Case Law Details
JCIT Vs Sanjana Realcon Pvt. Ltd (ITAT Delhi)
ITAT Delhi held that profit sharing as provided in MOU cannot be treated as ‘deemed dividend’ and accordingly outside the purview of section 2(22)(e) of the Income Tax Act.
Facts-
The assessee-company is incorporated with the main objective to carry on business as a real estate developer. On perusal of the balance sheet and financial accounts of the assessee, AO observed that the assessee has undertaken certain related party transaction. It was found that the assessee has received loans from a company, namely, Landspace Construction Pvt. Ltd. (Landscape) wherein the assessee holds 20% equity share and thus holds substantial interest.
Consequently, the Assessing Officer asked the assessee to show cause as to why provisions of Section 2(22)(e) of the Act should not be applied for the receipt of the loan from the lender co. during the year.
AO eventually concluded that the assessee being shareholder of Landspace and having received an amount of Rs.253.57 lakhs from the lender company is susceptible to tax on such loans received meets the ingredients of deeming fiction provided in Section 2(22)(e) of the Act. An addition of Rs. 2,53,75,000/- was thus made to the total income returned by the Assessee under the shelter of S. 2(22)(e) of the Act.
Conclusion-
Held that that the amount obtained from Landspace is in the nature of business transaction outside the purview of Section 2(22)(e). Mere declaration in the financial statement of amount received as inter corporate loan is neither here nor there. The nature of amount received is vouched by the subsequent actions. Thus, propriety of such explanation can hardly be questioned. Hence, without further delineation of factual matrix, we see no perceptible justification in the allegations made by the Revenue seeking to displace the character of transaction. We thus endorse the view taken by the CIT(A) and hence decline to interfere.
FULL TEXT OF THE ORDER OF ITAT DELHI
The captioned appeal has been filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-XXVIII, New Delhi [‘CIT(A)’ in short] dated 20.11.2018 arising from the assessment order dated 04.03.2016 passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2013- 14.
2. The grounds of appeal raised by the assessee read as under:
“1. Whether the Ld. CIT(A) was justified in holding the amount of Rs.2,53,75,000/- as a business or commercial transaction by deleting the disallowance u/s.2(22)(e) of the Income Tax Act, 1961.
2. Whether the Ld. CIT(A) was justified in ignoring the fact of repayment of loan of Rs.92,27,713/- to M/s. Landspace Construction Pvt. Ltd. and showing closing balance of Rs.1,72,35,064/- and thus the transaction was not made for rights in the property as claimed.
3. The appellant craves leave to add, alter or amend any of the ground(s) of appeal before or during the course of hearing of the appeal.”
3. As per the grounds of appeal, the Revenue is aggrieved by the order of the CIT(A) deleting the additions made in the hands of the assessee on account of ‘deemed dividend’ under Section 2(22)(e) of the Act.
4. Briefly stated, the assessee-company is incorporated with main object to carry on business as a real estate developer. The return filed by the assessee was subjected to scrutiny assessment. On perusal of the balance-sheet and financial accounts of the assessee, the Assessing Officer observed that the assessee has inter alia undertaken certain related party transactions. It was found that the assessee has received loans from a company, namely, Landspace Construction Pvt. Ltd. (Landscape) wherein the assessee holds 20% equity shares and thus a holds substantial interest. Consequently, the Assessing Officer asked the assessee to show cause as to why provisions of Section 2(22)(e) of the Act should not be applied for the receipt of the loan from the lender co. during the year. On enquiry, the Assessing Officer found that the assessee has received an amount of Rs.10.87 lakhs in the earlier years and further received 253.75 lakhs during the year in multiple trenches. The assessee has also returned an amount of 92,27,713/- through banking channel resulting in net outstanding amount of Rs.1,72,35,064/- as outstanding payable to lender namely Landspace. The impugned liability of Landspace was classified as received from Landspace in the nature of loan and advances from related parties. Consequently having regard to the provisions of Section 2(22)(e) of the Act, the Assessing Officer made enquiries with the assessee in this regard. In response, the assessee submitted that the amount received from the Landspace was not in the nature of any loan or advance simplicitor but was received in consideration of sharing 50% right in two real estate properties unit aggregating to Rs.6.51 crore allotted to the assessee in an upcoming project, viz., Sun Court Apartments at Greater Noida being developed by Jai Prakash Associates Ltd. (Builders). It was stated that the two flats in Sun Court were provisionally allotted to the assessee company vide provisional allotment letter dated October 21, 2011 and December 15, 2011 issued by the builder. As a sequel to such allotment of properties, a Memorandum of Understanding (MOU) dated 2nd April, 2012 was executed with Landspace whereby it was agreed that Landspace will acquire 50% right in the aforesaid two properties subject to payment of 50% of the total cost of said two properties under construction by the builder. It was further agreed in the MOU that in the event any of the two properties are decided to be sold prior to the construction of the building by the builder, the profit/losses arising from sale of rights in the such properties allotted, shall be shared between the assessee and Landspace in the ratio of their respective rights i.e. 50:50.
