Deemed dividend provisions not applicable on Normal Business Advances

ACIT Vs Shri Anumod Sharma (ITAT Delhi)

Analysis of the facts of the case referred by the AO and facts of the case of the assessee, it is quite evident that the facts of the referred cases in the impugned order are altogether different from the facts of the assessee, keeping in view of the fact that the assessee has never taken any loan during the financial year under consideration from M/s Apra Auto (India) Private Limited and also did not have any debit balance in the name of the assessee in the books of account of the said company.

 In nutshell, the assessee has also not received any advance in the nature of loan or advances as contemplated in the section 2(22)(e) of the Income tax Act, 1961 but received advance against sale of commercial space developed by the assessee on his own land in collaboration with M/s Unitech Limited as per Buyer’s agreement. We find that provisions of section 2(22)(e) of the Income tax Act, 1961 are not applicable in case of the assessee as the assessee has received advance of Rs.5,62,00,000/-from the said company against sale of commercial space in Signature Tower – II, Sector – 15, Gurgaon, Haryana. Since, the said receipts of advance of Rs.5,62,00,000/- against sale of commercial space is not a receipt in the nature of loan or advance as contemplated in section 2(22)(e) of the Income tax Act, 1961 which attracts the provisions of in that section as the said advance is in the nature of business advance which did not fall within the ambit of provisions of section 2(22)(e) of the Income tax Act, 1961.

FULL TEXT OF THE ITAT JUDGEMENT

The present appeal has been filed by the revenue against the order of ld. CIT (A)-XXVI, New Delhi dated 12.10.2015.

2. The only one ground raised in this appeal reads as under:

“1. On the facts and in the circumstances of the case, the ld. CIT (A) has erred in law in deleting the additions of Rs.10,57,01,194/- made u/s 2(22)(e) of the I.T. Act on account of deemed dividend.”

3. The facts have been taken from the order of the ld. CIT (A), the record of the revenue and the paper book filed. The AO, in the assessment order, has highlighted the fact that the assessee was holding 86.67% shares in M/s Apra Auto India P. Ltd and had been in receipt of amount running into Rs.10.57 crores from the account of M/s Apra auto India P. Ltd. Keeping in view the fact, that the said company that is M/s. Apa Auto India p. Ltd. was also having accumulated profits of Rs. 21.65 crore, the amount so received by the assessee has been treated as deemed dividend as per the Section 2(22)(e) of the Income Tax Act, 1961.

4. The assessee claimed before the AO that the amount received from M/s Apra Auto India Pvt. Ltd. represented following three distinct transactions:

“i) Advance against commercial building Rs. 5,62,00,000/-

ii) Anumod Sharma (expense account) Rs. 73,76,584/-

iii) Anumod Sharma ledger account 6,00,84,793/-“ (showing Rs. 1,95,390/- as credit Balance)

5. The AO after considering the assessee’s explanation on the issue highlighted that claim of receiving advance against commercial building was a ploy to escape the deeming provision of section 2(22)(e). The AO highlighted that agreement to sell between the assessee and M/s Apra Auto India Pvt. Ltd. was dated 03.04.2011 in which reference of bank transaction dated 08.04.2011 was recorded representing a sum of Rs.1.40 crore given as advance payment and credited in assessee’s bank account on 08.04.2011. The impugned agreement also recorded that the balance payment of Rs.5.60 crore had to be paid by 31^st December 2011 and in the event of non compliance the agreement was to be terminated leading to refund of advance payment without interest. The AO concluded that the claim of an agreement to sell put forward by the assessee was a colourable device intended to escape the provision of section 2(22)(e). It was also highlighted that similar pattern of receipt of amount running into crores was evident from the bank statement of early years. The AO also held that the expenses paid or amount transferred to different persons by M/s Apra Auto India Pvt. Ltd. on behalf of the assessee also came under the purview of deemed dividend. The AO placed reliance on the following judgments:

> Walchand & Co. Ltd. vs CIT (1975) 100 ITR 598(Bom)

> CIT vs. K. Shrinavasan 50 ITR 788

> CIT vs. P. Sarada 154ITR 387 (1985) (Mad)

