TaxTMI 
TaxTMI 
2010 (11) TMI 141
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....a are the directors of this company. Both of them are non-resident Indians settled inUSA. A search under section 132 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act' for short) was conducted by the Investigation Wing of the Department on 15-3-2006 and on other following dates at the business premises of the company and residence of Directors in Chennai. During search operation, various incriminating documents including books of account were found and seized. Consequent upon the evidence collected during search, notices under section 153C were issued by the Assessing Officer on5-9-2006 for these years. A request was made to treat the original returns filed to be treated as returns filed in compliance of the notice(s) issued under section 153C of the Act. I.T.A. No. 1947/Mds/2008 (A.Y. 2002-03) 3. In this year, the assessee-company filed the return of income on 26-9-2007 under section 153C admitting therein a total income of Rs. 19905. Apart from accepting, vide letter dated 12-12-2006, that the return filed originally for assessment year 2002-03, may be treated as the return filed in pursuance to this notice. Finally, the assessment order was framed under sect....
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....e payment made by the assessee as rental security deposit, failed to distinguish why the said payment should not be treated as rental advance. 3. For these and other grounds that may be adduced at the time of hearing, It is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer be restored." 5. We have heard the rival contentions. The main issue hinges around the applicability of the provisions of section 2(22)(e) of the Act. During the course of assessment proceedings, it was noticed that the assessee-company had filed its return for the first time for the assessment year 2002-03, as it was incorporated only on 20-11-2002. The company was found to have entered into a Lease Agreement on 11-12-2001 with its Directors, namely, Shri V. Ayyadurai and Shri V.A Shiva for taking their property situated at No. 3 Kuppusamy Street, T. Nagar, Chennai -17, on lease for a period of 51 months. The assessee-company was required to pay a monthly rent of Rs. 40,000. The company, in turn, entered into a further lease agreement dated 14-12-2001 with its group concern M/s Millennium Software Productions India Pvt. Ltd (MSPIPL) to lease out this very proper....
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....0-11-2001with the following main objects which are spelt out in the Memorandum of Association: (a) To let, lease and sub-lease fully furnished, fully equipped premises together with all easements, appurtenances, whatever belonging to and hereto enjoyed by the Company and to fit up the premises with computers, furnitures, fittings, fixtures, infrastructures, appurtenances and effects. (b) To take on lease and sub-lease flats and buildings, apartments and to provide for the conveniences commonly provided in flats, suites, residential and business centers. A copy of the Memorandum and Articles of Association of the appellant company is enclosed herewith for kind perusal of the CIT(A). Shri V. Ayyadurai and Shri V.A. Shiva, both being directors in the appellant, had entered into an agreement with M/s. MMPPL. The agreement dated11-12-2001, consularly notarized atUSA, was entered into for leasing out a property at No. 1,Kuppuswamy Street, T. Nagar, Chennai - 17 having three grounds and 900 sq.ft. as the builtup area to the appellant company. The said agreement (copy of which is furnished herewith) deals with the scope of the management of the properties and the legal powers....
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....hin the meaning of the provisions of Section 2(22)(e) of the IT. Act. The Assessing Officer has reproduced the relevant provisions of Section 2(22)(e) in the assessment order while making the impugned addition. For ready reference, the relevant clause of Section 2 is extracted below: "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 share holder, 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 percent 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." The analysis of the above clause would reveal the following: (a)&....
