholding level as envisaged u/s 2(22)(e). The assessee objected to the addition in first appeal on the ground that he was not a registered shareholder of the lender company and succeeded. The department went before the Tribunal but there also the assessee succeeded. On further appeal by the department, Hon'ble Rajasthan High Court held in Para 7 & 8 as under: - "7. The more important aspect, being the requirement of s. 2(22)(e) is, that "the payment may be made to any concern, in which such shareholder is a member, or the partner, and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions such payment by the company is treated as dividend. The intention behind the provisions of s. 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provision as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern. 36. The basis of bringing in the amendment to s. 2(22)(e) of the Act by the Finance Act, 1987 w.e.f 1st April, 1988 is to ensure that persons who control the affairs of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ........ ................... 41.In the light of the above discussion, the questions referred to the Special Bench are answered as follows : On the first question: Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. On the second question: The expression 'shareholder' referred to in s. 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of s. 2(22)(e) will not apply. Similarly, if a person is a beneficial shareholder but not a registered shareholder then also the provisions of s. 2(22)(e) will not apply." 3.6.3 The aforesaid decisions of the Spl. Bench has been approved by Hon'ble Mumbai High Court in the case of M/s Universal Medicare Pvt Ltd reported in (2010) 324 ITR 263. Subsequently, various other High Courts have also approved the decision of Spl. Bench of ITAT as well as that of Rajasthan High Court. 3.6.4 Hon'ble Delhi High Court in the case of M/s Ankitech Pvt. Ltd. (ITA No. 462 of 2009) reported in 340 ITR 0014, held as follows: - "24. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend. If the intention of the legislature was to tax such loan or advance as deemed dividend at the hands of "deeming shareholder", then the legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsel for the Revenue would stand answered, once we look into the matter from this perspective. 26. In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the Revenue to argue that if this position is taken, then the income "is not taxed at the hands of the recipient". Such an argument based on the scheme of the Act as projected by the learned counsel for the Revenue on the basis of ss. 4, 5, 8, 14 and 56 of the Act would be of no avail. Simple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance. 27. Precisely, for this very reason, the Courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the hands of the non shareholder recipient which is the core dispute in the present appeal. 3.6.7 In the present case, the assessee company is neither a registered nor a beneficial shareholder of the lender companies and the loan / advance is also not alleged to have been received by the assessee company on behalf of or for the benefit of its alleged shareholder i.e. ShCharanjeet Nagpal. 3.6.8 In view of the aforesaid discussion and the judicial precedents, we do not find any error in the order of the CIT(Appeals) in deleting the addition of Rs. 3,79,12,500/- made by the AO u/s 2(22)(e) of the Act. Therefore, appeal this ground of appeal of revenue is dismissed. 4. Ground No. 2, the revenue objected the deletion by the CIT (Appeals) of the Rs. 39,12,696/- made by the AO under the head "Income from House Property". 4.1 During assessment proceedings the AO noted that assessee's property at Kanwal Complex, City Centre, Gwalior was let out to two tanents namely Axis Bank and M/s Tanushaka Automobiles Pvt Ltd. (TAPL), a group concern. It was noted by the AO that 4200 Sft area on the ground floor was let out to Axis Bank @ 38/- per sq. ft. and the bank had given a deposit of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s another fact that Tanushaka Automobiles Pvt Ltd had totally different terms and conditions of rental agreement. They were older tenant and the space given to Axis Bank was the prime space of the property. Further, the appellant had taken a security deposit of Rs. 2 Cr. from Tanushaka Automobiles Pvt Ltd. as against no security deposit received from Axis Bank Ltd. Thus arrival of fair rental value on rent received from Tanushaka Automobiles Pvt Ltd on the basis of rent received from Axis Bank Ltd would not be a correct position as the terms and circumstances of the both the tenants are different. In various case laws cited by the appellant it has been held that if the appellant has received an actual rent in excess of municipal valuation then such rent ought to be treated as fair rent