IN THE ITAT HYDERABAD BENCH ‘A’
Deputy Commissioner of Income-tax, Circle 1(3)
B. Dhanunjaya Rao
IT APPEAL NOS. 443 TO 446 (HYD.) OF 2012
Co Nos. 98 to 101 (hyd.) of 2012
[ASSESSMENT YEARS 2002-03, 2003-04 AND 2006-07]
DECEMBER 14, 2012
Saktijit Dey, Judicial Member
These appeals by the Revenue and Cross-Objections by the assessees therein are directed against similar but separate orders of the Commissioner of Income-tax(Appeals)-II, Hyderabad. Since factual background as well as the issues involved in the present appeals by the Revenue and cross-objections by the assessees are common, these appeals and cross objections are being disposed off with this common order for the sake of convenience.
2. The only issue involved in the appeals of the Revenue relates to the additions made by the assessing officer in terms of S. 2(22)(e) of the Act, treating the advances taken by the assessees from a company in which they were having substantial stake, as deemed dividend. The grievance of the Revenue in its appeal is against the action of the CIT(A) in deleting such additions made by the assessing officer. The cross objections of the assessees merely support the order of the CIT(A), in the light of the appeal of the Revenue.
3. Brief facts of the case, as taken from the appeal of the Revenue, ITA No. 445/Hyd/2012, concerning Smt. B. Seetaratnam, for the assessment year 2003-04, are that the assessee filed return of income for the assessment year 2003-04 on 30.9.2003 declaring a total income of Rs. 1,00,900, besides agricultural income of Rs. 1,50,000. The said return was initially processed under S. 143(1) of the Act on 22.1.2004. Subsequently, it was noticed that the assessee had taken advances of an amount of Rs. 30,00,000 from M/s. BDR Projects Pvt. Ltd., wherein the assessee was holding 18.69%of shares. The said advances were treated as deemed dividend within the meaning of S. 2(22)(e) of the Act. As the assessee had failed to disclose the said income, being deemed dividend, a notice under S. 148 of the Act dated 16.7.2007 was issued. In the re-assessment proceedings that ensued, the assessing officer noticed from the annual report of BDR Projects Pvt. Ltd. for the year ending 31.3.2003 that the accumulated profits of the Company as on 31.3.2002 and 31.3.2003 are to the extent of Rs. 2,49,53,925 and Rs. 2,57,37,170 and as per the account extract furnished by the assessee, the said company made payments aggregating to Rs. 30,00,000 by way of advances during the year under appeal. Since the assessee was holding more than 10% shares, the assessing officer, treating the advance received by the assessee from the said company as deemed dividend under S. 2(22)(e) of the Act, and accordingly making an addition of Rs. 30,00,000, the assessing officer completed the assessment on a total income of Rs. 32,50,090, vide order of assessment dated 15.12.2008 passed under S. 143(3) read with S. 147 of the Act.
4. Aggrieved, assessee preferred appeal before the CIT(A), contesting the validity of issue of notice under S.148 and also the action of the assessing officer in treating the amounts withdrawn towards construction of house property by the Director of the company as deemed dividend under S. 2(22)(e). The CIT(A), while upholding the legality and validity of the reopening of the assessment under S.147, deleted the addition made on account of deemed dividend by following inter alia the decision of the Calcutta High Court in the case of Pradip Kumar Malhotra v. CIT  338 ITR 538.
5. Aggrieved by the relief granted by the CIT(A), assessee is in second appeal before us.
6. Facts of the case are similar in the remaining three appeals, excepting for the differences in the amounts of deemed dividend brought to tax in each of these mattes, and the fact that the issue of reopening of assessment is not there in the appeal for assessment year 2006-07 concerning Shri B. Dhanunjaya Rao, all other appeals. The amounts of deemed dividend brought to tax in the case of Smt. B. Seetaratnam for the assessment year 2006-07 is Rs. 20,00,000. Such amounts of deemed dividend brought to tax in the case of Shri B. Dhanunjaya Rao, whose share-holding in M/s. BDR Projects Pvt. Ltd., as evident from the order of the CIT(A) for assessment year 2002-03 was 33.33% and as such more than 10%, were Rs. 8,59,130 for the assessment year 2002-03 and Rs. 20,00,000 for the assessment year 2006-07. Aggrieved by the action of the CIT(A) in deleting these additions made by the assessing officer to bring to tax the deemed dividends in the hands of these two assessees, the present appeals are filed by the Revenue, wherein supporting the orders of the CIT(A) assessees filed the cross-objections.
