Where the amount was advanced due to the business exigencies as per agreement executed between the parties, it cannot be considered as deemed dividend

International Land Development (P) Ltd Vs ITO (ITAT Delhi)- The learned CIT(A) has vacated the demand with regard to payment made to Goldman Malls Pvt.Ltd. for the reason that the payments were made for business exigencies as well as Goldman Malls Pvt.Ltd. is not shareholder of the assessee company. We have perused the memorandum of understanding executed on 1.12.2006 between the assessee company and Goldman Malls Pvt.Ltd. placed at pages 255 to 260 of the paper book filed by the assessee. Under this agreement, the assessee had agreed to advance upto 5 crores to Goldman Malls Pvt.Ltd. to enable it to acquire the title and ownership rights of the land for the projects and to incur other costs and expenses in relation thereto. This agreement was produced before the CIT(A) and was sent to the AO for his comments. Though the AO stated in the remand report that the assessee has filed the copy of the agreements and memorandum of understanding executed by the parties and other connected papers, he has not given any adverse comment on this except reiterating that AO has made the addition within the ambit of Section 2(22)(e) of the Act. Moreover, Goldman Malls Pvt.Ltd. is not a shareholder of the assessee company. Therefore, the learned CIT(A) has rightly vacated the demand in respect of the payment made to Goldman Malls Pvt.Ltd.

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH ‘C’ : NEW DELHI

ITA Nos. 3390/Del/2010 & 3391/Del/2010

Assessment Years : 2005- 06 & 2007-08

Income Tax Officer, Vs. M/s International Land Development (P) Ltd.,

Cross-Objection Nos.218/Del/2010 & 219/Del/2010

Assessment Years : 2005-06 & 2007-08

M/s International Land Development (P) Ltd., Vs. Income Tax Officer,

ORDER

PER BENCH:

Land Development vs ITO: ITAT Delhi dismisses Revenue’s appeal on deemed dividend, upholding CIT(A)’s order vacating demand for FY 2005-06 & 2007-08.

These two appeals, filed by the Revenue are directed against the common order dated 30.4.2010 passed by learned CIT(A) in the matter of an order passed u/s 201/201(1A) of the Income-tax Act, 1961 for the FY 2003-04, 2004-05 and 2006-07 relevant to the AY 2004-05, 2005-06 & 2007-08 respectively. In these appeals, we are concerned only with the AY 2005-06 & 2007-08.

2. The assessee has also filed cross-objections arising from the said appeals.

3. We shall first take the appeal filed by the Revenue pertaining to the FY 2004-05 relevant to AY 2005-06.

4. The grounds of appeal raised by the Revenue are as under:-

“On the facts and in the circumstances of the case as well as in law, the learned CIT(A) has erred in

(i) Holding that the relevant payments could not be treated as deemed dividend in view of the fact that payment under consideration has not been assessed as deemed dividend in the hands of the recipients in the relevant assessment year. Such finding of the ld. CIT(A) is incorrect in law because assessment of income in the hands of recipient is not a pre condition to determine the liability of TDS. The liability to deduct tax, which is only a mode of collection arises once the nature of payments fulfills the conditions mentioned in the relevant section.

(ii) Ignoring the section 194 makes the principal officer of a company responsible to deduct tax before making any payment of any dividend within the meaning of section 2(22)(e) of the I.T.Act which no where talks of assessment of such dividend in the case of recipient.

(iii) Holding that payment to M/s ALM Info tech City (P) Ltd. and International Land Developers Ltd. could not be treated as deemed dividend on the ground that payment to above entities (ALM & Intl) is very much covered in the definition of dividend u/s 2(22)(e) of I.T.Act in view of language of that section ” ………Or to any concern in which such shareholder is a member of a partner and in which he has a substantial interest         “

(iv) Ignoring the fact that Sh.Alimuddin who is “such shareholder” (as he holds 36.79% of shares of assessee company) holds 21.19% share in ALM Info tech City (P) Ltd and therefore has substantial interest in that concern and accordingly the payment to that concern (ALM Info tech City (P) Ltd) is to be treated as dividend.

(v) Holding that payments to Alimuddin and Goldman Malls Pvt.Ltd. were made for business exigencies/purposes ignoring the fact that no such contention was taken before the AO during the proceedings u/s 201 of Income Tax Act.

Moreover, the payment has been shown in the loans and advances account by the assessee company itself in its books of accounts.”

