The facts related to this issue in brief are that the AO, during the course of assessment proceedings noticed that the assessee had taken an advance of Rs. 10,00,000/- from M/s. Precision Stock and Credit Pvt. Ltd. in which Shri Jasbir Singh held 22,000 out of 1,03,500 shares i.e. a beneficial holding of 21% shares with voting right. He further, observed that Shri Jasbir Singh had holding of 24.52% in assessee’s company and that the balance sheet of M/s Precision Stock and Credit Pvt. Ltd. revealed that it had an accumulated profit of Rs. 579203/- in the beginning of year, thus, satisfying the conditions of applicability of Section 2(22)(e) of the Act. The AO asked the assessee to explain as to why the amount of advance received to the extent of accumulated profits of M/s Precision Stock and Credit Pvt. Ltd. may not be taxed as deemed dividend as per the provisions of Section 2(22)(e) of the Act.
The Assessee submitted that the advance was received against the land which was in the nature of normal business transaction, M/s Precision Stock and Credit Pvt. Ltd. had no accumulated profits and the advance was given only out of share premium available with that company which could not be termed as part of accumulated profit as such the provisions of section 2(22)(e) of the Act were not applicable. Besides the assessee submitted that since the assessee company was not a share holder of M/s Precision Stock and Credit Pvt. Ltd. and just because of a common share holder the addition u/s 2(22)(e) of the Act cannot be made.
The AO, however, was not satisfied from the submission of the assessee by observing that the balance sheet of M/s Precision Stock and Credit Pvt. Ltd. revealed that accumulated profits of Rs. 5,79,203/- was included in reserve and surplus as per Schedule II. He also mentioned that a share premium of Rs. 66,15,000/- was added during the year beside the profit for the year of Rs. 99,213/- which gave the total reserve and surplus of Rs. 72,93,433/-. The AO accordingly made the addition of Rs. 5,79,203/- by invoking the provisions of Section 2(22)(e) of the Act. Reliance was placed in the judgment of the Hon’ble Bombay High Court in the case of Wall Chand & Co. Ltd. vs. CIT (1975), 100 ITR 598.
It is noticed that the assessee entered into an agreement with M/s Precision Stocks and Credit Pvt. Ltd. on 28.3.2006 for the sale of agricultural land and received Rs. 10,00,000/- vide cheque no. 406306 of Cooperative Bank Ltd, the same is evident from page no. 51 to 53 of the assessee’s paper book which is the copy of aforesaid agreement. The assessee also issued receipt for the above said amount copy of which is placed at page no. 54 of the assessee’s paper book. From the above facts, it is clear that the assessee who was engaged in the real estate business received an advance against the sale of land, therefore it was in the nature of business transaction.
The assessee company is not the shareholder in M/s Precision Stock & Credit Pvt. Ltd. and received the amount from the said company in the course of ordinary business activities. Therefore, in view of ratio laid down by the Hon’ble Jurisdictional High Court in the aforesaid referred to case, the provisions of section 2(22)(e) of the Act were not applicable. We,therefore, by considering the totality of the facts deem it appropriate to delete the impugned addition made by the AO and sustained by the Ld. CIT.
Compiled by Our Team member CA Amit Handa
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