7. The learned Departmental Representative submitted before us, commonly for these appeals that the CIT(A) was totally misconceived in granting relief to the assessee by placing reliance on the decision of the Calcutta High Court in the case of Pradip Kumar Malhotra (supra). The learned Departmental Representative submitted that the facts in the case of Pradip Kumar Malhtora (supra) are clearly distinguishable from the facts involved in the present appeals. The learned Departmental Representative submitted that in case of Pradip Kumar Malhotra (supra), the property was mortgaged by the shareholders for enabling the company to avail loans for its business purposes. Subsequently, when the shareholders requested for release of the mortgaged property, the bank refused to release it unless property of similar nature is mortgaged. Since the company was unable to release the mortgaged property, it advanced the money to the shareholders as required by them. However, in the case of the assessees before us, neither the properties of the assessees were mortgaged with the bank, for the purpose of availing of the loan by the company, nor was there any evidence produced by the assessees that they have made a request for the release of their properties from the bank, if at all, the same have been mortgaged. The learned Departmental Representative submitted that the assessee being Director of the concerned company, have only given their personal guarantee based on their net worth mentioned, which includes the value of the properties. The learned Departmental Representative further submitted that the ratio decidendi of the Hon’ble Calcutta High Court in the case of Pradip Kumar Malhotra (supra) cannot be considered to be a good law, as it has not taken into account, the decision of the Hon’ble Supreme Court in the case of Smt. Tarulata Shyam v. CIT  108 ITR 345. The learned Departmental Representative submitted that in the aforesaid case, the Hon’ble Supreme Court has laid down the law that even in a case the loan or advance to the share-holders cease to be outstanding at the end of the previous year, it can still be deemed as dividend, if the other conditions factually exist to the extent of the accumulated profits possessed by the company. Learned Departmental Representative also relied on the following decisions in support of his above contentions.
(1) CIT v. P.K. Abubucker  259 ITR 507
(2) M.D. Jindal v. CIT  164 ITR 28
(3) Miss P. Sarada v. CIT  229 ITR 444
(4) Ravindra D. Amin v. CIT  208 ITR 815 (Guj.)
(5) Walchand & Co. Ltd. v. CIT  100 ITR 598 (Bom.)
8. The learned Authorized Representative for the assessee, on the other hand, strongly supporting the impugned orders of the CIT(A), submitted that Directors’ personal properties were in fact mortgaged as security with the bank to enable the company to avail the loans. When the assessees were in need of money for construction of house property and wanted to avail loan by mortgaging the self-same property, they could not avail loan by mortgaging the self same property, as it was already mortgaged with the bank as security towards loan availed by the company. To help the directors out of the tight situation they were facing, the company came forward and advanced the amounts to the assessees during the years under appeal, as the company was benefitted due to the properties being kept as security for the loans availed by it. The learned Authorized Representative for the assessee further submitted that after construction of the building, the value of the property would further shoot up, and the company would also get benefited as it would be able to get further finance facility from the bank. The learned Authorized Representative for the assessee relying upon the decision of the Hon’ble Calcutta High Court in the case of Pradip Kumar Malhotra (supra), submitted that there being no individual benefit passed on to the assessees by virtue of the monies advanced by the company, it cannot be treated as deemed dividend, coming within the ambit of S. 2(22)(e) of the Act.
9. We have heard the rival submissions and perused the materials on record. We have also gone through the case-law relied upon by the parties. After going through the orders of the lower authorities, it is evident that while the Assessing Officer has held that the amounts advanced have to be considered as deemed dividend under S. 2(22)(e) of the Act, the CIT(A) by relying upon the decision of the Hon’ble Calcutta High Court in the case of Pradip Kumar Malhotra (supra), has held that since the assessees have placed their properties as personal securities towards loans availed by the company, there is no personal benefit to the assessees on account of the advances given by the company to the assessees. The CIT(A) held that the advances given by the company to the assessees cannot be considered to be a gratuitous loans or advances, attracting the provisions of S.2(22)(e) of the Act, as the advances given by the company were in return of an advantage availed by the company on account of mortgaging of the personal properties of the Directors.
