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TMI Blog2024 (9) TMI 1511X X X X Extracts X X X X X X X X Extracts X X X X ..... having substantial interest in the company, Orbit Resorts Pvt. Ltd., from whom he was in receipt of the impugned amounts, a fact, which was well within the realm of his knowledge, and which had implications on his tax assessment and thereby holding that the reopening of assessment was " neither legal nor justified" 2. The Ld. CIT(A) has erred both in law and on facts in holding that the advances made by the assessee's company to the assessee, in the facts and circumstances of the case, were not struck by the provisions of section 2(22)(e) of the income-tax Act, 1961, particularly as the entire story made up by the assessee is clearly an afterthought. 3. The Appellant craves to add or amend any grounds of appeal before the appeal is heard and disposed off." 3. Grounds of appeal in C. O. No. 33/Asr/2013: "1. That in the facts and circumstances of the case, the Id. Commissioner of Income Tax (Appeals) gravely erred in holding the advance rent of Rs. 8601836/-, received by assessee from M/s Orbit Resorts Pvt. Ltd. as deemed dividend under Section 2(22)(e) of the Income Tax Act. 2. That the appellant craves to add, amend or alter any ground of appeal before or at the time o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he perusal of reasons recorded, it transpired that the Ld.AO had received information from the Addl.CIT, Range-I, Chandigarh wherein it was intimated that the assessee had more than 60% interest in M/s Orbit Resorts Pvt. Ltd., Chandigarh and the said company had advanced loan of Rs. 4,66,08,911/- to the assessee. On the basis of this information, the Ld. AO formed the belief that the said advance fell within the ambit of section 2(22)(e) of the Act and accordingly the income to the said extent escaped assessment as it had not been disclosed in the return. Such proceedings were objected vide letter dated 15-12-2007 which, somehow, did not find favour with the Ld. AO. It was also brought to his notice that copy of account of the assessee as appearing in the books of M/s Orbit Resorts (P) Ltd., Chandigarh was submitted during original assessment proceedings in as much as the various stipulations of 'Lease Agreement' entered into between the assessee and the aforesaid company were also discussed at length and after considering all the facts and documents, he had completed the original assessment on 26-12-2008 after having satisfied himself that no income on account of the amount receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 7,41,778/- on 23-02-2006, it may be stated that there is no bar for making the advance payments in odd figures. Further, it may also be worth-while to submit here that all other payments made to the appellant on account of 'security' are in round figures and details thereof are also enclosed. For the sake of clarity and convenience, the following bifurcations under each head as per the account of M/s Orbit Resorts Private Limited in the Memorandum of account books of assessee and vice versa is given below:- As per S.Sukhbir Singh's Memo. Books of A/c Books As per Orbit Resort's Totals of credit/debit side of the account. 5,08,31,604.98 4,97,08,865.98 Less: Wrong /contra entry by bank on 3-3-2006 3,40,862.00 0.00 5,04,90,742.00 4,97,08,865.98 Less: Opening balance on 1-4-2005. 16,02,805.00 16,02,805.00 4,88,87,937.984,81,06,060.98 Less: Interest credited in the account. 14,97,282,9814,97,282,98 4,73,90,655.00 4,66,08,778.00 Security received (as per annexure-A attached). 3,00,00,000.00 3,00,00,000.00 On account of rent (after TDS) 7,71,919.00 7,09,542.00 [(771919-62377) paid ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 2006-07. Consequently, the Deputy Commissioner of Income-tax, Circle-ll, Bathinda recorded the following reasons on 25-03-2010 for issue of notice u/s 148 of the IT Act, 1961:- "As per information received from AddI. Commissioner of Income-tax, Range-I, Chandigarh vide letter No. Addl.CIT/R-l/SC-19/2008-09/5274 dated 26- 03-2009, it has been informed that Shri Sukhbir Singh Badal has interest of more than 60% in M/s Orbit Resorts Private Limited, Gurgaon and the company M/s Orbit Resorts Private Limited, Gurgaon has advanced loan Rs. 4,66,08,911/- (4,97,08,865 - opening balance 16,02,805 - interest of 14,97,149/-) during the year under reference to Sh. Sukhbir Singh Badal. Since the assessee has a interest of more than 10%, the receipt of Rs. 4,66,08,911/- is covered in the definition of Dividend' as per section 2(22)EUR of I.T. Act, 1961. The assessee has filed the return of income declaring an income of Rs. 1,31,68,060/- with agriculture income of Rs. 27,76,000/- and it does not include any dividend income of Rs. 4,66,08,911/-. As the assessee has not disclosed this dividend income in the return of income, therefore, I have reasons to believe that an income of Rs. 4,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement' executed