TaxTMI 
TaxTMI 
2021 (8) TMI 636
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....ly opposed to facts and is liable to be reversed. 1.2. The Commissioner of Income-Tax (Appeals) went wrong in disposing of the appeal in a summary manner without considering the facts of the case and the submissions mode before him in the proper perspective. 2.1 The Commissioner of Income-Tax (Appeals) went wrong in confirming the action of the Assessing Officer in bringing to tax a sum of Rs. 69,56,522 as deemed dividends. 2.2 The Commissioner of Income-Tax (Appeals) having found that the amount had been paid by the Company Tristar Accomodations Pvt Ltd for acquiring the property, erred in stating that the Company has paid more than what was agreed. 2.3 The Commissioner of Income-Tax (Appeals) ought to have also seen that the Assessing Officer is wrong in artificially splitting a normal business transaction the transaction into two. 2.4 The Commissioner of Income-Tax (Appeals) erred in not considering the evidences filed in support of the claim; but had confirmed the addition on assumptions. 3.1 The Commissioner of Income-Tax (Appeals) went wrong in confirming the action of the Assessing Officer in bringing to tax a sum of Rs. ....
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....loans and advances which is hit by provisions of section 2(22)(e) of the Act. 4. The AO, however was not convinced with the explanation furnished by the assessee and according to him, although the assessee has submitted agreement copies between M/s. Tristar Accommodation Ltd., and Shri Naren Rajan for both transactions, but on scrutiny of agreement between the parties, it was noticed that both agreements are signed by Shri Naren Rajan, one in the capacity of Proprietor of a firm and another in the capacity as a Director of the company. Further, although agreement is for purchase of property, but nothing has been mentioned about payment of consideration for purchase or property. Therefore, he opined that since no payment schedule was agreed upon between the parties, he has imputed his own estimation and accordingly, agreed consideration of Rs. 5.2 crores for purchase of 20 villas has been divided by 69 months (the total period of agreement) and arrived at a monthly equal installment of Rs. 7,53,623/-. The AO further computed total installments payable on each year and worked out amount to be paid as per agreement at Rs. 90,43,476/- for assessment years 2009-10 to 2014-15 each and....
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....nt submissions of the assessee and also taken note of various facts brought out by the AO held that advance taken from M/s Tristar Accommodation Limited for sale of 20 Villas is loan and advance as defined u/s 2(22)(e) of the Act, and hence, there is no error in reasons given by the AO to bring said advance within the ambit of section 2(22)(e) of the Act. The ld. CIT(A) has analyzed agreement between the parties and held that as seen from details of comparative statement for similar sales to others and their cost of the property till date of their possession, in comparison with cost of the property to M/s.Tristar Accommodation Ltd., clearly show that there is no much difference between the cost per unit for the bookings made on similar dates. He, further observed that from the comparative statement, the date of possession by other purchasers was 31-03-2011, while the registration of the property was completed much earlier. Therefore, he opined that there is no error in the findings recorded by the AO to treat excess payment of Rs. 69,56,522/- as deemed dividend u/s.2(22)(e) of the Act. The relevant findings of the CIT(A) are as under:- "7. As submitted by the Authori....
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....tated by the AO, it is only a loan provided to Shri Naren Rajen in the name of security deposit for joint development of property. Therefore, he opined that even this payment was hit by the provisions of section of 2(22)(e) of the Act and hence, rejected arguments of the assessee and confirmed additions made by the AO. The Relevant findings of the ld. CIT(A) are as under:- " 10. I have gone through the submissions made by the appellant and also the order of the Assessing Officer. As seen from the details submitted by the Authorized Representative, the land was not converted in the Revenue Records and hence there was no approval for the project. The Joint Development Agreement Was entered on 05.04.2008 between M/s. Tristar Accommodations Limited and the appellant Shri Naren Rajen. Till date there was no progress in the project. The company, MIs. Tristar Accommodations Limited has given an advance of Rs. 90 Lakhs to Shri Naren Rajen. The Authorized Representative could not establish that there was any business connection in paying an advance of Rs. 90 Lakhs to. Shri Naren Rajen. As stated by the Assessing Officer, it is only a loan provided to Shri Naren Rajen in the name of....