> MD Jindal vs. CIT 164 1TR 028 (Cal) (1987)

> Tarulata Shyam vs. CIT 108 ITR 345 (1977)(SC)

> Rajesh P. Ved vs. AC1T 001 ITR 275 (ITAT Mumbai) (2010)

> Ms. Sarada P vs. CIT 229 ITR 444(SC) (1998)

6. During the arguments before us, the ld. DR argued that the trifurcation of the total amount into three different heads as

i) Advance against commercial building Rs. 5,62,00,000/-

ii) Anumod Sharma (expense account) Rs. 73,76,584/-

iii) Anumod Sharma ledger account 6,00,84,793/-

is a cover up exercise to camouflage the issue of deemed dividend u/s 2(22)(e) of the Act. The assessee has re-casted his account into receipts, loans, advances, expense account and ledger accounts. It was argued that the initial submissions, there was no such differentiation such loans and advances rather the entire amount is shown as advance. It is the afterthought of the assessee to built a story of advance against commercial building in support of which buyer’s agreement dated 03.04.2011 has been prepared on a non-judicial stamp paper of Rs.100/-which was purchased on 17.09.2010 between the assessee who is the main promoter and holding 86.67% of shares in M/s Apra Auto (India) Pvt. Ltd. the ld. DR vehemently argued that the buyer’s agreement does not even bear complete details of the two witness, not been verified by the oath commissioner and also not registered. It is a ploy to escape the rigors of provisions of Section 2(22)(e). The documents like buyer’s agreement and the trifurcated ledger accounts of the assessee in the books of said company appear to have been prepared in so haste that in those ledger accounts the name of the bank in all entries (Debit/Credit) has been mentioned as bank of Baroda whereas all the transactions have been made through bank account of assessee as well as of the company in Nainital bank. She has taken us to the contents of the assessment order along with the Annexures which have been duly perused by us.

7. The ld. AR relied on the submissions made before the ld. CIT (A) and reiterated the same and relied on the order of the ld. CIT (A).

8. Heard the arguments of both the parties and perused the material available on record. The assessee is also engaged in the business of real estate development in collaboration with M/s Unitech Limited and was developing Signature Tower – II, Sector – 15, Gurgaon, Haryana. The assessee entered into buyer’s agreement with intending buyers in respect of commercial space in the said property and received advances during the financial year under consideration. The assessee has also entered into Buyer’s Agreement with M/s Apra Auto (India) Private Limited for sale of 7000 Sq. Ft. commercial space at Signature Tower – II, Sector – 15, Gurgaon, Haryana for a consideration of Rs.7,00,00,000/- and has received advance of Rs.5,62,00,000/- against sale of such commercial space from M/s Apra Auto (India) Private Limited. However, the said company was unable to pay the total consideration upto scheduled date as per Clause 5 and 6 of Buyer’s agreement, therefore the said agreement was terminated and the assessee refunded the said advance received to the said company during the financial year under consideration. The amount of Rs.10,87,21,000/- shown as given to the assessee and amount of Rs.10,84,00,000/- received from the assessee includes amount paid on account of advance of Rs.5,62,00,000/- against purchase of commercial space and also refund of Rs.5,62,00,000/- after termination of the said agreement.

9. We find that the assessing officer has invoked section 2(22)(e) of the Income tax Act, 1961 by treating the entire payments made by M/s Apra Auto (India) Private Limited only on the basis that the assessee has received huge amount throughout the year from the said company. We also note that the assessee has not taken any loan from M/s Apra Auto (India) Private Limited during the financial year under consideration and had credit balance during the entire financial year in the books of the said company. Details of loan given by the assessee to M/s Apra Auto India Private Limited and repayment received from the said company during the financial year under consideration along detail of balance is as under:

10. From the above, it can be gauged that the assessee had credit balance during the entire financial year in the books of the M/s Apra Auto India Private Limited. Therefore, it can be said that the assessee has not taken any loan from the said company, while the assessee has actually given loan and received repayment during the financial year under consideration of loan given to M/s Apra Auto India Private Limited.

