TMI Blog2017 (11) TMI 1761X X X X Extracts X X X X X X X X Extracts X X X X ..... ion made by the AO u/s 2(22)(e) of the Act. Therefore, appeal this ground of appeal of revenue is dismissed. Addition under the head “Income from House Property” - reasonable rent for which the property may be let out - Held that:- Where a property is fully let out, its Annual Value is to be taken at higher of the actual rent received / receivable from the said property or the sum for which the said property might reasonably be expected to let out from year to year. In the present case, municipal valuation of the concerned property was made on 27/06/2009 by the Municipal Corporation fixing the annual value of the property at ₹ 7,22,640/- relevant for the Assessment Year under appeal. In view of the decision in the case of John Tipson& Co. (P) Ltd [2006 (10) TMI 94 - HIGH COURT OF DELHI] as well Calcutta Hugh Court in the case of Commissioner of Income Tax Vs Satya Co. Ltd [1993 (8) TMI 293 - CALCUTTA HIGH COURT] as discussed the “reasonable rent” for which the property might be let out cannot exceed thesaid amount fixed as annual value by Municipal Corporation. As against this the assessee received total rent of ₹ 22,25,200/- which is much higher than the municip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 12/08/2014 for AY 2010-11 and order dated 06/04/2015 for AY 2011-12 passed by the CIT (Appeals), Gwalior. Since the issues involved in both these appeals are common and grounds taken by the department are also same, both the appeals are disposed of by this common order. 2.0 First, we take up appeal in ITA No. 327/Agra/2014 in respect of AY 2010-11. The Revenue has taken up the following grounds of appeal: 1. 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 ₹ 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 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 ₹ 39,12,696/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L it was explained that money/advance was received by the assessee under a mutual understanding between the two companies to the effect that the assessee company would permit its property to be mortgaged to the bank and would also give a corporate guarantee to the bank for the loan facility availed by TAPL and in turn TAPL would give short term business assistance in terms of funds to the assessee. It was also explained that the assessee company was neither a registered nor a beneficial share holder in any of the lending companies. The assessee therefore contended that provisions of Sec 2(22)(e) were not applicable to the amounts received from any of these two companies. He also relied on various case laws which are quoted by the AO in his 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend and thus are not liable to be taxed. In view of the above the addition u/s 2(22)(e) made by the AO for an amount of ₹ 10,00,000/- being the amount received form M/s Vinayaka Farms Resorts (I) Pvt Ltd is hereby deleted. 5.3.4 Similar is the situation for an amount of ₹ 3,69,12,500/- received by the appellant from Tanushaka Automobiles Pvt Ltd. Here also the appellant has argued that the appellant company is neither a registered nor a beneficial owner of shares of Tanushaka Automobiles Pvt Ltd. Here also the facts and circumstances are the same. As the appellant is neither a beneficial nor a registered shareholder of Tanushaka Automobiles Pvt Ltd. and thus any advance received by the appellant from such a concern does not qualify the test of deemed 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 ₹ 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 ₹ 3,79,12,500/- (Rs. 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition. The Ld Counsel for the assessee distinguished the cases cited by the Ld DR and in support of his arguments he relied on various case laws. He also placed before us a recent decision of the Hon ble Appex Court delivered on 5th October 2017 in the case of CIT, Delhi II Vs Madhur Housing and Development Company (Civil Appeal No. 3961 of 2013) and others. 3.5 We have heard both the parties, perused the material on record at length and considered the case laws cited in support. 3.6 It is undisputed fact the assesseee company is not a share holder in any of the lender companies ie TAPL and VFARPL though Shri Charanjeet Nagpal is a common shareholder having substantial shareholding in all the companies. Therefore the question before us to consider is whether, when the assessee company 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of section 2(22)(e) to the non shareholder concern was also considered by Mumbai E Special Bench of ITAT in the case of ACIT Vs BhaumikColourPvt Ltd. reported in (2009) 118 ITD 0001 and held as under: 34. We are of the view that the provisions of s. 2(22)(e) do not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern (non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of s. 2(22)(e) of the Act. 35. The intention behind enacting provisions of s. 2(22)(e) are that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute 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 shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a shareholder or to a concern in which a shareholder is substantially interested deeming them as dividend in the hands of a shareholder the ordinary and natural meaning of the word dividend is altered. To this extent the definition of the term dividend can be said to operate. If the definition of dividend is extended to a loan or advance to a non-shareholder, the ordinary and natural meaning of the word dividend is taken away. In the light of the intention behind the provisions of s. 2(22)(e) and in the absence of indication in s. 2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of a non-shareholder. . . . 