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...., Chennai in ITA No.3374/CHNY/2019 in the case of Shri M. Kiran Kumar. 10. The ld. DR on the other hand supporting order of the ld.CIT(A) submitted that the AO as well as the ld.CIT(A) has brought out clear facts that the transactions between the assessee and Shri Naren Rajan is nothing but loans and advances, which is hit by provisions of section 2(22)(e) of the Act. Therefore, it cannot be said that the transactions between the parties are normal business transactions. He further submitted that as regards Rs. 90,00,000/- advance paid for joint development of property at Vedapatti, although the assessee claims that it has entered into joint development agreement for development of property but facts on record reveals that said land was not even classified or converted in the Revenue records and further has not got approval from the concerned authorities. Further, Shri Naren Rajan has agreed to repay the advances. Therefore, it could be very easily said that said transaction is nothing but a loan transaction, which comes under the provisions of section 2(22)(e) of the Act. The AO as well as the ld.CIT(A) have brought out clear facts to the effect that transactions are in the ....
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.... the ambit of the word advance u/s. 2(22)(e) of the Act. The Board while issuing a Circular has considered number of decisions rendered by various High Courts including decision of Hon'ble Delhi High Court in the case of CIT vs. Creative Dyeing & Printing Pvt. Ltd.,(supra) where it was held that advances made by a company to a sister company and adjusted against the dues for job work done by the sister concern, is in the nature of business transactions would not fall within the definition of deemed dividend u/s.2(22)(e) of the Act. 12. In this legal background, if we examine the facts of the present case, we find that the assessee, in the capacity of proprietor of M/s. Tristar Consultancy Services had received a sum of Rs. 1,60,00,000/- from M/s Tristar Accommodation Limited, a Company in which the assessee is a director, for purchase of 20 villas. The said payment has been received in terms of a MOU between the parties specifying terms of agreement including consideration payable for purchase of villas. The AO has not disputed the fact that assessee has entered into an agreement with M/s Tristar Accommodation Limited for sale of villas. He, further admitted that transaction bet....
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....ate development business and managing director of a company, which is also into similar or different business. In this case, Shri Naren Rajan is engaged in the business of real estate development under proprietorship concern M/s. Tristar Consultancy Services, whereas the company M/s.Tristar Accommodation Ltd., is engaged in the business of development of property and letting it for rental income. The AO has also not disputed the fact that the assessee has paid security deposit for joint development of the property. But, not accepted explanation of the assessee for simple reason that development of property was not taken place. We have gone through reason given by the AO and explanation of the assessee on this point and we find that the property could not be developed immediately due to some procedural issues of getting approvals from concerned authorities. It is common in any business and more particularly in real estate business the project could not be taken immediately for various reasons. But, on that ground itself genuine transaction between the parties cannot be doubted. In this, both parties upon realized fact that the project could not be taken up, has cancelled agreement a....
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....T in [2011] 338 ITR 538 (Cal) held as under: "the phrase "by way of advance or loan" appearing in sub-clause (e) must be construed to mean those advances or loans which a shareholder enjoys for simply on account of 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 ; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. Thus, for gratuitous loan or advance given by a company to those classes of shareholders would come within the purview if section 2(22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder." 15. The assessee has relied upon the decision of ITAT, Chennai Benches in the case of Shri M. Kiran Kumar vs. CIT in ITA No.3374/CHNY/2019. The Tribunal had considered an identical issue in light of payments....
