Case Law Details

Case Name : CIT Vs Madurai Chettiyar Karthikeyan (Madras High Court)
Appeal Number : Tax Case (Appeal) No.898 of 2013
Date of Judgement/Order : 16/04/2014
Related Assessment Year :
Courts : All High Courts (3629) Madras High Court (269)

CA Sandeep Kanoi

The assessee is the proprietor of Shri Vekkaliamman Builders and Promoters and he also happens to be the Managing Director of Southern Academy of Maritime Studies Private Limited, in which he holds share of 63%. The Assessing Officer added a sum of Rs.87,57,297/‐ to the assessee’s income under Section 2(22)(e) of the Income Tax Act, 1961 as deemed dividend from Southern Academy of Maritime Studies Private Limited, rejecting the assessee’s contention that the company awarded construction contract to the assessee’s proprietary concern after completing with the procedures of the companies Act. The assessee stated that it being a normal business transaction, the amount received for the purpose of executing the construction work would not fall within the scope of ”loans and advances” under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer however viewed that when the assessee was having more than 10% share holding in the company, the said amount received by the assessee was liable to be assessed as deemed dividend. In so holding the Assessing Officer referred to an amount of Rs.1,90,00,000/‐ (Rupees one crore and ninety lakhs only) shown by the assessee under the head unsecured loan received from Vista Securities Technics Pvt.Ltd. Applying the decisions of the Mumbai High Court reported in (1973) 92 ITR 105 [CIT vs. Jamunadas Khrimji Kothari] and the Apex Court reported in (1998) 229 ITR 444[ Miss.P.Sarada vs. CIT] , the Assessing Officer however, held that an amount of Rs.87,57,297/‐ was liable to be treated as deemed dividend at the hands of the assessee.

Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals) who agreed with the assessee that he was rendering services to his client M/s.Southern Academy Maritime Studies P.Ltd. by constructing building; that the advance money received was towards construction of the building for the said private limited company. The assessee produced the minutes of the board meetings and ledger copies of the transactions. Referring to the decisions of the Delhi High Court reported in 173 Taxman 407 (Delhi) [CIT vs. Ambassador Travels P.Ltd.] and (09) 181 Taxmann 155, [CIT vs. Vikramjit Sen and Rajiv Shakdher] the Commissioner viewed that the trade advance was in the nature of money given for the specific purpose of constructing the building for the private limited company and hence the payment could not be treated as deemed dividend falling within the ambit of Section 2(22)(e) of the Income Tax Act, 1961. Thus, the Commissioner allowed the assessee’s appeal.

Aggrieved by this, the Revenue went on appeal before the Income Tax Appellate Tribunal, which confirmed the view of the Commissioner. The Tribunal pointed out that the reliance placed on by the Revenue on the decision of the Apex Court reported in 229 ITR 444 (cited supra) and the Bombay High Court reported in 92 ITR 105 (cited supra) were distinguishable on facts. When the Commissioner had come to the factual finding after verifying the minutes and ledger copies that the amount received by the assessee was in the course of normal business transaction against the services rendered by him to the company for constructing buildings, the question of invoking Section 2(22)(e) of the Income Tax Act, 1961 did not arise.

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