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under s. 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to nonmembers. The second category specified under s. 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving 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, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a judgment of the same date by a Division Bench of the High Court of Delhi in ITA No. 462 of 2009. Having perused the judgment and having heard arguments, we are of the view that the judgment is a detailed judgment going into Section 2(22)(e) of the Income Tax Act which arises at the correct construction of the said Section. We do not wish to add anything to the judgment except to say that we agree therewith. These appeals are disposed of accordingly. 3.6.6 The issue in dispute as to applicability of section 2(22)(e) to a non shareholder recipient of loan / advance, thus, now stands settled. As far case laws, cited by the Ld DR, are concerned it would be suffice to say that they do not address the specific issue of treating receipt of an advance/loan as deemed dividend 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 vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtion let out to TAPL was mainly basement, mezzanine and first floor. Thus, the agreements as well as area let out were not comparable. Further, deposit from TAPL at very low rate of interest also compensated adequately and added to the profitability of the assessee. It was also stressed that total rent received for the property was much higher than the annual value fixed by the municipal corporation and therefore there was no under valuation of fair rent. The assessee also relied on various decisions as discussed by the CIT(A) in his order. 4.3 The CIT (Appeals) deleted the addition holding in para 7.3 of his order as under I have gone through the various arguments of the AR and the written submissions given before me. The fact remains that the rent was received from Axis Bank at a much higher rate but also there is 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 ₹ 2 Cr. from Tanushaka Automobiles Pvt Ltd. as against no security deposit received from Axis Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Annual value how determined. 23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be- (a) the sum for which the property might reasonably be expected to let from year to year; or (b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or (c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable : Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. CIT (1981) 131 ITR 589 (SC), Dewan Daulat Rai Kapoor vs. New Delhi Municipal Committee (1980) 122 ITR 700 (SC) and Sheila Kaushish vs. CIT (1981) 24 CTR (SC) 351 : (1981) 131 ITR 435 (SC), this Court has laid down in CIT vs. Raghubir Saran Charitable Trust (1990) 183 ITR 297 (Del), that the Tribunal was justified in holding that the market rent of the property could not be more than the standard rent. In Raghubir Saran Charitable Trust (supra) the AO had incorrectly computed the market rent of the house and had added the difference between the market rent so calculated and rent which was being actually paid. The same result was reached in L. Bansidhar Sons vs. CIT (1993) 109 CTR (Del) 62 : (1993) 201 ITR 655 (Del) where however it was clarified that the position stood changed with effect from the 1976 amendment, after which the actual rent would be relevant only if it 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 propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t area as well as terms of both the tenants were different and distinguishable in features. Rent received from M/s Axis Bank cannot be the basis of determining the rent from M/s Tanushaka Automobiles Pvt Ltd. Moreover, the property did not consist of different units. It was a compact property some part of which was let out to one tenant and some part to other. Thus, the annual value of the said property was to be considered as a single unit as is done by the Municipal Corporation. In our opinion there is considerable force in the arguments of the Ld AR. 4.8 In view of the aforesaid discussion and considering all the aspects, we are of the considered opinion that the AO was not justified to make the impugned addition. Therefore, we find no reason to interfere in the order of ld CIT(A) on this issue. Ground No. 2 of the Revenue is accordingly dismissed. 5. In Ground No. 3, the revenue challenged the deletion by the CIT(A) of ₹ 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 ₹ 2.00 Cr to M/s Tanushaka Automobiles Pvt. Ltd amounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived a security deposit and an advance. The AO has also not doubted the fact that there was a formal agreement between both the parties to pay interest. The AO has also not doubted the fact that the interest provided / paid by the appellant to Tanushka Automobiles Pvt Ltd was 6%. The AO has also not doubted and has allowed interest paid to other depositors @ 12% per annum by the appellant. Merely because no interest was paid on certain security deposit would not be a factor for determining the allowability of interest and applicability of section 40A(2)(b). The test thus would be whether the interest @ 6% paid by the appellant to Tanushak Automobiles Pvt Ltd was reasonable and fair as compared to the market rates. The AO has himself allowed interest paid to various depositors @ 12%. Further, the rate at which the appellant has borrowed funds from the banks is still higher. The rate of 6% paid by the appellant to Tanushka Automobiles 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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