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.... Mariyam Creations as deemed dividend u/s.2(22)(e) of the Act. As, we have already noted in previous paragraphs, M/s. AK Exports is an independent proprietorship concern of the assessee and engaged in purchase and sale of gold and bullion from various parties and sells to LJM as a captive jewellery unit, for which it had received payments for sale of gold and gold ornaments. Similarly, M/s. Infinity Jewellers and M/s. Mariyam Creations are two third parties from whom M/s. AK Exports purchases gold and gold ornaments for which it has pending payments against purchase of goods. Based on the above transactions, the Assessing Officer has propounded the theory of circuitous transactions among the concerns for diverting profit of LJM in the guise of payment for purchase and sales and ultimately the same has been rerouted to the company as share application money. The AO, to arrive at such conclusion has given his own reasons including the capacity of two partnership firms and their business model including the places from where they operate their business. 8.8 We have given our thoughtful considerations to the reasons given by the AO to reach to a conclusion that cumula....
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....illogical for the AO to expect the testing facilities by the assessee or the two concerns M/s. Infinity Jewellers and M/s. Mariyam Creations. 8.10 The other reasons given by the AO to arrive at a conclusion that amount due in the books of M/s. AK Exports to two concerns is diverting of funds from LJM are that the company has funded a sum of Rs. 36 crores to M/s. Infinity Jewellers and M/s. Mariyam Creations. The assessee has placed account copies of the concerns M/s. Infinity Jewellers and M/s. Mariyam Creations in the books of LJM. From the above, it could be seen that it is a continuing account, where huge purchase and sales inter se these concerns. Thus, it is very clear that it has a commercial transaction and account is running accounts. Further, the account copy of M/s. Mariyam Creations in the books of LJM for the period 01.04.2014 to 31.03.2015 is placed on record as per which the closing balance is only a sum of Rs. 26.11 crores, whereas the AO has considered deemed dividend from this concern at Rs. 46.18 crores. Thus, from the above, it is very clear that the AO's action is founded on suspicions and surmises and without reference to actual facts and figures. ....
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....of the Act cannot be invoked. Had it been the case of the AO that the assessee had directly borrowed loans and advances from the company to his proprietorship concern, then the AO could have invoked the provisions of section 2(22)(e) of the Act. In this case, as rightly observed by the AO, the assessee has indirectly borrowed the funds of M/s. Infinity Jewellers and M/s. Mariyam Creations and that allegation of indirect benefit is only a formulative theory of circuitous transactions without there being any evidence to prove that these transactions are loans and advances giving benefit to the shareholder. Therefore, we are of the considered view that the AO as well as the CIT(A) were completely erred in coming to the conclusion that amount due in the books of M/s. AK Exports to M/s. Infinity Jewellers and M/s. Mariyam Creations is diversion of funds from LJM to the assessee and such transactions comes under the purview of deemed dividend u/s.2(22)(e) of the Act. 8.12 The assessee has relied upon plethora of judicial judgments in support of his arguments. The case law relied upon by the assessee are discussed as under:- a) The Calcutta High Court in the cas....
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.... provision :-".... C) The Kerala High Court in the case of CIT Vs Malayala Manorama Co. Ltd - 405 ITR 595, at Para 25 held; "25. From the above discussion, it is quite evident that the amounts under the disputed heads were being received by the Assessee from its Subsidiary Company only as part of regular business transactions, which was being accounted properly. The change in circumstance, as to the distribution of dailies/publications in the Gulf, causing the same to be transported through the Agent directly from Trivandrum to the Gulf, [instead of forwarding the same to Bombay, where the registered office of the Subsidiary Company is situated and then to have it transported from Mumbai to the Gulf, for distribution in the Gulf] was resulted because of the starting of direct flights from Trivandrum to Gulf, as pointed out by the Assessee. It was in this regard, that advance deposits were also effected by the Subsidiary Company and payments were being effected directly by the Assessee to the clearing and forwarding agent of the Subsidiary Company at Trivandrum, as per their instructions, which were being properly accounted. The payments effected by the Subsidiary ....