11. We find that the assessee has entered into buyer’s agreement with M/s Apra Auto (India) Private Limited for sale of 7000 Sq. Ft. commercial space at Signature Tower – II, Sector – 15, Gurgaon, Haryana for a consideration of Rs.7,00,00,000/- and received advance of Rs.5,62,00,000/- against sale of such commercial space from M/s Apra Auto (India) Private Limited. As per the buyer’s agreement, the buyer, M/s Apra Auto (India) Private Limited has to pay total consideration upto 31st December 2011. The buyer has paid Rs.1,40,00,000/- as advance payment to the assessee vide cheque no. 845668 drawn on the Nainital Bank Limited, Gurgaon in favour of the assessee upon signing of the said buyer’s agreement.

12. As per clause of the said agreement, in case of default in payment the owner (assessee) reserves right to terminate the agreement and refund advance to the buyer (M/s Apra Auto (India) Private Limited) without any interest or additional payment made by the buyer. The relevant portion of clause of buyer’s agreement is reproduced as under:

“6. That the timely payment, mentioned at point no. 5 above, which shall commence from April 2011 onwards in lieu of total consideration is the essence of this Agreement. It shall be incumbent on the buyer to strictly comply with the terms of payment. In the event of any breach of the payment which is part of this Agreement, the Owner may, at its sole discretion reserves the right to terminate this Agreement and forthwith refund the advance payment without any interest and /or the additional payment made by the Buyer if any to the Buyer and the Buyer shall be left with no Lien, right, title, interest or claim of whatsoever nature in and upon the said Premises and the Owner shall be entitled to re-sell the said Premises at its sole discretion and the Buyer shall not be object or demur to the said re-sale.”

13. Since, M/s Apra Auto (India] Private Limited was unable to pay the total consideration upto scheduled date as per Clause 5 and 6 of Buyer’s agreement, therefore the said agreement was terminated and the assessee refunded the said advance received against sale of commercial space at Signature Tower – II, Sector – 15, Gurgaon, Haryana, to the said company during the financial year under consideration. It is noted that during the financial year 2011 – 12 an amount of Rs.10,87,21,000/- has been paid to the assessee and Rs.10,84,00,000/- has been received back from the assessee. Thus, the amount of Rs.10,87,21,000/- shown as given to the assessee and amount of Rs.10,84,00,000/- received from the assessee which includes amount paid on account of advance of Rs.5,62,00,000/- against purchase of commercial space and also refund of Rs.5,62,00,000/- after termination of the Buyer’s agreement.

14. Further, it can be found that the assessee has also entered into similar buyer’s agreement dated 18.04.2011 with M/s NH Learning Infrastructure Services Limited during the financial year under consideration. The buyer’s agreement was executed for sale of 5000 sq ft to M/s NH Learning Infrastructure Services Limited for a consideration of Rs.5,00,00,000/- out of which amount of Rs.2,50,00,000/- has been received by the assessee during the financial year under consideration as advance as per the terms and conditions of the agreement. The copy of such buyer’s agreement with M/s NH Learning Infrastructure Services Limited along with confirmation from the said company for payment of Rs.2,50,00,000/- to the assessee during the financial year under consideration is similar to the one entered with M/s Apra Auto (India) Pvt. Ltd. The said agreement with M/s NH Learning Infrastructure Services Limited had been terminated during the financial year under consideration and the assessee has repaid an amount of Rs.2,30,00,000/- out of advance received amounting to Rs.2,50,00,000/- up to 31.12.2012 to M/s NH Learning Infrastructure Services Limited.

