2020 (2) TMI 616 - AT - Income Tax

Tax Tribunal: Loans disallowed under sec 2(22)(e) upheld, telescoping benefit for flat investment cash allowed

The Deputy Commissioner of Income Tax, Circle-1 (2), Pune. Versus Dhariya Construction Pvt. Ltd.

The Tribunal partly allowed the Revenue's appeal by reinstating the disallowance under section 2(22)(e) for the amount treated as loans/advances. However, ... Deemed dividend addition u/s 2(22)(e) - Amount received by the assessee as Inter-Corporate Deposit - HELD THAT:- It is essential for the amount given as “Inter Corporate Deposits”, there should be voluntariness emanating from the lender to give the amount to the assessee and not from assessee. In this case, there being common Managing Director, amount was being transferred as and when there was requirement of fund by the assessee from the account of M/s. Dhariya Infrastructure Development Pvt. Ltd. and thereafter returned back by the assessee to the lender. Hence the element of voluntariness is missing in the conduct of parties. The amount was in the nature of loan/advances only. Merely by mentioning in the ledger account, it was “Inter Corporate Deposit”, the nature and colour of transaction would not changed to “Inter Corporate Deposit”, as it continues to be loan/advances. Hence required to be taxed for the purposes of deemed dividend. We may rely upon the Jurisdictional High Court in the Durga Prasad Mandelia v. Registrar of Companies [1985 (9) TMI 282 - HIGH COURT OF BOMBAY] has noticed the distinction between deposits and loans in the context of section 370 of the Companies Act. We may also rely upon the coordinate Bench decision in the matter of KIIC Investment Company [2019 (1) TMI 391 - ITAT MUMBAI] , wherein the Bench had allowed the claim, as the intention can be gathered from the agreement, board resolution and other circumstances. However in the present case nothing is available to infer the intention of parties to give ICD. Thus, Ground Nos. 2 to 4 raised in appeal by the Revenue are required to be allowed Unexplained investment - Exclusion of amount being cash component of investment in flat at Surat - telescopic benefit to the assessee as the assessee made voluntary disclosures based on incriminating material detected during the survey action - statement of the assessee was recorded during the course of survey and the Managing Director of the assessee company had submitted that the assessee has earned an income from contract work which were not disclosed in the financial statement of the assessee - HELD THAT:- We see there is inherent contradiction in the case of the Revenue. Firstly, if the amount invested by the Director of the Company for purchasing of flat is held to be unexplained cash investment then it cannot be taxed in the hands of the assessee company because flat was purchased in the name of Director of the company and amount was invested by the Director. Whether the amount spent by the Director in cash for purchasing flat in his own name can be added in the hands of Assessee Company? - The answer to this question is “No”. As the amount was used by the Director and the said amount was invested individually. In the present case the assessee had agreed for the addition of undisclosed income for the earlier years and has sought for telescoping for the amount - In our view, telescoping is permissible to be granted to the assessee as the flat was purchased in the name of the Director. Ownership of the asset(flat) belonged to the individual not the assessee company. Needful is required to be done by the assessee by brining the ownership of the property back to the assessee in the balance sheet to the proportion of contribution made by the assessee company in purchasing flat. In the light of above, Grounds No.5 to 7 raised in appeal by the Revenue are dismissed. Issues Involved:1. Deletion of disallowance under section 2(22)(e) of the Income Tax Act.2. Interpretation of section 2(22)(e) regarding inter-corporate deposits versus loans/advances.3. Telescopic benefit for cash component of investment in flat at Surat.4. Acceptance of voluntary disclosure based on survey findings.Detailed Analysis:Issue 1: Deletion of Disallowance under Section 2(22)(e)The Revenue challenged the deletion of disallowance amounting to Rs. 2,93,26,224/- made by the Assessing Officer (AO) under section 2(22)(e) of the Income Tax Act. The AO treated the amount received by the assessee from M/s. Dhariya Infrastructure Development Pvt. Ltd. as loans/advances, which were to be taxed as deemed dividends due to the assessee's substantial shareholding in the lender company. The AO's decision was based on the fact that the assessee was the beneficial owner of 50% shares in the lender company, which had substantial reserves and surplus.Issue 2: Interpretation of Section 2(22)(e)The CIT(Appeals) interpreted the amount received by the assessee as 'Inter-Corporate Deposit' (ICD) rather than loans/advances, thereby not attracting the provisions of section 2(22)(e). The CIT(A) relied on judicial precedents, including the Mumbai Tribunal's decision in Bombay Oil Industries Ltd. vs. DCIT and the Madhya Pradesh High Court's decision in Sharda Talkies vs. Smt. Madhulata Vyas. The CIT(A) concluded that section 2(22)(e) specifically mentions advances or loans and not deposits, thus excluding ICDs from its purview.The Tribunal, however, found that the assessee failed to substantiate the claim that the amount was an ICD. The assessee did not provide any formal agreement, board resolution, or sufficient evidence to demonstrate that the funds were surplus and not borrowed. The Tribunal observed that the ledger account resembled a running loan account rather than an ICD account, with no documentation to support the nature of the transaction as a deposit. Consequently, the Tribunal held that the amount was in the nature of loans/advances and should be taxed as deemed dividends under section 2(22)(e).Issue 3: Telescopic Benefit for Cash Component of Investment in FlatThe CIT(A) granted telescopic benefit for the cash component of Rs. 2,53,59,490/- invested in a flat at Surat, based on the assessee's voluntary disclosure during the survey. The CIT(A) accepted the assessee's claim that the income declared for assessment years 2010-11, 2011-12, and 2012-13, amounting to Rs. 3,35,41,511/-, was available for investment in the flat. The CIT(A) allowed the telescoping benefit, considering the logical and factual basis of the claim, subject to the condition that the assessee does not pursue the issue in further appeal.The Tribunal noted that the assessee had acknowledged the cash payment during the survey and had declared the amount as additional income. The Tribunal found an inherent contradiction in the Revenue's case, as the flat was purchased in the name of the Director, not the assessee company. The Tribunal held that the telescoping benefit was permissible, provided the ownership of the property is brought back to the assessee company proportionate to its contribution. Thus, the Tribunal dismissed the Revenue's grounds on this issue, subject to the above observation.Issue 4: Acceptance of Voluntary DisclosureThe AO had confronted the assessee with evidence of undisclosed income during the survey, leading to the assessee's voluntary disclosure. The AO accepted the additional income declared by the assessee in the revised return, including the cash payment for the flat. The Tribunal upheld the CIT(A)'s decision to grant telescoping benefit, recognizing the voluntary nature of the disclosure and the logical basis for the claim.ConclusionThe Tribunal partly allowed the Revenue's appeal by reinstating the disallowance under section 2(22)(e) for the amount treated as loans/advances but upheld the CIT(A)'s decision to grant telescoping benefit for the cash component of the flat investment. The Tribunal emphasized the need for the assessee to substantiate claims with proper documentation and evidence.