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.... such transaction. What is to be ascertained is what is the purpose of such advance. If the amount is given as an advance simplicitor or as such per se without any further application, receiving such advance may be treated as "deemed dividend" but if it is otherwise, the amount given cannot be branded as advance within the meaning of deemed dividend u/s. 2(22)(e). By granting advance if the business purpose of the company is served and which is not the sum, which it otherwise would have distributed as dividend, cannot be brought within the deeming provision of treating such Advance as deemed dividend". 37. Hon'ble Kolkata High Court in the case of Gayatri Chakraborty (supra) has held that "law on this point is clear in the event transaction between a shareholder and a company in which the public were not substantially interested and the former had substantial stake, create mutual benefits and obligations, then the provision of treating any sum received by the shareholder out of accumulated profits as deemed dividend would not apply". 39. In the light of the above judicial proceedings we observe that the revenue authorities should invoke provisions of Section 2(22)....
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.... are of the considered view that commercial transactions in the books of M/s. AK Exports due to M/s. Infinity Jewellers and M/s. Mariyam Creations cannot be considered as indirect borrowing from LJM to treat the same as deemed dividend u/s.2(22)(e) of the Act. Hence, we direct the ld.AO to delete the addition made towards deemed dividend u/s.2(22)(e) of the Act." 16. Coming back to case laws relied upon by the ld. DR. The ld. DR has relied upon certain judicial precedents including decision of Hon'ble Supreme Court in the case of Miss P. Sarada vs. CIT reported in 229 ITR 444. We have gone through various case laws relied upon by the Revenue and find that, none of the case laws relied upon by the ld. DR dealt with the issue of normal trade advances / commercial transactions between company and shareholder. In fact, in all case laws relied upon by the Revenue, the issue was whether loans and advances given to a shareholder holding beneficial interest is coming within the ambit of provisions of section 2(22)(e) of the Act or not. In the given facts and circumstances of the case, the Hon'ble Courts held that advance made by a company to shareholder would have to be treated as deeme....
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....t. Seshu Rajan for delay in handing over of balance 17 villas at the rate of construction cost of Rs. 1,000/-per sq.ft., for land admeasuring 47,600 sq.ft., in which the 17 villas ought to have been built. In terms of supplementary agreement between the parties, the assessee had made provision for construction cost of Rs. 4,76,00,000/- in his books of account at the rate of Rs. 1,000/- per sq.ft., for 47,600 sq.ft., land, which was payable to Smt. Seshu Rajan towards balance 17 villas still deliverable, which includes compensation for delay also. Further, it was also agreed that the land portion on which 48 row houses were built instead of 17 villas which ought to have been built, Rs. 1,20,00,000/- would be paid by the assessee to Smt. Seshu Rajan. 20. The AO has not accepted the explanation of the assessee and according to him, although the assessee has agreed to give 30 villas in Phase-I for consideration of 19.86 acres land being developed by them, but he is yet to develop remaining 8.79 acres and hence, the provision made for construction cost towards villas to be built on remaining portion of land cannot be considered as ascertained liability which is accrued for the releva....
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.... remaining villas were either sold or capitalized in the books of the assessee for deriving rental income. Therefore, to compensate cost of 17 villas, the assessee has entered into a supplementary agreement and agreed to pay a sum of Rs. 4,76,00,000/- for which the land owner has agreed and such agreement was entered into on 20.03.2012 and hence, on the day when the agreement was signed, the liability towards cost of 17 villas was accrued and hence, it can be said that it is unascertained liability. In this regard, he relied upon the following judicial precedents:- i. Hon'ble Supreme Court in the case of M/s. Calcutta Company Limited vs. CIT (1959) 37 ITR 1 ii. Hon'ble Supreme Court in the case of M/s. Bharat Earth Movers vs.CIT (2000) 245 ITR 428 iii. ITAT, Chennai in the case of F.F.E. Minerals India Private Limited vs. JCIT (2004) 84 TTJ Chennai 907 iv. ITAT, Vishakapatnam in the case of ACIT vs. KCP Limited in I.T.A.Nos.449/Viz/2016 and 244/Viz/2018 v. ITAT, Ahmedabad in the case of ACIT vs Gayathri Construction in I.T.A.No.736/Ahd/2016 22. The ld. DR on the other hand strongly supporting order of the ld.CIT (A) submitted that it ....