“5. I have considered the submissions made by the assessee, the order of the assessing officer as well as the remand report sent by the AO in this matter and I am convinced with the assessees arguments for two reasons:-

1. M/s ALM Infotech City Pvt.Ltd. and M/s InternationalLand Developers Ltd. are not a share holder in the assessee company, therefore provisions of section 2(22)(e) of the IT Act are not applicable in respect of the paymentof advance/security deposit made by the assessee company and also in view of the fact that assessments of the recipient for the year under reference have alreadybeen   completed and deemed dividend has  not been assessed in their hands.

2. In the case of Alimmuddin and Goldman Malls P.Ltd. although both are share holders in the assessee company, it has been demonstrated with evidence that the payments were made for business exigencies/purposes and in view of the decision of Hon’ble Delhi High Court in the case of CIT vs. Sunil Sethi, ITA 569/2009 these payments cannot be treated as deemed dividend and in any case the assessment of ALM Infotech City Pvt.Ltd. and Allimuddin has since been completed and no income on account of been dividend has been assessed in the hands of either ALM Infotech City Pvt.Ltd. or Allimuddin.

In view of facts as discussed above I hold that the assessee company cannot be held as assessee in default u/s 201/201(1A) read with section 194 of IT Act for non deduction of TDS on total payment of Rs.95,196/- for F.Y. 2003-04, Rs.3,47,628/- for F.Y. 2004-05 and Rs.36,83,053/- for F.Y. 2006-07. I, therefore delete the above demand of raised by the u/s 201/201(1A) of I.T.Act.”

(i)  The shareholder should be a registered shareholder, and

(ii) The shareholder should also be a beneficial owner of the shares.

13. Since M/s ALM Info tech City (P) Ltd. is admittedly not a registered shareholder of the assessee company notwithstanding the fact that its shareholder Shri Alimuddin holds shares in M/s ALM Infotech City (P) Ltd., the provisions of Section 2(22)(e) cannot be applied to any payment made to M/s ALM Infotech City (P) Ltd. In this connection, reliance may be placed upon the decision of Hon’ble Rajasthan High Court in the case of CIT Vs. Hotel Hilltop – 313 ITR 116 where the Hon’ble High Court held that where the firm was not a shareholder in Hotel Hilltop and only its two partners were shareholders in Hotel Hilltop holding 23% and 25% shares, the advance paid to firm could not be assessed in the firm’s hands as deemed dividend. This could be deemed dividend in the hands of its partners. In the case of CIT Vs. Universal Medicare – 190Taxman 144 (Mum), the Hon’ble Bombay High Court has also taken a view that all payments by way of dividend have to be taxed in the hands of the recipient of the dividend, namely, the shareholder. The legal position is that a dividend has to be taxed in the hands of a shareholder. Consequently, in that case, the payment, even assuming that it was dividend, would have to be taxed not in the hands of the assessee but in the hands of the shareholder. In this view of the matter, we, therefore, hold that Section 2(22)(e) is not applicable insofar as payment made to M/s ALM Info tech City (P) Ltd. is concerned as M/s ALM Infotech City (P) Ltd. is not the shareholder.

14. It was further contended by the learned counsel for the assessee before the learned CIT(A) that the payment to M/s ALM Info tech City (P) Ltd. was made on commercial consideration. This fact emphasized by the assessee was brought to the knowledge of the AO by the learned CIT(A) with a direction to send a remand report. A copy of MoU dated 15.3.2002 entered into with M/s ALM Infotech City (P) Ltd. has been placed in the paper book at pages 23 to 29 filed before us under which the assessee had agreed to advance a sum of 30 lakhs to M/s ALM Info tech City (P) Ltd. to enable it to acquire the title and ownership right of the lands for the projects. However, in the remand report, the AO has reiterated his order passed u/s 201/201(1A) and has not disputed the facts so submitted by the assessee before the learned CIT(A). Therefore, the learned CIT(A) has taken a view that M/s ALM Info tech City (P) Ltd. is not a shareholder in the assessee company and provisions of Section 2(22)(e) are not applicable in respect of the payment of advance/security deposit made by the assessee company. In the course of hearing of this appeal, the learned counsel for the assessee has submitted that the payment to M/s ALM Info tech City (P) Ltd. was made under a MoU dated 15.3.2002 to acquire land on behalf of the assessee and was not an amount advanced by way of loan. This fact has not been disputed by the AO in his remand report as so stated by the CIT(A) in his order. It was further contended by the learned counsel for the assessee before the learned CIT(A) that the payment made to M/s ALM Infotech City (P) Ltd. has not been assessed as deemed dividend in its hands while completing the assessment u/s 143(3) of the Act and learned CIT(A) has taken this fact into account, and he set aside the order of the AO also in view of the fact that deemed dividend has not been assessed in the hands of M/s ALM Info tech City (P) Ltd. In the light of discussions made above, we, therefore, do not find any infirmity in the order of learned CIT(A) in vacating the demand of TDS with regard to payment made to M/s ALM Info tech City (P) Ltd.