5. It was thus essentially contended by the assessee before the Assessing Officer that the amount received from Landspace was, in effect, a consequence of the MOU entered in respect of a business transaction in the ordinary course where both assessee and the Landspace are engaged in real estate business.
6. The Assessing Officer controverted the explanation propounded by the assessee that the transaction is not in the nature of loan. The Assessing Officer observed that the loan transactions have been given the false exterior of a business transaction which in reality is a loan transaction as admitted in the financial statement. The MOU executed was found by the AO to be a make believe between to sister concerns and which remains unsubstantiated by a third party independent evidence. It was also observed that the repayment of 0.92 crore approx. to Landspace as per the ledger account reproduced in paragraph 4 of the assessment order is without any explanation. The Assessee has failed to offer any justification as why the lender will give excess money and seek return thereof in a transaction of such type which is intended to be governed by MOU. The Assessing Officer thus, for the detailed reason noted in the assessment order, eventually concluded that the assessee being shareholder of Landspace and having received an amount of Rs.253.57 lakhs from the lender company is susceptible to tax on such loans received meets the ingredients of deeming fiction provided in Section 2(22)(e) of the Act. An addition of Rs. 2,53,75,000/- was thus made to the total income returned by the Assessee under the shelter of S. 2(22)(e) of the Act.
7. Aggrieved by the additions made under Section 2(22)(e) by the Assessing Officer, the assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee reiterated its stance and contended that the Assessing Officer has invoked the provisions of Section 2(22)(e) divorced of the factual matrix and applicable law.
7.1 It was essentially contended that the AO has failed to consider the direct and circumstantial evidences filed in corroboration of explanation furnished before him during the assessment proceedings which clearly proved that the amount in question received by the assessee denotes the consideration for transfer of 50% rights in the properties acquired by the Assessee. It was pointed out that the rights in such properties were alienated to third party in the subsequent years and the profits accruing as a result of such alienation/transfer were also equally shared between the assessee company and Landspace in subsequent years in sync with their respective rights.
7.2 In this backdrop, the assessee contended before the CIT(A) that where the payment received by the shareholder, i.e., assessee herein, from the other company in the ordinary course of business transaction entered between two parties, such business transactions will not be hit by the provisions of Section 2(22)(e) of the Act and a corollary, the amount received cannot be deemed as dividend in the hands of recipient shareholder, i.e., the assessee-company.
7.3 Certain additional evidences were filed before the CIT(A), a remand report from the Assessing Officer was obtained thereon. After taking into account the factual matrix, the CIT(A) found potency in the contentions of the assessee and held that the receipt of money from Landspace is founded on business considerations and thus falls outside the purview of deeming fiction of Section 2(22)(e) of the Act.
7.4 The CIT(A) thus set aside and cancelled the additions made by the Assessing Officer under Section 2(22)(e) of the Act. The relevant operative paragraph of the order of the CIT(A) is reproduced hereunder:
“5.4 I have considered the facts of the issue, basis of addition made by AO and the submissions of the appellant during the appellate proceedings as well as remand proceedings. As can be seen from the assessment order that while making the addition in the case of the appellant, the Assessing Officer has relied on the facts that though the appellant has claimed the amount of Rs. 2,53,75,000/- as business transaction but in its balance sheet, in the Notes of Account, transactions with M/s. Landspace Construction Pvt. Ltd have been categorized under the head Inter-Corporate Loan. The Assessing Officer has also raised doubts on the authenticity of MOU dated 02.04.2012 with M/s. Landspace Construction Pvt. Ltd for purchase of two flats, Agreement to sell (ATS) dated 13.07.2015 with M/s Garrison Developers Pvt. Ltd for sale of these properties and letters issued by the developer for replacement of flats with villas. The AO has raised objections citing the procedural infirmities in these MOU and ATS stating that all these are managed by appellant in order to show the transactions with M/s. Landspace Construction Pvt. Ltd as commercial transactions, not the loan transactions. However, the detailed analysis of these agreements and the transactions entered therein, fairly say the different story. The perusal of MOU dated 02.04.2012, the copy of which is submitted during the appellate proceedings, reveals that the appellant company agreed with M/s. Landspace Construction Ltd. to acquire 50% rights in the aforesaid two properties subject to payment of 50% of total cost of the said properties. It was further agreed that the profit/loss would be shared in the ratio of 50:50 on the sale of aforesaid properties before or after the completion of construction of the said properties. In pursuance to this memorandum only, the Landspace Construction paid its share amounting to Rs. 3.20 crores (Rs. 2.53 crores during the year), out