Tribunal deletes deemed dividends & cash deposit additions under Income Tax Act

The Tribunal allowed all appeals, deleting the additions made under Section 2(22)(e) and Section 68 of the Income Tax Act, 1961, relating to the validity of deemed dividends and cash deposits. The Tribunal found that the amounts received were security deposits under a lease agreement, not dividends, and the source of cash deposits was explained adequately. The additions were deemed unjustified, and the Tribunal ordered their deletion.

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Issues Involved:
1. Validity of addition under Section 2(22)(e) of the Income Tax Act, 1961.
2. Addition under Section 68 of the Income Tax Act, 1961.

Issue 1: Validity of Addition under Section 2(22)(e) of the Income Tax Act, 1961

The common issue in all the appeals relates to the validity of the addition made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] under Section 2(22)(e) of the Income Tax Act, 1961, treating the amount received by the individual assessees from the company 'VTC Limited' as deemed dividend. The assessees, substantial shareholders in VTC Limited, were subjected to search and seizure operations. The AO observed that the assessees had taken hefty loans and advances from VTC Limited, which had substantial accumulated profits. The AO treated these amounts as deemed dividends under Section 2(22)(e) of the Act, rejecting the assessees' explanation that these were interest-free security deposits for leased land. The CIT(A) restricted the addition to the total accumulated profits of the relevant year or the amount advanced, whichever was lower.

Upon appeal, the Tribunal considered the submissions and material on record. The Tribunal noted that the assessees had substantial interest in VTC Limited, which had sufficient reserves and surpluses. However, the Tribunal found that the amounts received were in lieu of security deposits as per a lease agreement dated 1.4.2004, which was duly notarized and acted upon by the parties. The Tribunal observed that the lease agreement was not found during the search but was notarized and supported by a certificate from the Notary. The Tribunal also considered the validity of using old stamp papers for the agreement, relying on the Supreme Court's decision in 'Thiruvengada Pillai vs Navaneethammal & Anr', which held that old stamp papers could be used for execution of documents.

The Tribunal addressed the issue of the lease agreement not being registered, noting that the Supreme Court in 'Anthony v KC Ittoop and Sons and Others' held that an unregistered lease deed could create a month-to-month lease based on the conduct of the parties. The Tribunal concluded that the relationship between the assessees and VTC Limited as lessor and lessee was established, and the security deposits were part of a commercial transaction, not loans or advances. Therefore, the deeming fiction of deemed dividend under Section 2(22)(e) was not applicable, and the additions were ordered to be deleted.

Issue 2: Addition under Section 68 of the Income Tax Act, 1961

In the appeal of one of the assessees for the assessment year 2009-10, an additional ground was raised regarding the confirmation of an addition of Rs. 64,25,000 under Section 68 of the Income Tax Act. The AO noted cash deposits in the assessee's bank account and show caused the assessee to explain the source. The assessee provided a consolidated cash flow statement, which the AO rejected for not being date-wise. The CIT(A) confirmed the addition.

Before the Tribunal, the assessee argued that she was not required to maintain regular books of account and had provided a detailed cash flow statement showing the availability of cash to meet the deposits. The Tribunal examined the cash flow statement and found that the assessee had sufficient funds available on the relevant dates. The Tribunal held that the source of the deposits was explained, and the addition under Section 68 was not justified. The addition was ordered to be deleted.

Conclusion

The Tribunal allowed all the appeals, deleting the additions made under Section 2(22)(e) and Section 68 of the Income Tax Act, 1961. The order was pronounced in the Open Court on 10.07.2019.

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