10. At this stage, it will be worthwhile to look to the provisions as contained in S. 2(22)(e) of the Act, which, to the extent relevant for our purpose, is extracted below-
“(2)** ** **
(22) ‘Dividend’ includes…..
(a) and (d)** ** **
(e) Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the asset of the company or otherwise), made after the 31st day of May 1987, by way of advance or loan to a share-holder, being a person, who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend, whether with or without right to participate in profit), holding not less than 10% of the voting power or to any concern in which that shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern), or any payment by any such company on behalf of, or for the individual benefit, of any such share-holder to the extent to which the company in either case possesses accumulated profits.”.
but “dividend” does not include-
(i)** ** **
(ii) Any advance or loan made to a share-holder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company.”
To come within the ambit of the aforesaid provisions, the following conditions must exist-
(a) It must be a company in which public are not substantially interested;
(b) The company must have made payments by way of advance or loan to a share-holder, holding more than 10% of the shares of the company;
(c) The company must have accumulated profits during the relevant year;
Sub-clause (ii) of S. 2(22)(e) carves out an exception by providing that any loan or advance to a share-holder by a company, which is engaged in money lending business, in the ordinary course of its business, shall not be treated as dividend.
11. In the facts of the present case, it is not disputed that all the conditions attracting the provisions of S. 2(22)(e) exist. It is the case of the assessee that since it has mortgaged its property with the bank to enable the company to avail finance facilities from the bank, the advance by the company is not a gratuitous loan or advance, but in return for an advantage which the company has already availed on account of mortgaging of properties done by the assessees. However, it is a fact on record that the assessees have not produced any documents to prove the fact that the personal properties of the assessees were actually mortgaged with the bank for the sake of availing loans by the company. The letter dated 31.5.2008 of the Andhra Bank, submitted in the paper-book does not establish the fact that the properties were mortgaged with the bank. The assessees have also not produced any correspondence made either with the bank or with the company towards release of the properties mortgaged, as was the fact in the case of Pradip Kumar Malhotra (supra) before the Hon’ble Calcutta High Court. In the absence of conclusive evidence to prove the fact of mortgage and also the fact that the assessee has not requested the bank for release of the mortgage, the ratio of the decision in the case of Pradip Kumar Malhotra (supra) will not apply to the facts of the present case.
12. It will be pertinent to mention here that long after the hearing of the appeal was closed, the assessees, on 5.11.2002, has submitted a copy of the letter of the Andhra Bank dated 27.9.2012, indicating that a property of the director, Smt. B. Seetaratnam, was given as a security towards credit facility availed by the company. However, in the absence of any petition by the assessee seeking acceptance of the additional evidence, no cognizance can be taken by us, while adjudicating upon the issue in dispute. Even accepting that letter also does not lead us to any conclusion so far as assessee’s claim of mortgaging the property is concerned, as the said letter does not establish the fact that the property in question was actually mortgaged with the bank. That apart, the language of S. 2(22)(e) is clear and unambiguous and does not leave any scope for interpreting it in a different manner. The said provision being a deeming provision, it has to be interpreted strictly in accordance with the spirit of the language contained therein. As we have already reiterated herein above, the payments made by the company towards advances to the assessee fulfills all the characteristics of ‘dividend’ as envisaged in S. 2(22)(e) of the Act. In the aforesaid circumstances, there cannot be any other conclusion excepting to consider the advances given by the company to the assessees as deemed dividend at the hands of the assessee. The case-law relied upon by the learned Departmental Representative also supports this view.
13. In the light of the above discussion, the CIT(A) in our considered view was not justified in granting relief to the assessees. We accordingly set aside the orders of the CIT(A) impugned in these appeals, and restore the additions made by the Assessing Officer on account of deemed dividend in terms of S. 2(22)(e) of the Act. Consequently, grounds of the Department in these appeals are allowed.
14. In the absence of any specific ground raised by the assessees in their cross-objections, which warrants independent adjudication, since as noted above, the grounds of the assessees in the cross-objections merely support the orders of the CIT(A), in the light of the appeals of the Revenue, the Cross-Objections of the assessees are infructuous. As such, they are dismissed.
15. In the result, all the four appeals of the Revenue are allowed and the cross-objections of the assessees, being infructuous, are dismissed.