of the total cost of Rs. 6.1 crores. Thus, the payments received by appellant during the year from M/s Landspace was in the nature of advance/share towards purchase of property, not as a loan as concluded by AO during the assessment proceedings. The subsequent events also confirm the nature of transactions that it was purely a commercial transaction, not the loan transactions. The Agreement to Sell dated 13.07.2015, in respect of aforesaid two flats at Sun Court Apartments, has also been entered into between M/s. Garrison Developers Pvt. Ltd, a purchaser and appellant alongwith M/s Landspace Construction Pvt. Ltd, as seller wherein shares in profit of both the entities have been assigned at 50% each. The letter dated 23.02.2017 and NOC dated 29.12.2017, issued by the developer M/s. Jaiprakash Associates Ltd, also mention the 50% rights in both the properties acquired by appellant as well as M/s. Landspace Construction Ltd and in accordance to that, the developer allotted one unit in favour of appellant and other in favour of M/s. Landspace Construction Pvt Ltd. Subsequently, the proceeds of Rs. 7.50 crores received from M/s. Garrison Developers Pvt Ltd on sale of these two properties and profit earned at Rs. 1.35 crores, was divided by both the entities and accounted for in their accounts at Rs. 67.50 lakhs each. The copies of statements of account and entries in the bank statements have been duly entered into by both the entities and furnished during the remand as well as appellate proceedings for perusal. Thus, the aforesaid chain of events, supported with documentary evidence with MOU and ATS, clearly shows that the amount of Rs. 2,53,75,000/- received by appellant was a commercial/business transaction in connection with purchase of two flats at Sun Court, Jaypee Greens, Greater Noida and earning profit out of sale of these flats. The procedural infirmities as pointed out by AO in the MOU or ATS and availability of surplus funds or taking loans from NBFC do not make any difference to the merit of the case. The comments of statutory auditors in the notes on account also do not alter the real nature of the transactions. In view of this, I hold that the amount of Rs. 2,53,75,000/- received by appellant from M/s. Landspace Construction Pvt. Ltd is in the nature of business/commercial transaction, not as loan transaction and therefore, not covered by the provisions of section 2(22)(e) of the Act. I, therefore, delete the addition made by AO and allow the grounds taken by appellant.”
8. Aggrieved by the reversal of additions made under S. 2(22)(e) of the Act by the CIT(A), the Revenue has preferred appeal before the Tribunal.
9. The Ld. DR appearing for the Revenue broadly relied upon the observations made in the assessment order. The ld. DR pointed out that the stand taken by the assessee does not match with the audited financial statement of the Assessee, where transactions have been recognized and reported as ‘inter- corporate loans has not been taken cognizance of in its natural perspective. It was contended that the purported MOU between group entities seeking to demonstrate a transfer 50% right in the so called property in Sun Court is sham and was not proved to have been acted upon in the subsequent years. It was contended that if the claim of the assessee towards existence of MOU for sharing right in the property is taken at face value, there was no warrant to declare the amount received as Inter-Corporate Loan. The assessee in its books has appropriated such purported considerations for sharing rights against the properties provisionally allotted to the Assessee by Builder. It is also not known as to how the consideration purportedly paid to builder against provisional allotment has been reflected in the audited financial statement. The onus was always on the Assessee to demonstrate the reasons for making wrong declarations in the audited financial transactions and suppress the true nature of transaction, now it proposes to convass.
10. Adverting further, the ld. DR pointed out that the Assessing Officer has examined the issue threadbare and submitted that the ledger account of Land Space in the books of assessee would show that an amount of Rs.92,27,713/- has been repaid to Land Space for which no justification is available even today. It was next contended that the amount received has also not been shown to have utilized for payments to the builder if any. The whole amount of Rs.253.75 in question has been retained by the assessee at the end of financial year except a part thereof which was returned at the end of the financial year without showing any utilization towards so called acquisition of property rights.
11. It was submitted that the ld. CIT(A) has conveniently persuaded itself with a make it believe theory propounded by the assessee before it without making any objective analysis of the fact situation.
12. It was submitted that the MOU between two intimately connected parties has been introduced at the time of assessment as an afterthought to escape the clutches of Section 2(22)(e) of the Act. It was asserted that the amount received and partly repaid shows glaring mismatch with the proposition of consideration against acquisition of rights in two flats purportedly allotted by the builder in favour of the assessee. Neither payment received matches with the amount expected to be paid nor the payment received has been utilized for payment to builder. It was submitted that the CIT(A) has not appreciated the nuances of the transactions and has given improper relief on the basis of sham documents which have not been acted upon.
