ACIT Vs. Harshad V. Doshi-ITAT Chennai
Order
This is a departmental appeal. Grievance is that Commissioner (Appeal) deleted additions made by the assessing officer under section 2(22)(e) of the Income Tax Act, 1961 (for short `the Act’) on account of advances paid by one M/s Doshi Housing Ltd. Rs. 3,19,82,112 and rental advance of Rs.19,89,000 paid by the same company to the assessee. According to the revenue Commissioner (Appeal) did not consider the decision of Hon’ble Jurisdictional High Court in the case of CIT v. P.K.Abubucker (2003) 259 ITR 507 (Mad) and erred in considering that the payments made by DHL to assessee were driven by business consideration.
2. Short facts apropos this are that assessee the managing director of a company by name M/s Doshi Housing Ltd. (DHL for short) was having substantial holdings of shares, therein whereby any advances or loans received by him from the said company would invite application of section 2(22)(e) of the Act. In addition to being the managing director of DHL, assessee was also partner in various constructions firms viz. a) Sanghvi & Doshi Construction, b) Mahalakshmi Builders, c) Doshi Construction, d) Doshi & Doshi, e) Shree Siddachal Construction f) Sri Mahalakshmi Construction and g) Mahalakshmi Foundations. DHL was a company which was engaged in the business of property development. Other firms mentioned above in which assessee was a partner, were also in the related business only. During the course of assessment proceedings, from the Balance sheet filed by DHL for the relevant previous year, it was noted by the assessing officer that their Schedule showing sundry creditors, reflected assessee to have obtained an advance of Rs. 3,87,53,235. A rental advance of Rs.19,89,000 was also seen.
3. Assessee was queried as to why provisions of section 2(22)(e) should not be applied and the above sums considered as deemed dividend in his hands. Response of the assessee was that all the advances received were for acquiring land which was to be developed by DHL and the decision to hold the ownership different from that of the said company, was a pure business decision, for reducing the cost of registration as per Tamil Nadu Stamp Act, 1974. According to the assessee the usual business practice was to pay certain deposits to the land owners and take up development work thereafter. It was argued by the assessee that such decision to purchase the land through the assessee, who was the managing director of DHL, was purely a business decision of the company and it was not for any benefit for the assessee. Assessee also pointed out that such amounts received by him from DHL, were adjusted against payments made to the sellers of the land, immediately on receipt and therefore the amounts should not be considered as deemed dividend in his hands.
4. Assessing officer however was not impressed. According to him, bifurcating the ownership, from development of the land was to circumvent the provisions of Tamil Nadu Stamp Act, 1974 which resulted in a loss to the State Exchequer. Therefore, in his opinion, though such a practice was customary and usual, it could not be accepted, being for an unlawful purpose. Again according to him, out of the advances received by the assessee from DHL payments made to the land vendors had resulted in the acquisition of the property in the name of the assessee and not in the name of DHL. Assessing officer also noted that assessee had shown capital gains on the sale of such land when finally effected after development by DHL to the ultimate customers, and hence it was an admitted position that assessee himself was the owner of the land. Learned assessing officer therefore came to a conclusion that the assessee having gained from the advances received from DHL, which were all credited into his personal bank account, section 2(22)(e) of the Act was clearly attracted. Assessing officer also took note of the assessment proceedings in the case of DHL wherein interest paid by the said company was disallowed for a reason that funds were diverted to the directors/shareholders. This according to him further proved that the advances received by the assessee were not in the nature of any business transactions. Thereafter, placing reliance on the decision of the Apex court in the case of Miss P.Sarada v. CIT (1998) 229 ITR 444 (SC) and the decision of the Hon’ble Jurisdictional High Court in the case of CIT v. P.K.Abubucker (supra), he held that the sum of Rs.3,59,44,112 out of total advance of Rs.3,87,53,232 and rental advance of Rs.19,89,000 received by the assessee from DHL were deemed dividend under section 2(22)(e) of the Act.