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....rms of JDA between the parties is not disputed by the AO as well as the CIT(A). In fact, both authorities had accepted the fact that as per the JDA between the parties, the assessee shall handover 30 villas, but could handover only 13 villas up to the end of the financial year 2011-12. It was an admitted fact that parties have entered into a supplementary agreement dated 20.03.2012 and mutually agreed to settle the dispute by taking a consideration of Rs. 4,76,00,000/- in lieu of 17 villas to be handed over to the land owner. The only dispute the AO as well as ld.CIT(A) made was that Phase-II could not be commenced due to approval from local authorities and when the project itself was not commenced, the question of accrual of liability towards 17 villas does not arise for the relevant financial year. 25. We have given our thoughtful consideration to the facts brought out by the Assessing Officer, in light of arguments advanced by the ld.AR for the assessee and we do not ourselves subscribe to the reasons given by the AO as well as the CIT(A) to disallow provision created in books of accounts for cost of construction of 17 villas to be given to the land owner in terms of JDA and ....
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....ein it is an undisputed fact that Phase-I of the project carried out by the assessee has been completed. Therefore, the allegation that supplementary agreement is on a project which does not exist is baseless. Further, it is irrelevant whether the person executing the earlier project is alive, as long as the commitment towards the other party to the JDA is honoured by legal heirs of the deceased. The legal heirs have honoured the assessee's commitment under the JDA. Therefore, the allegation that the assessee has not honoured the terms of JDA is not valid. In this regard, assessee has placed on record the affidavit sworn by Smt. Seshu Rajan confirming honoring of commitment. Since, the other party to the JDA has accepted to settle her final dues of balance 17 villas under a new set of terms and conditions, the commencement of Phase-II of the project is not relevant as there are no villas to be settled out of Phase-II now. Further, as per the JDA dated 18.01.2006, the assessee has to handover 30 villas within 3 years from the date of JDA, and if such date is considered then the assessee ought to have handed over the villas on or before 17.01.2009. Since, there was a delay in exec....
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....allised as a result of binding contract between the parties the same is allowable as held by the Hon'ble Supreme Court reported in Calcutta co. Ltd. v. CIT (1959) 37 ITR I (SC) and Bharat Earth-Movers v. CIT (2000) 245 ITR 428 (SC) as well as the decision of the Special Bench reported in 35 ITR 18 [(sic)--(1990) 34 ITD 50 (Hyd)(SB) (supra)]and (1992) 43 ITD 527 (Mad) (supra) and as conceded by the Department before the jurisdictional High court in (2003) 130 Taxman 400 (Mad) (supra). iv. The Hon'ble ITAT, Vishakapatnam in the case of ACIT vs. KCP Limited in I.T.A.Nos.449/Viz/2016 and 244/Viz/2018 Assessment Year: 2011-12 and 2012-l3) has held that the liquidated damages for delay supply of materials as per the contract terms is allowable as business deduction. v. Similar view has been held by Hon'ble ITAT, Ahmedabad in the case of ACIT vs Gayathri Construction in I.T.A.No.736/Ahd/2016 Assessment Year: 2003-04) that liquidated damages for delayed completion of contract is allowable as deduction" 28. In this view of the matter and by following various judicial precedents including decision of the Hon'ble Supreme Court in the case of M/s. Bharat Earth Move....
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....30. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. Admittedly, advance received from M/s. Tristar Accommodation Ltd., was for the purpose of purchase of villas. This fact has not been disputed by the AO. The AO has categorically admitted that the assessee has entered into a MOU for sale of villas to M/s. Tristar Accommodation Ltd. The AO has considered advance given for purchase of Villas u/s.2(22)(e) of the Act, as deemed dividend only for the reason that the assessee has paid upfront payment and hence, he has estimated installment payment for each year and determined excess amount for the relevant period. Thus, he has considered excess payment as loans and advances and brought to tax u/s.2(22)(e) of the Act. We have gone through reasons given by the AO for treating advance paid to the assessee by M/s. Tristar Accommodation Ltd., for purchase of villas u/s.2(22)(e) of the Act and we ourselves do not subscribe to the reasons given by the AO for the simple reason that once having accepted the fact that transactions between the assessee and the company was a normal commercial transaction, then there is no rea....