13. The ld. DR thus urged for reversal of the order passed by the CIT(A) and restoration of the action of the Assessing Officer.
14. The ld. Counsel for the assessee, on the other hand, submitted that the CIT(A) has acted upon the tell-tell evidences placed before him which were duly confronted to the Assessing Officer in the course of the appellate proceedings by obtaining a remand report. The ld. counsel submitted that the Assessing Officer missed the point that both the assessee as well as Landspace are engaged in the real estate business and the transaction of transfer of 50% right in the properties provisionally allotted by the builder in favour of the assessee is an act of ordinary business in real estate business. The transfer of rights in the allotment of property in Sun Court is backed by MOU which was presented to the assessee at the first instance in the course of the assessment proceedings. A part return of the amount received during the year again can be for a variety of reasons and will not vitiate the real character of business transactions. It was next submitted that the common rights in these two properties were transferred to one M/s. Garrison Developers Pvt. Ltd. by executing Agreement to Sale (ATS) dated 13.07.2015. the ATS also acknowledges the presence of Landspace as third party for transfer of its 50% right. It was submitted that total cost involved for purchase of two properties was Rs.6.15crore approximately and Landspace has paid its share of Rs.3.20 crore approximately (Rs.2.53 crore) during the year towards acquisition of right. The resultant profits of Rs.1.53 crore on sale of rights to M/s. Garrison was also divided by the assessee and the Landspace equally in the subsequent year of sale. The ld. counsel thus submitted that mere inadvertent /wrong disclosure in the financial statement will not cast shadow the real character and in such circumstances, the book entries made in the particular manner is not decisive to determine the real character in the light of the judgment of Hon’ble Supreme Court in Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 367 (SC).
15. The ld. counsel for the assessee thus submitted that in the absence of any adverse material, interference with the order of the CIT(A) on the basis of suspicion and conjectures is uncalled for.
16. We have carefully considered the rival submissions. In the given factual matrix, the applicability of Section 2(22)(e) on receipt of amount from the lender co. where the assessee holds substantial interest is in question.
17. On a broader reckoning, as noted in the preceding paragraphs, it is the case of the Revenue that the amount received by the assessee from Landspace attracts the provision of Section 2(22)(e) being a loan transaction from the company where the assessee holds substantial interest as a shareholder. The assessee, on the other hand, contests the allegation of the Revenue and contends that the real character of amount received from Landspace being attributable to the business transaction in the field of real estate is demonstrable. Consequently, the amount received cannot be branded as loans/advances simplicitor and hence section 2(22)(e) of the Act has no application.
18. On perusal of the order of the CIT(A), it is noticed that the assessee has been allotted two properties by the builder in an upcoming project namely Sun Court Noida. The assessee claimed to have entered into an MOU dated 2nd April, 2012 with the lender company seeking to part with 50% right therein in favour of As claimed, the MOU was acted upon and the money was transferred by the lender to the assessee in consideration of acquisition of rights in the property allotted in favour of the assessee by the builder. An Agreement to Sale (ATS) dated 13.07.2015 was thereafter was entered into jointly with Landspace (confirming party) as proposed sellers with the proposed buyer M/s. Garrison Developer. Thus, the MOU was duly acted upon at a later point of time. The resultant profit were also claimed to have been shared equally as provided in MOU to support the inherent character of money received from Landspace.
19. These facts clearly vindicates the claim of the assessee that the amount received was in consideration of transfer of rights in the property allotted and thus cannot be regarded as a loan transaction of ordinary nature.
20. We have carefully weighed the totality of circumstances. The moot question is the credibility of explanation offered by the assessee to support its claim of business transaction qua a loan transaction of ordinary nature. To support the nature of money received from Landspace, the assessee claims that such MOU has been acted upon. Where the rights in the property was sold and profits have been shared as business receipt by Landspace, the other considerations fades into insignificance. The CIT(A), in our view, has examined the issue threadbare and has rightly concluded that the amount obtained from Landspace is in the nature of business transaction outside the purview of Section 2(22)(e). Mere declaration in the financial statement of amount received as inter corporate loan is neither here nor there. The nature of amount received is vouched by the subsequent actions. Thus, propriety of such explanation can hardly be questioned. Hence, without further delineation of factual matrix, we see no perceptible justification in the allegations made by the Revenue seeking to displace the character of transaction. We thus endorse the view taken by the CIT(A) and hence decline to interfere.
21. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open Court on 20/12/2022.
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