5. Challenging the above before Commissioner (Appeal) assessee made submissions as summarized here under:
(i) Assessee was acquiring the property for and on behalf of DHL Though some such properties were held in his name, on certain others only power of attorney was obtained. Whatever be the nature of holding, they were handed over to DHL for development. Only on an understanding that land will be developed by DHL, acquisition of the property was made by the assessee and therefore assessee was only a tool in the business conducted by DHL
(ii) There was no intention to circumvent the provisions of Tamil Nadu Stamp Act. Bifurcation of ownership and development was a legally permitted tax planning methodology.
(iii) Hon’ble Jurisdictional High Court had in the case of Park View Enterprises v. State of Tamil Nadu (1991) 189 ITR 192 (Mad) had held that registering authorities before whom undivided land was being conveyed could not compel production of agreement for construction and impose stamp duty on such agreement. Hence it was essential for DHL to bifurcate ownership and development so as to reduce the cost which could otherwise have been high, on account of stamp duty being levied on ultimate sale both on the land value as well as the building value, making the prices uncompetitive.
(iv) Assessee was only following a customary practice in property development business in keeping the ownership and development separate. Earnings of capital gains by the assessee were only secondary incidence and would not dilute the primary object. Primarily the transactions were all part of the property development business of DHL
(v) As for the reliance placed by the assessing officer on the assessment of DHL, assessee pointed out that Commissioner (Appeal) in the case of that company had deleted the disallowance of interest, having found that the transactions were guided by commercial expediency.
(vi) There was no benefit to the assessee since advances received from DHL were almost immediately used for paying the land owners,
(vii) Out of six properties for which funds were received from DHL, only three were registered in the name of the assessee whereas two were registered in other names. One other property was still under an agreement for sale and not registered.
(viii) Just because the assessee could get some minor benefit in subsequent years, on account of transfer of all undivided interest of land in Aspirin Garden, Vadapalani, Tambaram, Vanagaram, Vengaivasal and Villivakkam, it would not mean that the advance received by the assessee were not for the business purpose of DHL
6. In support of the above, assessee also filed letters addressed to DHL whereby various aspects relating to negotiations on the terms of purchase, were informed to the said company, copies of board resolution of DHL authorizing the assessee to negotiate and purchase properties, details of fund transferred from DHL & its utilization. For supporting its contention regarding addition of the lease deposit, assessee filed a copy of lease deed through which he had let out his property to DHL
7. Learned Commissioner (Appeal) after considering the submissions of the assessee, documents filed by him and the assessment records, came to a conclusion that there was no intention on the part of DHL to transfer funds to the assessee as advance or loan for the benefit of the assessee. According to him funds were transferred with a clear understanding that it should be utilized to develop property which was to be handed over to DHL for development. From the statement of accounts relating to the advance, learned Commissioner (Appeal) found that the money, as soon as it was received, were disbursed by the assessee to the land owners, in a sequence which did not show up any gap. Learned Commissioner (Appeal) also found strength in the argument of the assessee that DHL had entered into proxy ownership of land so as to bring down the cost of stamp duty for the prospective buyers and the managing director was the best option available with it for such proxy. Holding that section 2(22)(e) being a deeming provision had to be construed strictly, Commissioner (Appeal) was of the opinion that the advances given by DHL to the assessee were purely business transactions done by the said company for commercial expediency which took it out of the purview of section 2(22)(e) of the Act, Vis-a-vis the finding of the assessing officer that assessee had shown capital gains with regard to properties at Aspirin Garden, Vanagaram and Vengaivasal, learned Commissioner (Appeal), after verification of the assessment records, came to a conclusion that assessee had not earned any capital gains from the properties in the impugned assessment year and the capital gains which were admitted in the subsequent assessment year were only due to difference in the market value of the properties as fixed by the authorities. Learned Commissioner (Appeal) also was of the opinion that even if assessee had earned some capital gains, these were generated from the allottees or purchasers of residential apartments of DHL and hence could be considered only as a fee towards assessee’s services in negotiations and finalization of the sale of the properties. Therefore he held that there was no scope in including any of the advance paid to the assessee from DHL as deemed dividend. However, in so far as the sum of Rs.39,62,000 comprised in the total of Rs.3,59,44,112 which was the balance amount due to the said company, on purchase of 4100 sq.ft.super built area and 640 sq.ft. open terrace area made by the assessee from the said company, learned Commissioner (Appeal) held it to be deemed dividend under section 2(22)(e) of the Act, Thus effectively out of the total addition of Rs.3,59,44,112 made by the assessing officer, learned Commissioner (Appeal) deleted the whole but Rs.39,62,000. In so far as the sum of Rs. 19,89,000 paid by the said company to the assessee as advance for lease of his building for the purpose of office premises, learned Commissioner (Appeal) was of the opinion that it was only a security deposit, which would not call for application of section 2(22)(e) of the Act. He therefore deleted this addition as well.