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....udgment is equally applicable to the appellant's case with the same force. The deemed dividend issue has been the subject matter of many judicial pronouncements which are highlighted below in brief: (a) The Hon'ble ITAT, Chandigarh Bench in the case of DCIT v. M/s. Lakra Bros. [2007] 106 ITJ 250 (Chd.) has held that the definition of the "deemed dividend" as enshrined in section 2(22)(e) cannot be stretched to include in its ambit the legitimate transactions carried out in the ordinary course of business, where the intention is neither to give a loan or advance nor to confer individual benefit on shareholders. (b) The Hon'ble Bombay High Court in the case of CIT v. Nagindas M. Kapadia [1989] 177 ITR 393 (Bom.) has held that advances made against purchases do not attract the provisions of section 2(22)(e) which, in turn, implies that regular business transactions cannot be construed as loans and advances within the meaning of section 2(22)(e). (c) The Hon'ble Mumbai ITAT in the case of M/s. N.H. Securities Ltd. v. DCIT [2007] 11 SOT 302 (Mum.) has held as under: "wherever payments made by a limited company to its shareholders are proved by its characteristics as o....
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..../Del/99; (2007) 26 ITATINDIA 47 (DELHI) (n) M/s.VN Prakash Securities Pvt. Ltd. v. DCIT; ITA No. 3716/Mum/2004; (2006) 33 ITAT INDIA 755 (Mum.) DCIT v. M/s.VN Prakash Securities Pvt. Ltd.; ITA No. 4894/Mum/2004; (2006) 33 ITATINDIA 755 (Mum.) The Hon'ble ITATs in the cases referred to above at Sl. Nos. (e) to (n) have categorically held that payments made in the ordinary course of business are not liable to be treated as deemed dividend. They have also distinguished between the deposits and the loans and advances. The Hon'ble Mumbai ITAT in the case of M/s. Nandlal Kilachand Investment Ltd. cited supra has held that security deposits received by an assessee in connection with the leasing out of a property cannot partake the character of loans and advances within the meaning of the provisions of Section 2(22)(e) and thereby cannot be regarded as deemed dividend. In view of the aforesaid arguments and the judicial pronouncements, the A.O was legally not justified in treating the security deposit of Rs. 7,54,098 as the deemed dividend and therefore, the addition made under section 2(22)(e) deserves to be deleted." 6. After considering the above written submission, he held ....
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....clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via)] of clause (23C) of section 10 [or by an electoral trust]]. Explanation-for the purposes of this sub-clause, "trust" includes any other legal obligation ;] (iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17 ; [(iiia) any special allowance or benefit, other than perquisite included under sub-clause (iii), specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit; (iiib) any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living ;] (iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any su....
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....television or electronic mode, in which people compete to win prizes or any other similar game ;] [(x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees ;] [(xi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. Explanation.-For the purposes of this clause, the expression "Keyman insurance policy" shall have the meaning assigned to it in the Explanation to clause (10D) of section 10 ;] [(xii) any sum referred to in [clause (va)] of section 28;] [(xiii) Any sum referred to in clause (v) of sub-section (2) of section 56;] [(xiv) Any sum referred to in clause (vi) of sub-section (2) of section 56;] [(xv) Any sum of money or value of property referred to in clause (vii) of sub-section (2) of section 56;] 9. The Income-tax become chargeable for any assessment year at any rate or rates, Income-tax at that rate or those rates applicable for that year in accordance with and subj....
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....tion, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not; (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not; (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 ....
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.... years immediately preceding the previous year in which such acquisition took place]. Explanation 3.-For the purposes of this clause,- (a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern ;] 11. It is seen that section 2(22)(e) of the Act talks about deemed dividend which we have already discussed in earlier part of the order and as to what are the ingredients of a deemed dividend. What we have been able to understand is that the word 'dividend' in its ordinary connotation means the sum paid to or received by a shareholder proportionate to his share holding in a company out of the total sum distributed. As stated above, the definition of word 'dividend' is enumerative and not exhaustive. Every amount received by a shareholder cannot be treated as a dividend. The expression uses two parts - (i) accumulated profits; and (ii) distribution thereof. Accumulation does not mean the....
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....y 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 ;" 13. A bare reading of the above section evinces that any loan or advance made to a substantial shareholder or to a concern in which such shareholder has substantial interest and the company itself has accumulate profits, it is deemed as a dividend. To attract this provision, the payment is to be made by way of an advance or loan. Such an advance or loa....
