[2009] 33 SOT 437 (AHD.)
IN THE ITAT AHMEDABAD BENCH 'A'
Steelco Gujarat Ltd.*
v.
Assistant Commissioner of Income-tax, Circle 8, Ahmedabad
T.K. SHARMA, JUDICIAL MEMBER AND D.C. AGRAWAL, ACCOUNTANT MEMBER
IT APPEAL NO. 1050 (AHD.) OF 2006
[ASSESSMENT YEAR 2002-03]
JULY 31, 2009
Section 43(1) of the Income-tax Act, 1961 - Actual cost - Assessment year 2002-03 - Whether waiver of loan is equivalent to terms grant, subsidy or reimbursement as are used in Explanation 10 to section 43(1) - Held, no
FACTS
The assessee had entered into an agreement with 'W' Ltd. for obtaining a loan. The said loan was for the purpose of the assessee's working capital. For obtaining said loan the assessee had hypothecated its plant and machinery to 'W' Ltd. Subsequently, due to heavy losses suffered by the assessee, it was declared as a sick company by the Board of Industrial Finance and Reconstruction. The assessee approached 'W' Ltd., for arriving at one-time settlement of the principal amount of loan and interest thereon. In response to said request, 'W' Ltd. settled the dues at a reduced figure, which resulted into waiver of a part of amount of loan. The Assessing Officer treated the amount so waived of by 'W' Ltd. as subsidy, grant or reimbursement. Thereafter, he concluded that cost of plant and machinery purchased by the assessee was met directly or indirectly by 'W' Ltd., as the assessee had received waiver of part of loan amount. The Assessing Officer also held that the said loan was used for the purchase of machinery in the previous year relevant to the assessment year 1998-99. The Assessing Officer then invoked the Explanation 10 to section 43(1) and, thus, reduced the amount of loan so waived of from the actual cost of the plant and machinery for the purpose of calculating depreciation. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer.
On second appeal :
HELD
The assessee had plant and machinery already existing prior to the receipt of finance from 'W' Ltd. It was apparent from the chart of payment referred to by the assessee. This clearly indicated that the loan was not given directly or indirectly for the purpose of purchasing plant and machinery. The arguments of the Assessing Officer, the Commissioner (Appeals) and the department that the loan from 'W' Ltd. was used to repay the suppliers of plant and machinery was not acceptable because no such nexus was established by the revenue. The agreement of the assessee with 'W' Ltd., to which the assessee had referred to spoke of hire-purchases. The actual cost of the machinery was shown at Rs. 5,31,62,364 and loan was approved at Rs. 3 crores. A reading of that agreement suggested that the assessee had actually hypothecated plant to 'W' Ltd., for obtaining the loan. The assessee would be paying rentals to 'W' Ltd., as per schedule to the agreement. The department referring to this presumed that it was the 'W' Ltd., which had advanced money for purchasing plant and machinery and not for working capital requirement. The hire-purchase agreement as per the department referred to rentals to be paid by the assessee, meaning thereby that the assets for the time being were owned by 'W' Ltd. and, therefore, if a part of the loan was waived of then that part would be reduced from the actual cost. The Tribunal, however, did not agree with that proposition. For affecting the actual cost there should be either grant or subsidy or reimbursement against such cost. The word 'waiver' is not used in the Explanation 10 to section 43(1). In the main sub-section the words 'made directly or indirectly by any other person or authority' mean that there has to be a voluntary act on the part of the 'any other person or authority' to meet the cost of the assets. In the instant case 'W' Ltd. had not met the cost of the assets. A whole reading of the agreement did not indicate that 'W' Ltd. was in any way intending to meet the cost of the assets. Hypothecation of plant and machineries for obtaining of loan is not equivalent to the meeting the cost of the assets. The Explanation 10 to section 43(1) only refers to pro rata deferment of any cost met by any 'authorities' or 'person' by way of grant, subsidy or reimbursement. It does not refer to any waiver of any loan. Subsidy has been defined as financial aid granted by the Government to a business enterprise in order to encourage it in production, quantity or quality-wise, and to help in the sale of commodities produced at a lower rate. The word 'grant' used in the Explanation 10 means any sum or money paid as an aid out of the State funds or funds of any institution. The word 'reimbursement' is defined as payment of what has been spent. The word 'waiver' has not been used either in the main section or in the Explanation . From a combined reading of the concept of the three terms 'subsidy', 'grant' and 'reimbursement', it appears that they have the following common characteristics: (1) 'Government authority' or 'any other person' is giving money as an aid to the assessee to purchase an asset; (2) This aid termed as 'grant' or 'subsidy' is given to the business entrepreneur either to augment its capital or to provide financial support for sustaining production and maintaining price, or setting-up an industry, or for purchase of an asset for industries; (3) To compensate certain expenses incurred by the assessee by reimbursing the expenditure either on capital assets or on other business expenses; (4) There is general intention of the 'authority' or 'other person' to forego the sum at the time of grant thereof. When the above principles were applied to the facts of the instant case, it was found that 'W' Ltd. had the intention to recover the loan from the assessee. It was not given to meet out the cost of any plant and machinery partly, fully, directly or indirectly. 