8. Now before us assailing the order of the Commissioner (Appeal) the submissions made by learned departmental Representative were as under:
(i) Money of the company was given to the assessee to purchase the land in his name and assessee had transferred such land to the other owners by selling the undivided share of the land therein. In this process assessee was making money and the surplus was admitted by him under the head `capital gains’.
(ii) The land having been registered in the name of the assessee, the profits were also received by the assessee. Such land was held by the assessee for considerable time till the undivided share therein was ultimately sold after construction of the flats.
(iii) Even a benefit conferred on a director who was holding substantial interest, in an indirect manner also fell within the scope of section 2(22)(e) of the Act. Reliance was placed on the decisions of the Honble Apex Court in the case of L.Alagusundaram Chettiar v. CIT (2001) 252 ITR 893 (SC); CIT v. B.M.Kharwar (1969) 72 ITR 603 and that of Hon’ble Gujarat High Court in the case of Ravindra D. Amin v. CIT (1994) 208 ITR 815 (Guj).
(iv) For the immediately preceding assessment year also, assessee had shown capital gains on Pallikaranai land which was purchased by him with the money received from DHL and hence assessee was getting benefit therefrom.
(v) There was nothing to show that the land was handed over to DHL and nowhere in the document it was mentioned that the property belonged to DHL or assessee was holding the land on behalf of DHL, Even if it is considered that there was a business practice of bifurcating ownership and development, in order to reduce the incidence of stamp duty, since such a method caused loss to the exchequer, it should not be allowed,
(vi) The quantum of benefit is not relevant and once assessee has got some benefit, section 2(22)(e) has to be applied.
(vii)By following a procedure where ownership is held by managing director and development of the plot by DHL, assessee was abetting an offence of not paying the stamp duty. When there is a violation of law, even for a small amount, the entire amount became taxable as held by Hon’ble Kerala High Court in the case of Agappa Child Centre v. CIT (1997) 226 ITR 211 (Ker).
(viii) Assessee had become the owner of the land with the company’s money and having shown capital gains therefrom, it could not be said that there was no benefit received by him from the money or advance received from DHL
(ix)The company DHL was not engaged in purchase and sale of land but only construction and therefore the transaction with the assessee could not be considered as one motivated with business purpose,
9. Per contra learned counsel for the assessee referring to Schedule I of Indian Stamp Act, 1899 as corrected upto Tamil Nadu Act, 31 of 2004, submitted that where a land in which the vendor had constructed or in which a vendor had agreed to construct a flat or a house, was transferred, stamp duty was payable on the land as well as the cost of proposed construction. Therefore according to him, it was in the business interest of keeping the prices lower to the customer, that DHL had bifurcated the ownership and development of the land. Learned counsel for the assessee contended that there was nothing illegal or unlawful in this methodology which was essential to remain competitive in the business of property development. It was very much necessary to keep the prices down for the ultimate customer, so as to remain competitive and it was only with this intention that DHL had used its managing director’s name for holding the land. Learned counsel for the assessee pointed out that the ultimate price for which the flat was sold included the value of the undivided share of the land, and such value was miniscule. Referring to paper book pages 57 & 58, learned counsel for the assessee pointed out that except for Aspirin garden, Vanagaram, Vengaivasal and Reddi Kuppam none of the properties were registered in assessee’s name but were held by various sister concerns of DHL or jointly held by assessee along with other directors. Further according to him, the advances received from DHL were immediately paid to the vendors of the property and these were all in accordance with the decisions taken by DHL. Continuing his arguments learned counsel for the assessee, submitted that the advances received from DHL were for acquiring properties for