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....ares holding not less than 10 per cent of voting power (e) to any concern (which includes companies) in which such shareholder holds more than 20 per cent beneficial interest (f) any payment by the closely-held company on behalf of or for the individual benefit of such shareholder. 14. No payment whatsoever has been found to have been made to the directors by these companies for their individual benefits and the lease arrangements between the assessee-company and its directors and so also between the assessee-company and M/s MSPIPL were clearly executed on commercial expediency. Such transactions inter se sister concerns, which are purely based on business expediency and are permitted as has been held by M/s S.A.Builders v. CIT, 288 ITR 1. Whatever transactions are executed during the ordinary course of business cannot be given extended meaning of 'deemed dividend'. It is the intention of the parties which matters and not the inference of the Assessing Officer. A loan or advance given for individual benefits of shareholders only has to be treated as 'deemed dividend'. There are numerous decisions in this connection which have been listed by the ld. CIT(A) in the above....
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....e Assessing Officer in which rent advance has been held to be deemed dividend is actually distinguishable on facts because in that case, the assessee had received rental advance for using towards the construction of a property which was to be subsequently leased out to the parties making the payment of the advance. Therefore, that receipt definitely constitutes an advance in the same sense in which the term 'loan' has been in this section. In the given case, the assessee has leased a furnished property after taking it on lease and after spending a substantial amount of money out of its own sources. Moreover, it is a refundable security deposit and the decision of the Hon'ble Jurisdictional High Court is not applicable to the case in hand. The Mumbai Bench of the Tribunal in the case of ITO v. M/s Nandlal Kilachand Investment Ltd. (supra) had an occasion to deal with exactly similar payment. The Tribunal has distinguished the same from loans and advances when the security deposit to the tune of Rs. 3.30 crores was received by the assessee in connection with leasing out of a building. After discussing section 2(22)(e) of the Act in the context of the provisions of RBI Act, 1934 and C....
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....." 18. The facts of this year are exactly identical to the facts of earlier assessment year except the amount of rent advance received which is Rs. 9 lakhs in this case. Therefore, on the basis of similar reasonings and arguments, we dismiss this appeal of the Revenue also. I.T. A. No. 1949/Mds/08 (A.Y 2006-07) 19. This appeal of the Revenue is directed against the order of the ld. CIT(A) dated23-7-2008. The grounds raised in this appeal are as under: "1. The order of the learned CIT(A) is contrary to law and facts of the case. 2.1 The ld. CT(A) erred in deleting the following additions of Rs. 8.65 crores, being the addition made under section 2(22)(e) of the IT. Act by the Assessing Officer on the ground that Assessing Officer has not legally justified in classifying the same within the meaning of section. 2(22)(e) of the Act. i. Addition on account of rental advance Rs. 12,00,000 ii. Addition on account of further advance received from sister concern Rs. 7,24,164 iii. Addition on account of advance rent Rs. 12,00,000 iv. Addition on account of unrecorded cash payment Rs. 1,50,00,000 v. Addition on account of payment made to....
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....e sister concern M/s. MSPIPL as on 31-3-2006 stood at Rs. 30,00,000 but the O/B of the rental advance as on 1-4-2005 was found to be Rs. 18,00,000 2.12 The Ld. CIT(A) failed to observe that the payment of Rs. 1.5 Crores was routed through the assessee company, in which Shri V. Ayyadurai was owning more than 20 per cent beneficial share, hence the said amount was also treated as Deemed Dividend in the hands of the assessee. 2.13 The ld. CIT(A) failed to observe that since the payment of Rs. 84,10,500 was routed through the assessee company in which Shri V. Ayyadurai was owning more than 20 per cent of share the said amount was treated as deemed dividend in the hands of the assessee company on protective basis and in the hands of Shri V. Ayyadurai on substantive basis. 2.14 The Ld. CIT(A) failed to observe that Since the transfer of share of the assessee company from Shri V.Ayyadurai and Shri V.A.Shiva to their relatives w.e.f. 01/04/2005 was treated as a fictitious transaction, the A.O. observed that the advance of Rs 6,00,04,931 came within the ambit of the provisions of section 2(22)(e) and taxed it as deemed dividend. 3. For these and other grounds that may be adduced....