15. Hence, as per the facts it is quite evident that the assessee has not taken any loan from M/s Apra Auto (India) Private Limited instead he has given loan to the said company and received advances from the said company against sale of commercial space as per buyer’s agreement and the same was refunded during the financial year under consideration on termination of buyer’s agreement as per its clauses. It is to note that the same are in the normal course of business of the assessee and the said company. The provisions of section 2(22)(e) of the Income tax Act, 1961 is not applicable when no loan was taken and received advance under the commercial expediency in the normal course of business. For the sake of convenience, relevant text of section 2(22)(e) of the Income tax Act, 1961 is reproduced as under:

“2(22) “dividend” includes—

(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;”

16. Hence, analysis of the facts of the case referred by the AO and facts of the case of the assessee, it is quite evident that the facts of the referred cases in the impugned order are altogether different from the facts of the assessee, keeping in view of the fact that the assessee has never taken any loan during the financial year under consideration from M/s Apra Auto (India) Private Limited and also did not have any debit balance in the name of the assessee in the books of account of the said company.

17. In nutshell, the assessee has also not received any advance in the nature of loan or advances as contemplated in the section 2(22)(e) of the Income tax Act, 1961 but received advance against sale of commercial space developed by the assessee on his own land in collaboration with M/s Unitech Limited as per Buyer’s agreement. We find that provisions of section 2(22)(e) of the Income tax Act, 1961 are not applicable in case of the assessee as the assessee has received advance of Rs.5,62,00,000/-from the said company against sale of commercial space in Signature Tower – II, Sector – 15, Gurgaon, Haryana. Since, the said receipts of advance of Rs.5,62,00,000/- against sale of commercial space is not a receipt in the nature of loan or advance as contemplated in section 2(22)(e) of the Income tax Act, 1961 which attracts the provisions of in that section as the said advance is in the nature of business advance which did not fall within the ambit of provisions of section 2(22)(e) of the Income tax Act, 1961.

18. We have gone through the rationale given by the ld. CIT (A), the relevant operative portion is as under:

“9. I have considered the specific arguments raised by the appellant during appellate as well as assessment proceedings and the comments of the AO/JCIT in the remand report. It is seen that the AO, in the assessment order has highlighted receipt of amount of Rs 10,08,41,000 from M/s Apra Auto India P. Ltd and the said receipt of payments by the appellant have been highlighted in the assessment order in the form of a account which does not have a opening balance or the closing balance. It is important to appreciate that the appellant on being confronted with the proposed addition had specifically claimed that financial transactions of the appellant with M/s Apra Auto India P. Ltd comprised of 3 distinct types as under:-

(i) Advance against commercial spacing 5,62,00,000

(ii) Anumod Sharma ledger account 6,00,84,793

(iii) Anumod Sharma (Expense account) 73,76,584

10. The AO had rejected the appellant’s claim of their being 3 distinct types of transaction on the ground that it was only intended to cover up the issue of deemed dividend u/s 2(22)(e). The AO in support of his conclusion has highlighted that the agreement between M/s Apra Auto India P. Ltd and the appellant for proposed sale of commercial space was merely to avoid the applicability of provisions of section 2(22)(e) as the said agreement was on non-judicial stamp paper of Rs 100. It was further highlighted by the AO that the assessee has taken such loans and advances from same company running into crores of rupees in the earlier years as well. The appellant in support of the impugned agreement to sell being in the normal course of business had highlighted another proposed sale to N.H. Learning Infrastructure Services Ltd vide agreement dated 18.04.2011 wherein the appellant had received an amount of Rs 2,50,00,000 out of total agreed amount of Rs 5 crores. The said deal also did not fructify into eventual sale and was terminated leading to refund of the said amount by the appellant to the tune of Rs 2,30,00,000 during the year only. It is seen that the AO while highlighting the transaction between the appellant and M/s Apra Auto India P. Ltd did not discuss as to how the said deal was different from a deal for proposed sale between the appellant and N.H. Learning Infrastructure Services Ltd. In view of this omission, the AO during the appellate proceedings was directed to offer his comments vide this office letter dated 30.07.2015. The AO vide his report dated 29.09.2015 submitted his comments.