'Waiver' would mean voluntary relinquishment of a legal right or advantage, benefit, claim or privilege. Thus, act of waiver would come posterior whereas grant and subsidy would be interior of the transaction, i.e., purchases of plant and machinery in the instant case. The reimbursement is always posterior to the transaction (of purchase of plant and machinery). Therefore, the waiver of loan is also not equivalent to reimbursement and, therefore, will not fall under the category of reimbursement. Waiver is also not equivalent to 'grant' or subsidy. Thus, the waiver does not fall into either of the three terms used in the Explanation 10 to section 43(1) or proviso thereof. Further, there has to be direct nexus of loan with purchase of plant and machinery. In the instant case, plant and machinery were already existing prior to taking of the loan. Therefore, grant of loan by 'W' Ltd. could not be related to the purchase of plant and machinery. Therefore, it could not be inferred that it was given to meet the cost of plant and machinery. Once the sum waived by 'W' Ltd. could not be related to purchase of plant and machinery, it could not be reduced from the cost for the purposes of reducing allowable depreciation. [Para 7]
In the result, the appeal filed by the assessee was to be allowed. [Para 8]
M.M. Shah for the Appellant. Rajeev Agarwal for the Respondent.
ORDER
T.K. Sharma, Judicial Member. - This is an appeal filed by the assessee against the order filed by the assessee raising the following grounds of appeal :
"The learned Commissioner of Income-tax (Appeals) was not justified in law and on facts of the case in treating the waiver of outstanding principal amount of loan of Rs. 86,02,061 by Wipro Finance Ltd., as subsidy, grant or reimbursement towards cost of the fixed assets as envisaged under section 43 Explanation 10 of the Income-tax Act, 1961 and confirming disallowance of depreciation of Rs. 21,50,515."
2. The main issue involved in this appeal is that the Assessing Officer reduced and the learned CIT(A) has confirmed the amount of loan waived by M/s. Wipro Finance Ltd., from the actual cost of plant and machinery for the purpose of calculating depreciation.
3. The facts of the case are that the assessee is a company engaged in the production and sales of cold rolled steel coils/sheets and galvanized coils/ sheets having its plant at GIDC, Palej. The return of income was filed declaring a total loss of Rs. 14,71,77,158 for the assessment year 2002-03. In the statement of total income forming part of the said return, a note was appended that it has written back the amount of loan of Rs. 86,02,261 being waiver of principal amount of loan taken from Wipro Finance Ltd. The assessee entered into an agreement with Wipro Finance Ltd., for a loan of Rs. 3 crores. It was claimed before Assessing Officer that the loan was for the purpose of working capital. For obtaining the loan machineries were pledged as security and hypothecated to Wipro Finance Ltd. After deducting the documentary charges, bank charges etc., assessee received Rs. 70 lakhs on 19-9-1997 and Rs. 2,16,60,676 on 12-9-1997. Thus, it received a total amount of Rs. 2,86,60,676. Subsequently due to heavy losses suffered by the assessee, it was a declared as sick company by the Board of Industrial Finance and Reconstruction. It approached Wipro Finance Ltd., and other financial institutions like IDBI, IFCI, ICICI and Nationalized banks for arriving at one time settlement of principal amount of loan and interest thereon. In response to this request an agreement dated 31-3-2000 was entered with Wipro Finance Ltd., to settle the dues at Rs. 1,87,50,000 as against the outstanding dues of Rs. 2,73,52,061 standing in the books. Thus it resulted into waiver of amount of Rs. 86,02,061. Other financial institutions also have similarly waived dues. The Assessing Officer, however, inferred that what the assessee-company has received, tantamount to subsidy grant, reimbursement (whatever name it called), which includes waiver of interest/tax/principal etc. Thereafter, he concluded that cost of various assets acquired by the assessee is thus met directly or indirectly by Wipro Finance Ltd., as the assessee has received waiver of an amount of Rs. 86,02,061. The said loan was used for the purchase of machinery in the previous year relevant to the assessment year 1998-99. Assessee did not claim any depreciation on the machinery, in earlier years but it started claiming depreciation from the current year i.e., 2002-03, i.e., it was the first year, when the assessee claimed depreciation on the said machinery whose cost of acquisition was inferred as reduced by way of waiver of Rs. 86,02,061. The learned Assessing Officer then invoked Explanation 10 of section 43 according to which grant or waiver etc., received by the assessee was not to be included in the actual cost of the asset. Accordingly, the Assessing Officer disallowed 25 per cent of the depreciation on Rs. 86,02,061 by reducing this amount from the cost of plant and machinery.