in terms of section 23. Following the ratio laid down by said decisions I find that the actual rent received by the appellant is in excess of the fair rent as per municipal valuation of similar date filed before me by the appellant. In view of the above there is no justification by the AO in making an addition of Rs. 39,12,696/-. Thus the addition of Rs. 39,12,696/- made by the AO under section 23 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him. Explanation. -For the purposes of clause (b) or clause (c) of this subsection, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise. (2) Where the property consists of a house or part of a house which- (a) is in the occupation of the owner for the purposes of his own residence; or (b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house or part of the house shall be taken to be nil. (3) The provisions of sub-section (2) shall not apply if- (a) the house or part of the house is actually let during the whole or any part of the previous year; or (b) any other benefit there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is higher than the standard rent. Once again the decision of this Court in CIT vs. Vinay Bharat Ram & Sons (HUF) (2003) 179 CTR (Del) 31 : (2003) 261 ITR 632 (Del) is topical. The Department had assailed the following remand order of the CIT(A)- "The AO is directed to redetermine the annual value of the property in accordance with my findings, he will limit the same to the higher of the following (a) the municipal valuation, (b) the fair rent determinable under the Rent Control Act, and (c) the actual rent paid by the assessee. This direction I feel fairly and reasonably gives effect to the pronouncements of the Supreme Court on the subject from time to time." The Tribunal had affirmed the remand order. The Division Bench of this Court was of the view that no substantial question of law had arisen, and the appeal of the Department was dismissed. We may only add and clarify that the words 'municipal valuation' would in the syntax of the present IT Act and of municipal taxation statutes be synonymous and interchangeable with 'standard rent'." 4.6.2 Thus, the "reasonable rent" can only be the "standard rent" which is in syntax with the "municipal valuation". Hon'ble Calcu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allenged the deletion by the CIT(A) of Rs. 13,75,355/- made by the Assessing Officer u/s 40A(2)(b) of the Income Tax Act, 1961. 5.1 Brief facts are that the assessee had paid interest @ 6% per annum on the security deposit of Rs. 2.00 Cr to M/s Tanushaka Automobiles Pvt. Ltd amounting to Rs. 12,00,000/-. The AO also noted that assessee had received security deposit from other tenant and had given security deposits to others for the premises taken on rent. However, no interest was either received or paid on such other deposits. On these facts the AO disallowed said interest of Rs. 12,00,000/- holding as under: - "4.4.2 On perusal of these details it is evident that other than in the case of interest paid on security deposit received from TAPL the assessee has neither paid any interest on any of the security deposit received on account of renting of property owned by it nor has received any interest on any of the security deposit paid on properties taken on rent. In other words the assessee has made excess payment of interst of Rs. 12,00,000/- @ 6% per annum on security deposit to TAPL which is one of the persons specified under section 40A(2)(b) of the Act while it has not paid a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iles Pvt Ltd cannot be considered as higher at all. Further as regards contention of the AO that once the same is considered as deemed dividend the interest would not be allowed, it has been held by me that above that the amount is not to be treated as deemed dividend. Furthermore, even if it would have been considered as the same the nature of amount received by the appellant from Tanushka Automobiles Pvt Ltd does not change. For the purpose of taxation a deeming fiction has been added but the nature of amount remains as loans and advance and thus even on this there is no question of disallowance. In view of the above discussion I hereby delete the disallowance of Rs. 13,75,355/- made by the AO on account of interest paid by the appellant to Tanushaka Automobiles Pvt Ltd." 5.3 The Ld DR has relied on the assessment order whereas the Ld AR has supported the order of CIT (Appeals). 5.4 We have heard both the parties at length, perused the material on record and have considered the legal issues. 5.5 Sec. 40A(2)(b) of the Income Tax Act, 1961 prescribes certain specified persons, any payment to whom for the expenditure incurred by the assessee may be disallowed as per section 40A(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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