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....the hands of the assessee company. 23. On examination of seized documents marked as Ann/MPB/Docs/S dated 17-3-2006 it was seen that agreement was entered into between one Shri Rajesh of M/s JSR Real Estate and Shri Ayyadurai, Director only but not in the name of the assessee company for purchase of 37.38 acres of land at Kottaiyur Village. This advance was paid by the assessee company. This amount was also added under section 2(22)(e) of the Act. 24. On perusal of the schedules forming part of the Balance Sheet, it was seen that the assessee had a debit balance of Rs. 6,00,04,931 on account of advance received for land. The transfer of shares was treated as a fictitious one and the Directors of both the companies had more than 20 per cent beneficial shares of both the companies, so this amount was treated as deemed dividend under section 2(22)(e) of the Act in the hands of the assessee company. Against these additions, appeal was filed before the ld. CIT(A), who deleted all these deletions and allowed the appeal of the assessee. Now, the Revenue is in appeal. 25. We have considered the rival submissions and have perused the entire record. In the given case, there is no dis....
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....his very amount is the subject of earlier addition which has been deleted by us. Therefore, the ld. CIT(A) has correctly deleted this amount from assessee-company's hands. 29. The next issue regarding the deletion of protective addition of Rs. 1.5 crores added under section 2(22)(e) of the Act is based on the facts that MSPIPL has transferred a sum of Rs. 1.5 crore to the assessee-company for utilization by Shri V. Ayyadurai for purchasing 70 acres of land at Sriperumbudur from two persons namely, Smt. S. Rukmani and Shri R.M Govindan. This amount was also added under section 2(22)(e) of the Act in the hands of Shri V.Ayyadurai, and on protective basis in the hands of the assessee-company. 30. After hearing both sides, we have found that the directors held less than 10 per cent beneficial shares in the assessee-company during the year and hence, provisions of section 2(22)(e) of the Act cannot be applied as stated and discussed in earlier part of this order. Therefore, this addition has also been legally deleted by the ld. CIT(A). 31. The Revenue has also challenged the deletion of addition of Rs. 84,10,500 added as 'deemed dividend' on the basis of seized document marked ....
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....ri M. Rajkumar by way of advances for purchase of lands and also in support of the fact that the said advance stood embezzled by that auditor through forgery and fraudulent practice. It was pointed out by the learned ARs that criminal proceedings stood launched by the appellant company against Shri M. Rajkumar in the appropriate court for recovery of the huge sum of money advanced to him. Evidences pertaining to on-going legal proceedings have also been furnished by the learned ARs in this regard. The arguments put forward by the learned ARs have carefully been examined and I am of the opinion that advance of more than Rs. 5 crores to Shri M. Rajkumar and the alleged clandestine embezzlement of the fund by him has no bearing on the addition made by the Assessing Officer However, the Assessing Officer is found to have erred in law while resorting to this addition because there is no cogent evidence brought on record by him to prove that the transfer of shares from Shri V. Ayyadurai/ Shri V.A. Shiva to their relatives was executed with the sole intention of defrauding the revenue. Since in the previous grounds I have already held that the share transfers are amply evidenced by legal ....