4. The learned CIT(A) confirmed the order of the Assessing Officer through a brief order. The learned CIT(A) inferred that the assessee has purchased plant and machinery by using the loan obtained from Wipro Finance Ltd. He observed that payment to suppliers of the plant and machinery was made by first from working capital which was increased by loan obtained from Wipro Finance Ltd. Thus the loan obtained from Wipro Finance Ltd., was ultimately used to acquire plant and machinery for which hire-purchase agreement was signed by the Wipro Finance Ltd. The cost of machinery should thus be reduced from the total cost by this amount as per Explanation 10 of section 43 of the Act. According to him grant/waiver etc., so received shall not be included in the actual cost of the asset.
5. Against this, the learned AR of the assessee submitted that it is incorrect on the part of the authorities below to infer that the assessee obtained loan from Wipro Finance Ltd., for the purpose of acquiring plant and machinery. In fact finance was obtained from that company for working capital requirement and not for purchasing plant and machinery or for making payment to the suppliers of plant and machineries. The learned AR of the assessee drew our attention to page 2 of the PB wherein details of payment to the suppliers of the plant and machinery has been given, according to which the payments were made prior or after obtaining the loan from Wipro Finance Ltd. He referred to the following chart :
Details of payments made to machinery suppliers
| Before July, 1996 to December, 1996 | Rs. 9,39,86,764 | Payment made at least 12 months before loan taken. |
| January, 1997 to March, 1997 | Rs. 23,72,424 | Payment made at least 6 months before loan taken |
| September, 2001 to Ooctober, 2001 | Rs. 2,14,86,960 | Payment made after four years from loan taken |
| July, 2002 to October, 2002 | Rs. 1,98,08,503 | Payment made after 5 years from loan taken |
By referring the above chart, learned AR of the assessee submitted that there is no nexus between the loan taken and payments made to suppliers of plant and machineries. This loan taken from Wipro Finance Ltd., was not utilized for making payments to supplier. The learned AR of the assessee further submitted that the nomenclature of the agreement "Hire Purchase Agreement" is not correct. The fact is that the machinery was hypothecated for taking working capital loan. He referred to the agreement dated 27-8-1997 which does not indicate that Wipro Finance Ltd., is financing the plant and machineries. He then referred to the agreement dated 31-3-2000 whereby part of the loan was waived as per one time settlement. It also does not indicate that either the loan or the waiver thereof was for meeting the cost of plant and machinery. The learned AR of the assessee then submitted that waiver of part of the principal amount of loan cannot be termed as subsidy towards the cost of fixed assets as envisaged under section 43 and Explanation 10 thereof.
6. Against this, the learned DR relied on the orders of the authorities below and submitted that surrender of a part of the loan is in fact a grant which would be covered by Explanation 10 of section 43(1) and therefore, the amount of loan so waived will be reduced from the actual cost for the purpose calculating the depreciation.