their projects in Aspirin Garden, Vadapalani, Tambaram, Vanagaram, Vengaivasal and Villivakkam. Out of these only the properties of Aspirin Garden and Vengaivasal, the registration of documents fell in the relevant previous year. In the case of Tambaram project the land was yet to be registered. According to him power of attorney registered in the assessee’s name would not make the assessee owner of the property and the understanding all along was that assessee was holding the property in the business interest of DHL and not that of the assessee himself. Reliance was also placed on paper book page 14 which is a letter written by M/s Doshi Construction in which assessee is a partner to DHL where the matter regarding transfer of property, negotiation and finalization have been clearly mentioned. Attention was also brought to minutes of the board of directors of DHL placed at page 15 whereby advance payments for purchase of property through Mr. Harshad V. Doshi was authorised and sufficient amounts directed to be transferred. All in all, according to him, these were pure business transactions and were not in the nature of loans of advances which could be considered as deemed dividend under section 2(22)(e) of the Act. Filing a copy of the order dated 4-2-2010 of this Tribunal in the case of DHL in ITA No. 1057 & 1058/Mds/2009, learned counsel for the assessee submitted that this Tribunal had affirmed deletion of disallowance of interest paid by the said company, which disallowance was made by the assessing officer based on a finding that loans out of interest bearing funds were given by the said company to its directors, which included therein assessee here, for purchase of land. Relying on paragraph 4 of the order of the Tribunal dated 4-2-2010 learned counsel for the assessee pointed out that such disallowance of interest was deleted on a finding that loans given by DHL to it’s directors were guided by pure commercial expediency. For his argument that trade advance and monies given for effecting commercial transactions or during the ordinary course of business for business expediency, could not be taxed as deemed dividend, learned counsel relied on the decision of Hon’ble Delhi High Court in the case of CIT v. Rajkumar (2009) 23 DTR 204 (Del); that of Delhi Bench of this Tribunal in the case of Sunil Sethi v. DCIT (2009) 25 (II) ITCL 283 (Chd-Trib) : (2008) 26 SOT 95 (Del-Trib); that of Chandigarh Bench in DCIT v. Lakra Brothers (2007) 106 TTJ 250 (Chd-Trib) and that of a Co-ordinate Bench in the case of DCIT v. Shri M.Ponnuswamy in ITA No.1699/Mds/2008 dated 26-6-2009.
10. We have perused the orders and heard the rival contentions. There is no dispute that DHL had advanced sum of Rs.3,59,44,112 to the assessee. It is also not in dispute that the assessee is having substantial interest in DHL which could warrant application of section 2(22)(e) of the Act. Learned Commissioner (Appeal) had deleted this addition but for a sum of Rs.39,62,000 on which assessee is not in appeal. In so far as the rental advance of Rs.19,89,000 is concerned Commissioner (Appeal) had deleted the addition, finding it to be an advance given by the said company for leasing out a building from the assessee for using it for its office. Nothing was brought on record by the revenue to rebut the finding of learned Commissioner (Appeal) that this was only a lease advance. Hence we find no reason to interfere with his order that section 2(22)(e) could not be applied on this amount. Therefore we confine ourselves to the issue whether the sum of Rs.3,19,82,112/- received by the assessee would attract section 2(22)(e) of the Act for deeming it as dividend in his hands. Assessee’s contention is that business of DHL was property development and in order to reduce the stamp duty incidence upon the ultimate customers, it was very much necessary to bifurcate the ownership of the land from the development or construction of the flats therein. Short point made by the assessee is that if DHL itself held the ownership of the land as well as development rights therein, on sale of flats or proposed flats, ultimate customer would have had to pay stamp duty on both cost of land and proposed construction cost of the flat. In so far as this argument of the assessee is concerned he is absolutely right. Schedule I of Indian Stamp Act, 1899 corrected upto Tamil Nadu Act 31 of 2004 mentions at clause (i) of item No.5 as under:-
