Advance to Directors for Land Purchase cannot be treated as Deemed Dividend

Full Text of the ITAT Order is as follows:-

This appeal filed by the assessee is directed against order of the Commissioner of Income Tax (Appeals) {CIT(A)}, Vijayawada vide ITA No. 208/CIT(A)/VJA/2015-16 dated 28.2.2017 for the assessment year 2012-13.2. During the assessment proceedings of M/s. STC Transports Private Limited, the A.O. found that an amount of Rs. 1,28,25,277/- was outstanding as loans and advances to the Directors. The assessee company is having accumulated profits and the Directors are having more than 10% share in the shareholding of the company. Therefore, the A.O. issued show cause notice as to why the loans and advances given to the Directors should not be treated as a deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961 (hereinafter called as ‘the Act’). The assessee replied that the assessee company has entered into an agreement for purchase of vacant site belonging to Mr. D.L.V. Sridhar, M.D. of the company, ad measuring 1504.81 sq.yds. with ACC shed by an agreement dated 8.8.2008 for a consideration of Rs. 1.50 crores. Since the amounts are due to the Director, the said land could not get registered and the amount was shown outstanding as on the date. The assessee explained to the Assessing officer (AO) that the company has entered in to a business transaction for purchase of land in the interest of business, hence there is no case for taxing the genuine advances as a deemed dividend u/s 2(22)(e) of the Act. The A.O. not being convinced with the explanation of the assessee held that the amounts advanced to the Directors are to be treated as deemed dividend and accordingly brought to tax. The AO further, noticed that a sum of Rs. 1.49 crores was given as advance to Mr. D.L.V. Sridhar, the M.D. of the company and the share of the profits of the assessee works out to Rs. 85,40,000/-. Thus, the deemed dividend taxable u/s 2(22)(e) of the Act works out to Rs. 85,40,000/-, accordingly, the A.O. assessed a sum of Rs. 85.40 lakhs in the hands of the assessee.

3. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) confirmed the addition made by the A.O. The Ld. CIT(A) relied on the decision of Ms. P. Sarada Vs. CIT (1998) 229 ITR 444 and the Kerala High Court decision in the case of CIT Vs. P.V. John (1990) 181 ITR 1 and also the decision of Hon’ble Delhi High Court in the case of CIT Vs. Sunil Chopra (2011) 201 Taxman 316 and the Madras High Court in the case of CIT Vs. P.K. Abubucker (2004) 135 Taxman 77 (Mad) and the decision of this Tribunal in the case of Nishidevi Vs. DCIT and held that the advance given to the assessee is nothing but indirect distribution of profits and accordingly, confirmed the order of the A.O.

4. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us. During the appeal hearing, the Ld. A.R. submitted that the assessee Mr. D.L.V. Sridhar is the Managing Director of the company and having controlling shares in M/s. STC Trading. The company intended to purchase the vacant land belonging to the Managing Director Mr. D.L.V. Sridhar. Accordingly, the company has entered into a purchase agreement dated 14.7.2008 for purchase of land ad measuring 1504.81 sq.yds. located at Enikepadu village, Vijayawada for a consideration of Rs. 1.50 crores. As a part consideration, the assessee company made the advances to the assessee, which is outstanding as at the end of the year. Finally, the site was registered on 15.11.2016 by sale deed dated 15.11.2016 and got it registered in the office of the Registering Officer, Gunadala, Vijayawada by document No. 6011. The Ld. A.R. submitted that the advance for land is evidenced by the purchase agreement and finally substantiated by the sale deed, which was got registered. Therefore, there is no case for suspicion regarding the genuineness of advances given to the assessee as a business consideration and purely related to the business decision. The sale consideration received by the vendor was offered to capital gains tax and paid the resultant tax, thus there is no case for suspicion. The Ld. A.R argued that the case laws relied upon by the Ld. CIT(A) is distinguishable on facts. Hon’ble Supreme Court’s decision in the case of P. Sarada Vs. CIT (supra), it was a loan given by the company and which was ultimately repaid. In the case of P.V. John (supra) Hon’ble Kerala High Court held that section 2(22)(e) of the Act must be given strict interpretation. Hon’ble Delhi High Court in the case of Sunil Chopra (supra) though the company has given advance for purchase of the land, the advance was outstanding and the sale was not taken place. In the case of Hon’ble Madras High Court’s decision in the case of CIT Vs. P.K. Abubucker (supra), the advance was given to the M.D., which was adjusted against the loans, rents payable by the assessee company, whereas in the case of the assessee the assessee company has got registered the land on payment of full consideration. Further, the said land was given as security by the M.D. for the amounts advanced by the Axis bank to the company. Therefore, though the sale agreement was entered and not registered the property was continued to be collateral security for the amounts advanced to the company. In the case of Nishidevi Vs. DCIT in ITA No. 186/Vizag/2011 of this Tribunal, the property was not registered. Therefore, the Ld. A.R. argued that the facts of the case laws relied upon by the Ld. CIT(A) are completely different and distinguishable and not applicable in the assessee’s case. Since the sale transaction is genuine, the Ld. A.R. argued that there is no case for taxing the impugned transaction as deemed dividend and requested to allow the appeal of the assessee.

5. On the other hand, the Ld. D.R. argued that it is a clear diversion of funds and indirect distribution of the accumulated profits in a colourable device of advance for purchase of the property and argued that the order of the CIT(A) called for no interference.

6. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. In this case, the assessee is the Managing Director of the company M/s. STC Transports Private Limited and having controlling shares in the company. The assessee has entered into an agreement with the assessee company for sale of his land ad measuring 1504.81 sq.yds. site at Enikepadu village in R.S. No. 168/1 & 168/2 for a consideration of Rs. 1.50 crores and received the sums of Rs. 1.49 crores till the end of the financial year and the registration was pending as at the end of the year. However, subsequently the land was got registered in favour of the company and the company was given possession of the land. In the intervening period, the assessee has offered its land to the company’s loans as a security for the amounts advanced by the Axis bank. Though Ld. CIT(A) relied on various decisions cited (supra), the facts of the said decisions are distinguishable as submitted by the Ld. A.R. and not applicable in the assessee’s case. Though Ld. CIT(A) stated that as per the sale agreement, there was a discrepancy with regard to the advance payment of Rs. 4.95 lakhs. The same was clarified by the Ld. A.R. stating that a sum of Rs. 2.20 lakhs was paid in cash and the balance amount was paid by cheques. Ultimately, the land was registered in the name of the company and transferred to the assessee. Since the land was transferred, we do not find any reason to suspect the genuineness of the transaction and to support the argument of the Ld. D.R. as colourable device. The Ld. D.R. did not place any evidence to show that the transaction is not genuine or bogus. Since the evidences establish that the advance was given for purchase of the land, we do not find any reason to sustain the order of the Ld. CIT(A), accordingly we set aside the orders of the lower authorities and allow the appeal of the assessee.

7. In the result, the appeal filed by the assessee is allowed.

The above order was pronounced in the open court on 8th Nov, 2017.