7. We have considered the rival submissions of the parties and perused the materials on record. The undisputed facts are that the assessee had plant and machinery already existing prior to the receipt of finance from Wipro Finance Ltd. It is apparent from the chart of payment referred to by the learned AR of the assessee. This clearly indicates that the loan was not given directly or indirectly for the purpose of purchasing plant and machinery. The argument of the Assessing Officer, CIT(A) and the learned DR that the loan from Wipro Finance Ltd., was used to repay the suppliers of plant and machineries is not acceptable because no such nexus is established by the revenue. The agreement of the assessee with Wipro Finance Ltd., to which the learned AR of the assessee has referred it speaks of hire purchases. The actual cost of the machinery is shown at Rs. 5,31,62,364 and loan is approved at Rs. 3 crores. A reading of this agreement suggests that the assessee has actually hypothecated GI Plant to Wipro Finance Ltd., for obtaining the loan. The assessee would be paying rentals to Wipro Finance Ltd., as per schedule to the agreement. The learned DR referring to this presumed that it is the Wipro Finance Ltd., which has advanced money for purchasing plant and machinery and not for working capital requirement. The hire purchase agreement as per the learned DR refers to rentals to be paid by the assessee meaning thereby assets for the time being are owned by Wipro Finance Ltd., and therefore, if a part of the loan is waived then that part will be reduced from the actual cost. We, however, do not agree with this proposition. For affecting the actual cost there should be either grant, or subsidy, or reimbursement against such cost. The word "waiver" is not used in Explanation 10 to section 43(1). For the sake of convenience, the same is reproduced as under :—
"Explanation 10.—Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee :"
In the main sub-section the words "made directly or indirectly by directly by any other person or authority" mean that there has to be a voluntary act on the part of the "any other person or authorities" to meet the cost of the assets. In the present case Wipro Finance Ltd., had not met the cost of assets. We have already observed that a whole reading of the agreement does not indicate that Wipro Finance Ltd., was in any way intending to meet the cost of the assets. Hypothecation of plant and machineries for obtaining of loan is not equivalent to the meeting the cost of the assets. Explanation 10 of section 43(1) only refers to pro rata deferment of any cost met by any "authorities" or "person" by way of grant, subsidy or reimbursement. It does not refer to any waiver of any loan. Subsidy has been defined as financial aid granted by the Government to a business enterprises in order to encourage it in production, quantity or quality- wise, and to help to sale of commodities produced at a lower rate. In Advance Law Lexicon, 3rd Edition [2005] page 4524, the word "subsidy" has been defined as under :—
"'Subsidy' defined. 545 V. c. 31, S. 9.
(Subsidum.) An aid, tax, or tribute granted to the King for the urgent occasions of the kingdom, to be levied on every subject of ability, according to the value of his lands or goods. (Tomlin). Money contributed by a State Government, institution, or person, in behalf of any special object.
'Subsidy' generally means money granted by the State or a public body to keep down the prices of commodities. Subsidy may be in the nature of direct or indirect Government grants on production or exportation of goods including any special subsidy on transportation of any particular product. (Anti-Dumping Law)
Agreed sum paid, over and above market charges, to assure supply or service that would otherwise be unavailable because of lack of profit. (Business Term)
The financial aid granted by the Government to a business enterprise in order to encourage rise in production, quantity and quality-wise, and also to help sell the commodity produced, at a lower price. (Banking)
Sum paid (by Government) to companies in certain industries to enable them to sell their goods or services at a price close to the prevailing market price. A subsidy is also used to provide financial support to a commercial or quasi-commercial activity that would otherwise not be viable in narrow profit-and-loss terms, usually in order to sustain broader economic and social benefits (Business; Insurance; International Accounting)."
The word "Grant" used in Explanation 10 means any sum or money paid as an aid out of the State funds or funds of any institution. The word "reimbursement" is defined as payment of what has been spent. On page 4029 of Advance Law Lexicon, it is defined as under :—
"Reimbursement.—In ordinary parlance reimbursement means repayment of what has been spent. To reimburse is to repay what is expended (Deepak Fertiliser & Petroleum Chemicals Corpn. Ltd. v. Union of India [1996] 381 DRJ 209),
The word 'reimbursement' means and implies restoration of an equivalent for something paid or expended. It presupposes previous payment. Tata Iron & Steel Co. Ltd. v. Union of India [2001] 2 SCC 41, Para 16,
The act of paying back somebody for his or her out-of-pocket expense (Investment)."
It may be seen that the word "waiver" has not been used either in the main section or in the Explanation. From a combined reading of the concept of the three terms "subsidy", "grant" and "reimbursement", it appears that they have the following common characteristics :
(1)"Government authority" or "any other person" is giving money as an aid to the assessee to purchase an asset.
(2)This aid, termed as "grant" or "subsidy" is given to a business entrepreneur either to augment its capital or to provide financial support for sustaining production and maintaining price, or setting up an industry, or for purchase of asset for industries.
(3)To compensate certain expenses incurred by the assessee by reimbursing the expenditure either on capital assets or on other business expenses.
(4)There is general intention of the "authority" or "other person" to forego the sum at the time of grant thereof."