15. With regard to payment made to Shri Alimuddin, the assessee submitted before the learned CIT(A) that the payment made to Shri Alimuddin was not in the nature of any loan or advance but was made in the regular course of assessee’s business in terms of MoU for the acquisition of land on behalf of the assessee) and, therefore, the payment is not covered by Section 2(22)(e) of the Act. In support of the contention that the money advanced in the regular course of business cannot be treated as deemed dividend, number of decisions were cited by the learned counsel for the assessee before the learned CIT(A).

16. After considering the assessee’s submission and AO’s order, the learned CIT(A) has observed that it has been demonstrated with evidence that the payment was made for business exigencies/purposes and in view of the decision of Hon’ble Delhi High Court in the case of CIT Vs. Sunil Sethi – ITA No.569/2009, payment made to Shri Alimuddin cannot be treated as deemed dividend. The learned CIT(A) further observed that the payment made to Shri Alimuddin has not been assessed as deemed dividend in his hands.

17. In the course of hearing of this appeal, the learned counsel for the assessee submitted that an agreement was executed between assessee and proprietary concern of Shri Alimuddin to acquire loan suitable for the forthcoming project of the assessee company and the said amount was not utilized by Shri Alimuddin for his personal purposes. It was thus contended that the payments made by the assessee were for business exigencies as per agreement executed between the parties. A copy of memorandum of understanding executed on 5.7.2002 with M/s ALM International, a proprietary concern of Shri Alimuddin has been placed before us at pages 75 to 78 of the paper book filed by the assessee where under the assessee had agreed to advance upto 1 crore to him to enable him to acquire the title and ownership rights of the land for the projects and to incur other costs and expenses in relation thereto. This agreement is not found to be bogus or sham by the AO by making any comment in the remand report. It was further submitted that these facts were placed before the AO, and AO has not made any comment on the assessee’s submission, but merely stated that he supported the order passed by him.

18. It is not in dispute that the moneys advanced in the regular course of business cannot be treated as deemed dividend as held in the following cases:-

(i) CIT Vs. Ambassador Travels (P) Ltd. – 173 Taxman 407 (Del).

(ii) CIT Vs. Raj Kumar – 181 Taxman 155 (Del).

(iii) CIT Vs. Nitin Shantilal Parikh – Income Tax Reference No.66 of 1999 (Gujarat).

(iv) CIT Vs. Creative Dyeing & Printing (P) Ltd. – 184 Taxman 483 (Del).

(v) CIT Vs. Sunil Sethi – ITA 569/2009.

(vi) Atul Mittal in ITA No.3863/Del/2002 (ITAT Del).

(vii) Nigam Chawala (page 303 of the paper book).

19. In the case of CIT Vs. Sunil Sethi – ITA No.569/2009, the Hon’ble High Court of Delhi has held that since the amount of 30 lakhs which was given to the assessee was in the nature of imprest payment, the same could not be treated as deemed dividend u/s 2(22)(e) of the Act. In this case, a sum of 30 lakhs was given to the assessee for the purpose of making advance in respect of certain land dealings which were proposed to be entered into by the company through the assessee and the Tribunal noted that no material was brought on record to suggest that whatever was explained by the assessee was incorrect.

20. In the case of CIT Vs. Creative Dyeing & Printing (P) Ltd. – 184 Taxman 483, the Hon’ble High Court has held that the amount advanced for business transaction between the parties would not fall within the definition of deemed dividend u/s 2(22)(e) of the Act. In this case, the Hon’ble Delhi High Court has followed its own decision in the case of CIT Vs. Raj Kumar – 181 Taxman 155 (Del). In the course of hearing of this appeal, the learned DR has not been able to controvert the fact that the payment was made by the assessee to Shri Alimuddin under MoU for the acquisition of land on behalf of the assessee nor this fact was disputed by the AO in his remand report.