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....was not convinced with cash flow statement filed by the assessee explaining source of cash deposit into two bank accounts and according to him, cash withdrawn in same bank accounts in earlier occasion was used to deposit in term deposit in HDFC Bank account on same dates. Therefore, he has not considered cash withdrawal in earlier occasions as source to explain subsequent cash deposits in both savings bank accounts. The AO has also not considered land advance paid and received back in cash during the year, on the ground that the assessee has not furnished copy of agreement for land advance given in earlier occasion and the name and address of person to whom said land advance was given. Therefore, he has reworked cash flow statement furnished by the assessee and arrived at shortage of cash balance on the date when cash is deposited into two bank accounts and worked out a sum of Rs. 2,92,84,500/- as peak credit and made addition u/s.69 of the Act. 32. The assessee has challenged addition made b y the AO before the ld. CIT(A). The CIT(A), after considering cash flow statement filed by the assessee, has accepted negative cash balance arrived at on particular date at Rs. 51,85,645/- ....
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....and the assessee has not able to prove availability of cash from withdrawals. Therefore, it is incorrect on the part of the ld. CIT(A) to allow benefit to the assessee to explain source out of cash withdrawals. 35. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. Admittedly, the assessee has filed a cash flow statement explaining the source for cash deposits into two savings bank accounts maintained at Indusind Bank and HDFC Bank. The assessee had had explained source for cash deposits, out of cash withdrawals from previous occasions from same bank account, drawings from proprietary concern and land advance paid in earlier years and received back in current year as source for cash deposits. The assessee has arrived at a negative cash balance of Rs. 51,85,645/- and accepted that there is no source for cash deposit to the extent of Rs. 51,85,645/-. Even before us, no evidence has been filed to explain negative cash balance. Therefore, the additions made by the AO to the extent of Rs. 51,85,645/- is upheld. As regards source explained out of cash withdrawn from earlier occasions and drawings from M/s. Tristar....
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.... recovered from them. The AO has disallowed bad debts written off expenses on the ground that catering business was closed down three years ago and the bad debts of a business that has been closed down cannot be claimed against other business income and hence, disallowed the claim of 'bad debts' to the total income. 39. On appeal, the ld.CIT(A) has deleted addition made by the AO by holding that when receivables was written off as 'bad debts' in the books of accounts of the assessee, conditions stipulated for written off as envisaged under provisions of section 36(1)(vii) of the Act are satisfied and hence the same needs to be allowed. 40. The ld. DR submitted that the ld.CIT(A) has erred in deleting disallowance of bad debts without appreciating the fact that bad debts claimed pertains to business which was closed down three years ago and the same has been claimed against income from other business. 41. The ld.AR for the assessee on the other hand supporting order of the ld.CIT(A) submitted that the conditions for claiming bad debts in the books of accounts is stipulated u/s.36(1)(vii) r.w.s. 36(2) of the Act and the assessee has fully complied with the provisions. The....
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....ization of land for project expenses amounting to Rs. 75,00,000/-. During the financial year relevant to assessment year 2012-13, the assessee has completed Phase-I of real estate project called 'TRILOK' developed by him under a Joint Development Agreement (JDA) with the land owner. In this regard, he has debited construction related expenses to his profit & loss account under the head 'Project related expenses'. The assessee has retained 48 row houses out of total houses constructed in the project to earn rental income. Hence, the cost of 48 row houses was capitalized in his books of accounts as 'fixed asset'. However, the proportionate land value of 48 row houses was not capitalized in books of accounts, because the assessee was not entitled to land, since it was yet to be transferred by the land owner. The AO has made addition towards cost of land relating to 48 row houses amounting to Rs. 75,00,000/- on the ground that the assessee has already obtained Power of Attorney in the name of his mother and is executing sale deed for land to the buyers. The AO further noted that the assessee should have registered these lands through the power of attorney to his name and without doi....