When we apply the above principles to the facts of the present case, we notice that Wipro Finance Ltd. is of the intention to recover the loan from the assessee. It was not given as to meet out the cost of any plant and machinery partly, fully directly or indirectly. As per page 4922 of Adv. Law Lexicon, "waiver" would mean voluntary relinquishment of a legal right or advantage benefit, claim or privilege. Thus, act of waiver would come posterior whereas grant and subsidy are enterior of the transaction, i.e., purchases of plant and machinery in the present case. The reimbursement is always posterior to the transaction (of purchase of plant and machinery). Therefore, the waiver of loan is also not equivalent to reimbursement and therefore will not fall under the category of reimbursement. Waiver is also not equivalent to "grant" or subsidy. Thus, the waiver does not fall into either of the three terms used in Explanation 10 or proviso thereof. Further there has to be direct nexus of loan with purchase of plant and machinery. In the present case, plant and machinery are already existing prior to taking the loan. Therefore, grant of loan by Wipro Finance Ltd., cannot be related to the purchase of plant and machinery. Therefore, it cannot be inferred that it was given to meet the cost of plant and machinery. Once, the sum of Rs. 86,02,061 waived by Wipro Finance Ltd. as OTS , cannot be related to purchase of plant and machinery, it cannot be reduced from the cost for the purposes of reducing allowable depreciation.
8. In the result, the appeal filed by the assessee is allowed.
IT : Transferable occupancy rights of a flat given to shareholders by a company on perpetual basis subject to deposit of a meagre sum, are deemed dividend under section 2(22)(a)
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[2012] 28 taxmann.com 149 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'E'
Shantikumar D. Majithia
v.
Deputy Commissioner of Income-tax, Central Circle-44, Mumbai*
B.R. Mittal, Judicial Member
And Rajendra, Accountant Member
IT Appeal Nos. 2517, 2518, 2520, 3160,
3232 & 3234 (Mum.) of 2011
[Assessment years 2006-07 & 2007-08]
October 19, 2012
Section 2(22), read with section 2(24), of the Income-tax Act, 1961 - Deemed dividend - Distribution entailing release of company's assets - Assessment years 2006-07 and 2007-08 - HPPL, a closely held company, constructed a building and granted occupancy rights of flats in said building to its shareholders - Assessee, one of shareholders of HPPL, got occupancy rights on perpetual basis - In lieu of said rights, assessee was to hold shares in HPPL and had to give interest free refundable security deposit - He could transfer said rights to third party by way of sale subject to transferee depositing interest free refundable security deposit - Even sale consideration to be received was not payable to HPPL - Whether such rights were not perquisite benefits given by HPPL, but were dividend under section 2(22)(a) in form of assets and were assessable in relevant assessment years - Held, yes [Para 23] [In favour of revenue]
FACTS
Facts
• HPPL, a company, had constructed a building and had given occupancy rights of flats in said building to its shareholders.
• The assessee one of shareholders got occupancy right of flat on deposit of a certain sum towards proportionate cost of land and cost of construction.
• The Assessing Officer held that distribution of occupancy rights amounted to distribution of stock-in-trade among shareholders and, thus, it should be considered as dividend under section 2(22)(a), and made addition under section 2(22)(a).
• However, the Commissioner (Appeals) treated same as perquisite benefit under section 2(24)(iv).
Argument of assessee
• The occupancy rights were given to the shareholders for the year ending on 31-3-2002 and same could not be treated as deemed dividend because HPPL did not have any accumulated profits as on 31-3-2002.
Argument of revenue
• The assessee had got in guise of occupancy rights full ownership with small amount of security deposit and, therefore, it was to be considered as deemed dividend under section 2(22)(a).
Issue involved
• Whether grant of occupancy right could be considered as deemed dividend under section 2(22)(a) or it was to be considered perquisite/benefits given by HPPL to its shareholders and as such was to be assessed under section 2(24)(iv) ?
HELD
Occupancy rights were given to assessee
• The letter addressed to the assessee by HPPL categorically states that he has to pay interest free refundable deposit amount of Rs. 18 lakhs towards the proportionate land, construction and development cost. It is evident that assessee has got the occupancy right of the premises by way of letter dated 25-3-2006. Hence, the authorities below have rightly held that said occupancy right is given to the assessee in assessment year 2006-07 and not in earlier assessment year. [Para 18]
Occupancy right not perquisite benefit under section 2(24)
• The assessee had received occupancy rights in the premises on perpetual basis and in lieu of which, the assessee was to hold shares in HPPL and also to give interest free refundable deposit of Rs. 18 lakhs towards proportionate land cost and development cost. The assessee is also entitled to transfer the occupancy rights by way of sale and transfer of block of assets and create third party rights subject to transferee depositing the required amount of interest-free refundable security deposit and assessee thereafter to give possession to the transferee. Therefore, the Commissioner (Appeals) is not justified to hold that it is perquisite benefit given by HPPL to its shareholder and not the transfer of occupancy rights to its shareholders. Hence, the provisions of section 2(24)(iv) do not apply to grant of occupancy rights by HPPL. [Para 21]
Occupancy right be treated as deemed dividend under section 2(22)(a)
• The assessee has got the occupancy right in perpetuity as assessee can transfer his occupancy rights of the premises under consideration by way of sale to a third party subject to condition that transferee is to deposit the required amount of interest free security deposit with HPPL. The consideration to be received by the assessee on transfer of his occupancy right is not to be refunded to HPPL. HPPL will have no objection for creating third party rights in the occupancy right given to assessee. The Assessing Officer has rightly held that the value of flats received are nothing but dividend given in the form of assets by HPPL. Hence, the decision of the Assessing Officer that said occupancy right of the premises allotted by HPPL to assessee amounts to deemed dividend under section 2(22)(a) was upheld. [Para 23]
Vijay Mehta for the Appellant. Girija Dayal for the Respondent.