on 10-11-2004 and consequently the same nomenclature of the transaction was repeated in the Cash Flow Statement and in the replies submitted during assessment proceedings. In this regard, the appellant assessee, in particular, has inter alia, relied upon the judgment of H'ble Andhra Pradesh High Court in the case of CIT v. J.D. Italia reported at (1983) 141 ITR 948 (AP) wherein it has been held that the name or label given by a party to a particular amount is not conclusive and if an assessee uses a wrong or inappropriate expression, he would not be made liable on that account if, in law, he is not so liable That since this fact was duly discussed with the AO during original assessment proceedings and he was satisfied that the payments made to the appellant assessee were not 'loans' but payments on account of 'security' and advance-rent which were made for business considerations and thus did not fall within the ambit of section 2(22)(e) of the Act. During appellate proceedings, the A/Rs of the appellant assessee have vehemently contended that all the material facts of the case were available on record during original assessment proceedings and thus the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well infer that the said payments stood covered by section 2(22)(e) of the Act and further by raising a normal query, he could also ascertain the shareholdings of the appellant in the said company. However, the AO did not take any adverse view in this regard while completing the original assessment. In view of these facts, two possibilities may come up. One, that the AO was not aware about the provisions of section 2(22)(e) and the other that the AO was satisfied that the advances received by the appellant assessee on account of 'security' and 'advance-tax' were for business considerations and thus the provisions of section 2(22)(e) could not be invoked in the circumstances of the case. In the former situation, the judgment in the case of Dr. Habicht vs. Makhija would apply in the case and in the latter situation the judgment of H'ble Madhya Pradesh in the case of Lokendra Singh vs. ITO, quoted, supra, would come into play. Thus, in both the situations, the provisions of section 147 of the Act could not be invoked in this case. Further, in the reasons recorded, the AO has no where mentioned that the appellant assessee 'has failed to fully and truly disclose all the material fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, it is held that the initiation of proceedings u/s 147 of the Act could not be invoked in this case and consequently re-opening of the assessment was neither legal nor justified. Accordingly, Ground No.2 of the Appeal of the appellant assessee is hereby accepted. In view of the fact that proceedings u/s 147 of the Act in this case have been quashed; the other grounds of appeal have become infructuous and do not require any adjudication. However, in the interest of judicial discipline, the other grounds of appeal are also being decided as under:- 6. The ld. DR has supported the assessment order. He filed a written submission where the relevant parts reads as under: "7. The basic grievance of the Revenue's appeal is against the quashing of the proceedings u/s 147 of the Act by the CIT(A). On this issue, I would like to submit that the assessee has filed return in Form No. 2D (SARAL). The assessee neither in the return of income nor during the course of original assessment proceedings disclosed / made any submission indicating that he was having substantial interest (60%) in the company - M/s Orbit Resorts Pvt. Ltd. wherefrom he had received an amount of Rs. 3 Cr. in the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ues as per its grounds of appeal which require adjudication that- (i) Whether re-opening of the assessment u/s 147 of the Act was legally valid and justified; and (ii) Whether the payment of 'security' and 'advance-rent' by M/s Orbit Resorts (P) Limited., Chandigarh to the appellant fell within the ambit of section 2(22)(e) of the IT Act, 1961. 9. The Ld. CIT(A) has discussed that the appellant assessee filed his Income Tax Return relating to the assessment year 2006-07 on 29-01-2007 showing income at Rs. 1,31,68,060/- and agricultural income at Rs. 27,76,000/-. The assessment was completed at a total income of Rs. 1,34,69,680/- with agricultural income of Rs. 24,98,380/- vide order u/s 143(3) dated 26-12-2008. The Commissioner of Income Tax (Appeals), Bathinda vide his appellate order bearing Appeal No.219- IT-CIT(A)/BTI/08- 09 dated 15-06-2010 allowed certain relief to the assessee. However, after the completion of original assessment on 26-12-2008, the AO received information from Addl. Commissioner of Income-tax, Range-I, Chandigarh that Shri Sukhbir Singh Badal has interest of more than 60% in M/s Orbit Resorts Private Limited, Gurgaon and the said company had advanced lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht vs. Makhija (1985) 154 ITR 552 (Bom.). Lokendra Singh vs. ITO (1981) 128 ITR 450 (MP) and Atma Ram Properties Private Limited versus DCIT in ITA No.87/2010 decided on 11-11- 2011 (Delhi) reported at (2012) SITC 237 (Del.). 