11. The perusal of the order of the AO at page no 9 shows that a issue has been raised that the assessee at the time of submission before him submitted ledger account of appellant’s dealing with Apra Auto (India) P Ltd and the name of the bank was written as Bank of Baroda whereas actual transaction had taken place through bank of Nainital. The AO on the basis of this mistake opined that the appellant was in a haste because of which the incorrect submission had been made. The AR, during the course of appellate proceedings, has submitted his explanation to clarify the issue as raised by the AO in the assessment order. The submission of the appellant are contained at para 1.2.32 to 1.2.35 of his reply dated 29.07.2015. It has been stressed that the mistake had crept in on account of a technical flaw in the accounting software used by the appellant namely TALLY in which the name of first entry on a single day crops up on the query being issued to the software and on this account, the later entry gets eclipsed for which manual cross check has to be done so as to correctly present the factual picture. The mistake, however, has been confirmed to the extent that at the time of submission, the printout taken from the computer was having the name of transaction entered into with bank of baroda being the first entry on that day. In the circumstances, I don’t consider it any issue of material consequence as factually, the amount in question has been transacted through the Nainital bank only.

12. The AO had further highlighted in the assessment order at page no 9 that the appellant had taken loans and advances from Apra Auto (India) P Ltd in earlier years as well. In this regard, the appellant was directed to file his ledger account with Apra Auto (India) P Ltd and vice- versa so as to see if the facts were as highlighted by the AO in the assessment order. It is seen that for the FY 11-12 i.e. preceding FY, the appellant had a outstanding from Apra Auto (India) P Ltd as on 01.04.2010 to the tune of Rs 1,11,43,224 and during the entire year, various payments have been made either by the company or by the appellant but at no point of time, there is any net outstanding by the appellant towards Apra Auto (India) P Ltd. In view of this, the observations of the AO as mentioned above does not seem to have any factual legs.

13. The perusal of AO/JCIT’s comments in the remand report clearly shows that no distinction between the two deals has been pointed out either during assessment proceedings or the appellate proceedings. It has been the claim of the appellant that both the deals were entered into during the year under consideration in the normal course of business and the AO could not accept one with the outside party and reject one with the associate corporate entity. It is seen that the appellant had received an amount of Rs.2,50,00,000 from N.H. Learning Infrastructure Services Ltd in pursuance of the agreement to sell and the said receipt of amount has been accepted as such by the AO which means that the AO was satisfied with regard to the identity, creditworthiness and genuineness of the transaction so as not to invite any deeming provisions u/s 68 with reference to the said amount. This being so it was not open to the AO to treat another exactly similar transaction entered into by the appellant with the company in which he is substantially interested as not being in the ordinary course of business. Nothing has been highlighted to draw any distinction between the two transactions as the language as well as the judicial stamp paper used for both the transactions is exactly the same. Therefore, I don’t find logic in the conclusion of the AO in treating the impugned transaction with M/s Apra Auto India P. Ltd as being one for the purposes of avoiding the provisions of section 2(22)(e). Here, it would be important to note that the appellant had an amount receivable to the tune of Rs 78,84,793 and Rs 1,95,390 as on 31.03.2011 and 31.03.2011 from M/s Apra Auto India P. Ltd. The perusal of the copy of account shows that during the entire period of the FY under consideration, there have been amounts outstanding towards M/s Apra Auto India P. Ltd rather than the other way round. Therefore, apart from receipt of amounts on account of the proposed commercial sale by the appellant, no amounts had been received by the appellant from M/s Apra Auto India P. Ltd. The amounts that had been received were on account of repayments by M/s Apra Auto India P. Ltd to the appellant rather than other way round. The transaction of proposed sale of commercial space, being on commercial considerations and in the normal course of business of the appellant clearly comes in the exception clause of section 2(22)(e). In view of the above facts and circumstances of the case, the addition made by the AO to the tune of Rs 10,57,01,194 is directed to be deleted.”

19. Having gone through the entire factum of the issue, the case laws cited by both the parties, rationale of the ld. CIT (A), keeping in view the fact that it is the company which owes the assessee the money rather vice-versa, it is unequivocally proved that the advance received from the company by the assessee is in the nature of trade advance against the booking of commercial place being built by the assessee, we hereby decline to interfere with the order of the ld. CIT (A) in deleting the addition made by the AO u/s 2(22)(e).

20. In the result, the appeal of the revenue is dismissed.

Order Pronounced in the Open Court on 26/12/2019.