ORDER
Per Bench - The assessee viz; Shri Shantikumar D. Majithia and department have filed cross appeals for assessment years 2006-07 and 2007-08 against common order of ld CIT(A) dated 31.1.2011 and assessee viz; Mrs Shobhana Majithia and department have filed cross appeals for assessment year 2006-07 against order of ld CIT(A) dated 31.01.2011.
2. Since grounds taken in these appeals are common on similar facts, we heard these appeals together and dispose off the same by this common order for the sake of brevity and convenience.
3. Since grounds are common in all these appeals, we take up appeals for the assessment year 2006-07 being I.T.A. No.2517/M/2011 filed by assessee Shri Shanti Kumar D.Majithia and appeal filed by department being I.T.A. No. 3232/M/2011 for our consideration.
4. Grounds raised by assessee are as under:
"1. The ld CIT(A) has erred in law and facts in passing the order u/s.250 of the Act.
2. On the facts and in the circumstances of the case and in law, ld CIT(A) has grossly erred in issuing notice for enhancement of the appeal filed. Consequently, the appellate order passed by ld CIT(A) is bad in law and void ab initio.
3. On the facts and in the circumstances of the case and in law, ld CIT(A) has grossly erred in holding that occupancy rights received by the appellant is benefit u/s.2(24)(iv) of the I.T. Act, 1961.
4. On the facts and in the circumstances of the case and in law, ld CIT(A) has grossly erred in determining the value of benefit u/s.2(24)(iv) of the I.T. Act, 1961 at Rs.16,44,000/-.
5. Grounds raised by department are as under:
"1. On the facts and in the circumstances of the case and in law, the Ld CIT(A) was not justified in deleting the addition of Rs. 93,95,460/- made u/s 2(22)(a) of the I T Act ignoring that the benefit received by the assessee on account of occupancy rights of the premises allotted to it by the company in substance amounted to distribution of its accumulated profits.
2. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in holding that capital gain tax & gift tax were not applicable to the present case without giving a proper opportunity to the Assessing Officer to be heard on this finding, which did not arise from the grounds of appeal."
6. In both the appeals i.e. appeal filed by assessee as well as department, grounds are inter-linked and, accordingly, same are being dealt with together.
7. The relevant facts giving rise to these appeals are stated by Assessing Officer in para 6 of the assessment order which are as under:
"6. M/s. Hatane Premises Pvt. Ltd. a family owned company purchased a property called Joshi Estates, around 1992 at S.V. Road, Vile Parle, Mumbai. The object of the company was to carry on the business of builders and developers. Accordingly, it constructed three buildings, two of which were residential and one was shopping cum office premises. One building was given away to the landlord of Joshi Estates as a part of the purchase deal, one building of six floors with one flat on each floor given to the shareholder family members and the shopping cum office premises was partly given to shareholder family members and the balance claimed to have been sold to a company called Dev Housing and Land Development. The company issued letters to the shareholders stating that their request for occupancy rights of various flats has been accepted against their block of shares and that they would have to pay interest free refundable deposit and further informed them that the municipal taxes would be payable by them and they would be entitled to transfer the occupancy rights of the flat concerned, by way of sale and create third party rights and give possession to the transferee subject to the transferee depositing the required amount of interest free deposits. During the period 1992 to 2003/2004 i.e by the time, the project was completed, the real estate prices went through the roof. If the company was to sell its entire stock in trade, it would result into huge profits and taxes payable would be very high. Accordingly, to avoid the payment of taxes, the company distributed the stock in trade amongst its shareholders. The said distribution has been done in A.Y.2006-07 and A.Y. 2007-08. On being questioned, as to why the said distribution should not be considered as dividend as per the provisions of section 2(22)(a) of the IT Act which reads as follows:
"Dividend includes - (a) any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company. "
In reply, the assessee vide its letter dated 26.12.2008 stated that the occupancy rights were given to its shareholders in the year ending 31.3.2002 and the company had no accumulated profits on that date. The assessee further stated that the first profit was earned by the company in the year ended 31.3.2005 when it sold its properties for the first time. The letters granting occupancy rights to the assessee of two flats admeasuring carpet area of 685 square feet each on the first and second floor, Shanti Kutir are attached to this order as annexure 'A' and 'B'. These letters confirm that the flats were given by the company on 25 March, 2006 and not before 31.3.2002 as claimed by the assessee. The falsehood of the assessee stands nailed. As per the balance sheets of the company, it had an accumulated profit of 1 98,46,433/- as on 31.3.2005 and Rs. 1,95,23,739/- as on 31.3.2006. It is important to note here that in terms of section 2(22)(a), the value of the unsold stock is also accumulated profits as the words used are "whether capitalized or not ". In fact, to circumvent the said part of section 2(22)(a), the assessee has wrongly declared stock in trade as fixed assets of Rs. 4,01,00,707/- and Rs. 5,26,00,007/- as on 31.3.2005 and 31.3.2006. This subterfuge has led to an absurd situation where both the parties i.e. company as well as shareholder claim to be the 'de lure' owner of the same flats while the flat owner being in possession is the 'de facto and de lure' owner both."