12. In the present case, the appellant assessee furnished his copy of account as appearing in the books of M/s Orbit Resorts Private Limited, Chandigarh during original assessment proceedings which contained all transactions of payment made to the appellant during the year and the word 'loan' has been mentioned in the various entries (leaving aside, at this stage, the fact whether the word 'loan' was mentioned through clerical error nor otherwise) besides the opening and closing balances and the AO could very well infer that the said payments stood covered by section 2(22)(e) of the Act and further by raising a normal query, he could also ascertain the shareholdings of the appellant in the said company. The Ld. CIT(A) has rightly observed that the AO did not take any adverse view in this regard while completing the original assessment, either the AO was not aware about the provisions of section 2(22)(e) or the AO was satisfied that the advances received by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Ld. CIT(A). The Ld. DR has merely filed a written note narrating the part of the discussion from the assessment order. He relied on thecase of Dishman Pharmaceuticals & Chemicals Ltd. Vs DCIT(Supra) (Guj-HC) which has not considered the Judgement of the Apex Court (Supra). In our view, the judgement relied by the Ld. DR is distinguishable on peculiar facts of the present case and it would not stand before the Judgement of the Hon'ble Apex Court as relied by the Ld. CIT(A). 16. From the record, it is evident as demonstrated by the Ld. CIT(A) that the facts and circumstances of the case lead to the conclusion that the payment of Rs. 3.00 crores by the company to the appellant on account of 'security' was for business considerations because the company in order to safeguard its business interest wanted to occupy the said premises for the times to come and thus agreed to make the said payment and also incorporated this clause in the 'lease-agreement'. This fact remains uncontroverted by the department. Merely alleging that the entire story made up by the assessee is clearly an afterthought would be of no help to revenue unless the factual evidence brought on record an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'loan' for the purposes of section 2(22)(e) and cannot be taxed as 'deemed dividends'. However the AO in his assessment order has held that in the case of the appellant assessee there was no business expediency to advance any loan to the assessee especially when in the various replies and documents furnished during assessment proceedings, the word 'loan' had been used. It has also been held by the AO that the excuse of mentioning wrong terminology by the accountant of the company could not be accepted. The AO has also relied upon the judgment of Hon'ble High Court of Madras in the case of CIT Vs. P.S. Abubucker (2004) 135 Taxman 77 (Mad.) wherein it has been held that 'advance rent' will be deemed as dividend even if the amount is received under the lease agreement (not as a shareholder but as a landlord) or even if it has to be adjusted against future rent. In the Remand Report also, the AO has also stated that receipt of 'advance rent' is not borne out from the Income Tax Return of the assessee and that the payments made intermittently throughout the year were not any kind of advance in lieu of availing of any premises on rent/lease. It has also been stated by him that odd fig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce-rent' was not borne out from the Income Tax Return of the appellant assessee, it has been explained by the A/Rs that the said 'advance-rent' was not liable to tax during the year under consideration and in support of it reliance has been placed on the Order of the H'ble ITAT, Amritsar Bench in the case of DCIT vs. Prince Rubber & Plastics reported at (2004) 1 SOT 85 (Asr) wherein the Hon'ble ITAT has concluded as under:- "Advance rent could not be brought to tax in the year of receipt as the income from house property could only be computed on the basis of annual lettable value of the property" The A/Rs of the appellant assessee have vehemently argued that in the leased property, having worth of about Rs. 30.00 crores; the company was running its business smoothly and comfortably from the said premises and in order to keep the lease agreement in force for the times to come, the payment of 'security' and 'advance-rent' were agreed to be made to the assessee as per the stipulations of the 'lease agreement' and thus these payments were for business considerations and did not fall within the ambit of section 2(22)(e) of the Act. Reliance in this regard has also been placed on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the payment of Rs. 3.00 crores