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....ring the course of search, stated that the said payment was made in excess of agreed consideration for providing extra facilities but failed to adduce any evidence in support of his claim. Further, the parties to whom the payments were claimed to have been made denied having received the said amount in cash. 3.3 The Ld. CIT(A) ought to have appreciated the fact that both the companies M/s Madras Madurai Properties Pvt. Ltd. (MMPPL) and M/s Millennium Software Private Limited ( MSPL) are controlled by the assessee this transaction i.e Rs. 1.5 crores withdrawn from SPL and routed through MMPPL was to by pass the provisions of section 2(22)(e) of the IT Act, 1961. 3.4 The Ld. CIT(A) failed to observe that the shares of MMPPL were transferred to relatives of the assessee w.e.f. 1-4-2005, which shows the intention of the assessee to circumvent the provisions of section 2(22)(e) of the IT Act, 1961. 4.1 The Ld. CIT(A) erred in deleting an amount of Rs. 24,10,500 (transaction with Mr. Rajesh of JSR Real Estate) treated by the Assessing Officer as deemed dividend under section 2(22)(e) of the Act. 4.2 The Ld. CIT(A) ought to have appreciated the fact that both the companies M/s....
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.... and hence the amount received from MSPL, in which the assessee has substantial interest, clearly attracts the provisions of section 2(22)(e) of the IT Act, 1961. 7. For these and other grounds that may be adduced at the time of hearing. It is prayed that the order of the ld. CIT(A) may be set aside and that of the Assessing Officer restored." 37. The first issue is regarding addition of Rs. 10 lakhs as interest under the head 'income from other sources'. The facts apropos this issue are that the assessee had paid Rs. 60 lakhs to Shri Jayakar in March 2003 on account of purchase of property at Abhiramapuram. An amount of Rs. 10 lakhs was adjusted during the previous year 2005-06 on account of interest. The Assessing Officer proposed to add this as interest received for the advances given to Shri Jayakar. Vide order sheet entry dated 20-12-2007, it was stated by the assessee that this transaction was notional in nature and the assessee had not received any amount in cash or through cheque. The assessee follows cash system of accounting and does not maintain any books of account. We have found that the assessee has paid advance of Rs. 60 lakhs to Shri Jaykar Henry which was tra....
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....res of MMPPL were transferred to the relavtives of the appellant w.e.f. 1.4.05 and the share-holding of the appellant in MMPPL was 4.99 per cent during the period of transaction. IV. MSPL and MMPPL have accounted this transaction of Rs. 1.5 crores by appropriate accounting entries in their books. 17. Section 2(22)(e) of the I.T. Act 1961 defines 'dividend' to include any payment by a company in which the public are not substantially interested made by way of advance or loan to a shareholder being a person who is the beneficial owner of shares holding not less than 10 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. 18. MMPPL claims that this amount was withdrawn and paid as part consideration for purchase of the land for MSPL. The appellant who is a director in both the companies holds 4.99 per cent of the share capital of MMPPL at the time of this transaction. The issue to be decided is whether the payment of the amount of Rs. 1.5 crores by MMPPL to the appellant (even without going into the merits of whether the amount was paid as purchase consideration or was spent by the a....
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....MMPPL were transferred to the relatives of the appellant with effect from1-4-2005and the shareholding of the appellant in the company was 4.99 per cent during the period of the transaction." 43. In view of the legal position stated above, the above stated facts would not attract the provisions of section 2(22)(e) of the Act and hence, the ld. CIT(A) has correctly deleted the impugned addition. 44. The next issue relates to deletion of Rs. 45 lakhs treated as deemed dividend on the basis of seized material which showed that following payments were made by MSPL for purchase of property at No. 31, 3rd Street, East Abiramapuram, Chennai: W. mone Rs. 82,00,000 B. money Rs. 55,00,000 45. The assessee explained that he had advanced to MSPL Rs. 60 lakhs on 31-3-2005 which was shown as liability as on 31-3-2006. Rs. 45 was paid to Shri Jayakar Henry through bearer cheques and encashment of the bearer cheques was done and the assessee obtained confirmatory letter from MSPL. After hearing both sides, we find that this addition is not justified. The addition on account of deemed dividend of Rs. 24,10,500 based on the transaction with Shri Rajesh of M/s Real Estate, were cr....