8. On the basis of above, AO has stated that the provisions of section 2(22)(a) are squarely applicable to the assessee's case and the value of the flats received by him are nothing but dividend given in the form of 'assets by the company', M/s. Hatane Premises Pvt Ltd (HPPL). AO considered the market value of the property as per stamp duty reckoner at Rs. 93,95, 460/- and added to the income of assessee as deemed dividend as per section u/s.2(22)(a) of the Income tax Act, 1961.
9. Being aggrieved, assessee filed appeal before the first appellate authority.
10. On behalf of assessee, it was contended that assessee is a shareholder of HPPL. The shares in the said company, i.e. HPPL had attached with right to occupy certain portions of the property constructed on a plot of land owned by it. A shareholder who holds a certain block of shares; could on payment of interest free refundable deposit to HPPL to be permitted to occupy a part of the said building. The said interest free refundable deposit was given by a shareholder towards the proportionate cost of land and cost of construction/development. The said occupancy rights were first granted by HPPL to its shareholders in the year ended 31.3.2002 and subsequently rights were merely amended from time to time. Each time when rights were so amended, a shareholder whose rights were reduced in any manner, was compensated. The said occupancy rights were as such transferable but only with the consent of HPPL. It was contended that HPPL had no accumulated profits in the year ended 31.3.2002 when the occupancy rights were attached to some of the shareholding. The first profit earned by said HPPL was only in the year ended 31.3.2005. The assessee in the year ended 31.3.2006, contributed a sum of money towards interest free refundable deposits and it secured an allotment of occupancy rights in respect of premises No.101 and 201 in the said building. On behalf of assessee, it was contended that AO did not appreciate submissions made by assessee that there was no distribution by HPPL since the asset continued to belong to HPPL and also that the shareholders had contributed towards the allotment of the Occupancy Rights and further that on the date when occupancy rights were allotted to shareholders as a whole HPPL had no accumulated profits. On behalf of assessee, it was also contended that the shareholders were given occupancy rights by the resolution of the Board of HPPL in the meeting held on 15.3.2002. Since HPPL did not have any accumulative profits, assessee got occupancy rights subject to the payment of interest free refundable deposit. Hence, it cannot be considered as deemed dividend.
11. Ld CIT(A) has stated that Article -5 gives the rights of use and occupation of allotted premises to the shareholders. This right shall be exclusive and subject to placing with HPPL interest free refundable security deposit of the amount as determined by the Board of company i.e. HPPL for the proportionate cost of land, other costs, and expenses related to the land cost, cost of construction and development of the building or buildings to be constructed by HPPL for the allotted premises per sq. ft of carpet areas of the allotted premises. Ld CIT(A) after considering provisions of section 2(22)(a) of the Act has stated that AO has considered letter dated 25.3.2006 regarding occupancy rights given to the shareholders on that date as distribution to apply provisions of section 2(22)(a) of the Act. Therefore, AO has considered the deemed dividend u/s.2(22)(a) of the Act in A.Y. 2006-07. Ld CIT(A) has stated that interest free refundable deposits were received by HPPL against the allocation of occupancy rights and therefore, the resolution for the allocation of occupancy right is meaningless till the payment for occupancy rights is made substantially. Ld CIT(A) has stated that more than 51% payment has been made and, therefore, it can be said that substantial payment has been made in the period relevant to assessment year 2006-07. Therefore, AO has chosen the correct assessment year for making the addition. However, ld CIT(A) has further stated that HPPL retained the ownership of the assets with itself. The occupancy rights of the flats which formed the part of the assets were given to the shareholders against payment of 'interest free refundable deposit' only and it cannot be said that there was distribution of assets either in part or fully. That the shareholders never could transfer the flat in their own name and had to surrender it back to the company and in lieu thereof to receive back the refundable deposit. Ld CIT(A) has stated that the addition made by AO u/s.2(22)(a) of the Act cannot be sustained.