on account of 'security' does not fall within the definition of 'deemed dividends' as per the provisions of section 2(22)(e) of the Act. So far as the 'advance-rent' payment of Rs. 8601836/- by the company to the appellant assessee is concerned, it has been found that in respect of the premises leased out to the company, a rent of Rs. 75,000/- per month was settled and it was also agreed by the parties that the said lease rent shall be escalated by 7-1/2% after the expiry of every year. In such a situation, the advance-rent paid by the company bears the character of 'loan' to the appellant assessee and falls within the ambit of section 2(22)(e) of the Act. This also finds support from the judgment of Hon'ble Madras High Court in the case of CIT vs. P.K. Abubucker reported at (2003) 259 ITR 507 (Mad.) which has also been relied upon by the AO. In the said judgment, the Hon'ble High Court has arrived at the following conclusion:- "Advance given by company to assessee (managing director) for construction of a building constituted deemed dividend under section 2(22) (e) even though the building was to be leased out to the company and the advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT vs. P.K. Abubucker reported at (2003) 259 ITR 507 (Mad.), which has also been relied upon by the AO and the Ld DR. In the said judgment, the Hon'ble High Court has arrived at the following conclusion:- "Advance given by company to assessee (managing director) for construction of a building constituted deemed dividend under section 2(22) (e) even though the building was to be leased out to the company and the advance was required to be set off against the rents payable in future years." 21. The Ld. AR argued that assessee has received advance rent from company in respect of the premises leased out to the company, and such advance rent was later adjusted towards rent payable to assessee and that it is a commercial transaction and would be outside the purview of section 2(22)(e). In support, he placed reliance on the judgement delivered by Hon'ble Karnataka High Court in the case of Smt. Jamuna Vernekar Vs. Deputy Commissioner of Income-tax, Circle 12(5), Bangalore,[2021] 129 taxmann.com 380 (Karnataka) IT Appeal No. 43 of 2013, February 10, 2021 where the Hon'ble Court adjudicated the issue whether loan or advance given to a shareholder can be treated as deemed dividend un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure an article at service etc. Therefore deposit is not covered by the definition of section 2(22)(e) of the act. In the instant case the assessee received certain sum from the company which was subsequently adjusted with the security deposit. The company did not give loan to the assassin to construct a building but captain deposit as any other commercial transaction. The sum soaked has been adjusted towards security deposit which is evident from the books of the company and therefore, the aforesaid deposit is outside the purview of section 2(22)(e) of the Act. A sum of Rs. 19,37,355/- amounts to trade advances which was recovered from rentals during the usual course of business. The trade advances arising during usual course of business and not for individual benefit of the assessee and the same amounts to advance payment of the rents adjusted monthly with the ledgers of the assessee. The Commissioner of Income-tax (Appeals) has also held that under the commercial transactions, the assessee had given prime property and after construction to the company and the company was benefited as the building after construction was let out to the company at much lower rate than the market pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that both the CIT(A) and the AO had relied upon the decision of the Hon'ble Madras High Court in the case of CIT Vs. P.K. Abubucker [2004] 135 Taxman 77 (Madras)/[2003] 259 ITR 507 (Madras) and the CIT(A) confirmed the action of the AO. The facts of the present case and that of the case of P.K. Abubucker are identical. On both the cases, the advance rent received was to be adjusted against the future rent receivable. The copy of the judgment is enclosed as Annexure "B", In view of the facts and circumstances of the case, it is requested that the addition made by the AO which was confirmed by the Cll(A) may kindly be upheld and the cross objection filed by the assessee may kindly be dismissed." 24. In the present case the assessee has leased prime properties at Chandigarh and received an advance rent in respect of the said premises leased out to the company, and such advance was to be later adjusted towards rent payable by the company. In our view, the amount of advance rent received by the assessee from the company would be a commercial transaction and it would certainly fall outside the purview of section 2(22)(e) of the Act. The assessee being having substantial interest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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