Assessment reopening quashed as advance rent and security payments ruled commercial transactions not deemed dividend u/s 2(22)(e) (22)(e)

ITAT Amritsar upheld CIT(A)'s decision quashing reopening of assessment u/s 147 and deletion of deemed dividend additions u/s 2(22)(e). The tribunal held that Rs. 3 crores paid as security and Rs. 86,01,836 as advance rent by company to assessee were commercial transactions falling outside deemed dividend provisions. Following Karnataka HC precedent in Smt. Jamuna Vernekar case, the tribunal ruled that advances given for beneficial consideration to the company constitute commercial transactions, not deemed dividends. Revenue's appeal was dismissed and assessee's cross-objection was allowed.

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Issues Involved:
1. Legality and justification of reopening the assessment under Section 147 of the Income Tax Act.
2. Applicability of Section 2(22)(e) regarding deemed dividends for payments made by M/s Orbit Resorts Pvt. Ltd. to the assessee.

Issue-wise Detailed Analysis:

1. Legality and Justification of Reopening the Assessment under Section 147:
The appellate tribunal examined whether the reopening of the assessment under Section 147 was legally valid and justified. The assessee initially filed a return showing an income of Rs. 1,31,68,060/- and agricultural income of Rs. 27,76,000/-. The assessment was completed at a total income of Rs. 1,34,69,680/- with agricultural income of Rs. 24,98,380/-. The assessment was reopened based on information that the assessee had received Rs. 4,66,08,911/- from M/s Orbit Resorts Pvt. Ltd., which was not disclosed in the original return.

The CIT(A) and the tribunal found that all material facts were disclosed during the original assessment proceedings, including the copy of the account of the assessee as appearing in the books of M/s Orbit Resorts Pvt. Ltd. The tribunal relied on several judgments, including Dr. Habicht vs. Makhija (1985) 154 ITR 552 (Bom.), Lokendra Singh vs. ITO (1981) 128 ITR 450 (MP), and Atma Ram Properties Private Limited vs. DCIT (2012) SITC 237 (Del.), to conclude that the reopening of the assessment was neither legal nor justified. The tribunal held that the initiation of proceedings under Section 147 was not warranted as the assessee had disclosed all primary facts truthfully, and the AO's failure to apply the law correctly during the original assessment did not justify reopening the case.

2. Applicability of Section 2(22)(e) Regarding Deemed Dividends:
The tribunal also examined whether the payments made by M/s Orbit Resorts Pvt. Ltd. to the assessee fell within the ambit of Section 2(22)(e) of the Income Tax Act, which pertains to deemed dividends.

Security Payment:
The CIT(A) and the tribunal found that the payment of Rs. 3.00 crores by the company to the assessee on account of 'security' was for business considerations. The company, in order to safeguard its business interest, wanted to occupy the premises for the long term and agreed to make the payment as per the lease agreement. Citing the case of Pradip Kumar Malhotra vs. CIT, the tribunal held that such payments did not fall within the definition of 'deemed dividends' under Section 2(22)(e).

Advance Rent:
The tribunal also addressed the issue of advance rent amounting to Rs. 86,01,836/-. The CIT(A) had initially upheld this amount as deemed dividend based on the judgment in CIT vs. P.K. Abubucker (2003) 259 ITR 507 (Mad.), which held that advance rent could be treated as deemed dividend. However, the tribunal considered a contrary view expressed by the Karnataka High Court in Smt. Jamuna Vernekar vs. Deputy Commissioner of Income-tax, which held that such commercial transactions fall outside the purview of Section 2(22)(e).

The tribunal concluded that the advance rent paid by the company was a commercial transaction and did not constitute a loan. Therefore, it did not fall within the ambit of Section 2(22)(e). The tribunal also noted that in the absence of a jurisdictional High Court ruling, the view favorable to the assessee should be adopted, citing the Supreme Court's decision in Commissioner of Income-tax vs. M/s Vegetables Products Ltd.

Conclusion:
The tribunal dismissed the revenue's appeal and allowed the cross-objection of the assessee. It held that the reopening of the assessment under Section 147 was not justified and that the payments made by M/s Orbit Resorts Pvt. Ltd. to the assessee, including the advance rent, did not fall within the definition of deemed dividends under Section 2(22)(e) of the Income Tax Act. The order was pronounced in the open court on 28.08.2024.

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