21. The AO’s remand report dated 27.9.2009 has been placed at pages 297 to 299 of the paper book filed by the assessee. In this remand report, the AO has admitted the fact that the assessee has filed the copy of agreements and memorandum of undertaking executed by the parties and other connected papers, and the order of the party for the relevant assessment year was also filed. The AO further stated that assessee has also explained the business exigencies under which such amounts were paid. He further stated that assessee has in support relied upon the decisions passed at ITAT Delhi Bench in the case of Smt.Nigam Chawala – 28 SOT 503 (Del), Bombay Oil Industries Ltd. – 28 SOT 383 (Mum). The AO, therefore, concluded that the assessee has supported its contentions by decisions. The AO stated merely in the remand report that he has made the addition within the ambit of Section 2(22)(e) of the act. It is thus clear that no adverse comments have been given by the AO in respect of the agreements and memorandum of undertaking executed by the parties on which reliance was placed by the assessee.

22. In the light of the discussions made above, we, therefore, hold that CIT(A) was justified in vacating the demand in respect of payment made to M/s ALM Infotech City (P) Ltd. as well as to Shri Alimuddin.

23. Now, we shall come to the appeal for AY 2007-08.

24. In this year, the AO has treated the following payment in the nature of deemed dividend u/s 2(22)(e) of the Act:-

(i) Payment to International Land Developers Ltd. – 3,15,515/-.

(ii) ILD Trade Centres – 37,17,194/-.

(iii) Shri Alimuddin – 10 lakhs.

(iv)  Goldman Malls Pvt.Ltd. – 1,00,25,000/-.

25. With regard to the payment of 3,15,515/- paid to International Land Developers Ltd., the assessee submitted before the learned CIT(A) that payment to M/s International Land Developers Ltd. is not covered by Section 2(22)(e) of the Act inasmuch as this concern is not a shareholder of the assessee company. The learned CIT(A) deleted the addition for this reason also. In the light of our view taken in AY 2005-06, we hold that payment made to International Land Developers Ltd. does not come under the ambit of Section 2(22)(e) of the Act inasmuch as International Land Developers Ltd. is not a shareholder of the assessee company.

26. Now, we come to payment of 37,17,194/- made to ILD Trade Centres a business concern of M/s ALM Infotech City (P) Ltd. In this respect, the learned counsel for the assessee has invited our attention to the copy of agreement executed between the assessee and M/s ALM Infotech City (P) Ltd. dated 20.10.2006 placed at pages 161 to 202 of the paper book. This is a developer buyer agreement dated 20.10.2006 entered into by the assessee with M/s ALM Infotech City (P) Ltd. M/s ALM Infotech City (P) Ltd. was developing and constructing a retail cum     commercial complex called “ILD Trade Centre”.  The assessee being allottee had agreed to purchase shop /office unit No.705 measuring 1133.74 sq.ft. for a total consideration of 39,68,090/-, out of which, a sum of 37,17,194/- was paid on 20.10.2006 and the balance sum of 2,50,896/- was agreed to be paid on delivery of possession. Thus, it is a case of business/commercial transaction and is not covered by Section 2(22)(e) of the Act.

27. Now, we come to the payment of 10 lakhs made to Shri Alimuddin. The nature of this payment has already been examined and decided by us in the AY 2005-06. The facts are identical in this year. Therefore, in the light of our decision for AY 2005-06 vide this common order, we uphold the order of CIT(A) in holding that the payment of 10 lakhs to Shri Alimuddin is not covered by Section 2(22)(e) of the Act.

28. Next payment is of 1,00,25,000/- made to Goldman Malls Pvt.Ltd. The learned CIT(A) has vacated the demand with regard to payment made to Goldman Malls Pvt.Ltd. for the reason that the payments were made for business exigencies as well as Goldman Malls Pvt.Ltd. is not shareholder of the assessee company. We have perused the memorandum of understanding executed on 1.12.2006 between the assessee company and Goldman Malls Pvt.Ltd. placed at pages 255 to 260 of the paper book filed by the assessee. Under this agreement, the assessee had agreed to advance upto 5 crores to Goldman Malls Pvt.Ltd. to enable it to acquire the title and ownership rights of the land for the projects and to incur other costs and expenses in relation thereto. This agreement was produced before the CIT(A) and was sent to the AO for his comments. Though the AO stated in the remand report that the assessee has filed the copy of the agreements and memorandum of understanding executed by the parties and other connected papers, he has not given any adverse comment on this except reiterating that AO has made the addition within the ambit of Section 2(22)(e) of the Act. Moreover, Goldman Malls Pvt.Ltd. is not a shareholder of the assessee company. Therefore, the learned CIT(A) has rightly vacated the demand in respect of the payment made to Goldman Malls Pvt.Ltd.

29. For the reasons and discussions made above, we, therefore, uphold the order of CIT(A) in vacating the demand pertaining to the AY 2007-08.