12. However, ld CIT(A) has held that assessee had received benefit/perquisite u/s.2(24)(iv) of the Act on account of obtaining occupancy rights in the building. Ld CIT(A) has proceeded to quantify the benefit and has stated that when the assessee surrendered the occupancy rights in respect of the part of allotted premises, the compensation of Rs.1000 per sq. ft was paid by HPPL. Therefore, assessee has received the value of benefit from the premises @ Rs. 1000 per sq. ft of the area of the occupancy rights that remains with the assessee. Ld CIT(A) has stated that assessee is having remaining area of 3418 sq. ft out of which 1644 sq. ft has been allotted in assessment year 2006-07 and the balance area 1774 sq. ft has been allotted in assessment year 2007-08. Therefore, ld CIT(A) determined the value of benefit u/s.2(24)(iv) of the Act at Rs. 16,44,000/- for assessment year 2006-07 and of Rs. 17,74,000/- for assessment year 2007-08 and added to the total income of assessee for the respective assessment years. Hence, these cross appeals by assessee as well as by department on the ground as mentioned hereinabove in paras 4 & 5.
13. On behalf of assessee, it was contended that assessee received occupancy rights in the building of HPPL by virtue of being a shareholder and as per the resolution passed in the meeting of the Board of Directors held on 10.1.2002, copy placed at pages 1-8 of PB. He submitted that the said occupancy rights were modified from time to time. Ld A.R. referred pages 40 & 41 of PB, which is copy of letter dated 13.5.2004 by HPPL granting additional occupancy rights to the assessee subject to payment of interest free refundable deposit of Rs. 18,00,000 per flat and also against holding of block of 80,000 equity shares per flat. He submitted that letter dated 25.3.2006 by HPPL to the assessee, copy placed at page 43 of PB only confirmed the right of the assessee to occupy the said flat. He submitted that there was dispute in respect of flat No. 101 and 201 in Building No.2, which has been allotted to the assessee and same was resolved in assessment year 2006-07 and, therefore, said letter dated 25.3.2006 was addressed to the assessee. He submitted that AO without going into the facts of that letter granting occupancy rights to the assessee on 25.3.2006 has adopted the market value of the property as per Stamp Duty Reckoner for the assessment year 2006-07 and added the same u/s.2(22)(a) of the Act. Ld A.R. submitted that said occupancy right was given to the assessee as a shareholder with refundable interest free security deposit with a right to sell. The said right given to the assessee is perpetual as assessee has a right to sell the occupancy rights in the premises to a third party and, accordingly, it could be considered a release of assets by HPPL to the assessee. Ld A.R. submitted that ld CIT(A) is not justified to apply provisions of section 2(24)(iv) of the Act considering occupancy right as value of perquisite/benefit provided by HPPL to the assessee as shareholder. He submitted that if the right is given in perpetuality, it does not fall in section 2(24)(iv) of the Act as it tantamounts to release of assets. He submitted that the order of ld CIT(A) to consider occupancy rights as amenities u/s.2(24)(iv) is not valid and the same should be set aside.
14. On the other hand, ld D.R. submitted that AO is justified to consider the occupancy rights as deemed dividend u/s.2(22)(a) of the Act because assessee has got occupancy rights as if the assessee became owner of the said part of the building with a small amount of security deposit. Ld D.R. by placing reliance on letter dated 25.3.2006 placed at page 43 of PB, submitted that occupancy right has been given to the assessee in assessment year 2006-07 and, therefore, AO has rightly treated the value of occupancy right as deemed dividend u/s.2(22)(a) of the Act.
15. Ld A.R. in his rejoinder, submitted that if the said occupancy right is deemed dividend, it cannot be taxed in assessment year 2006-07 as the right was given in assessment year 2003-04 and, there is no distribution of assets in assessment year 2006-07. Ld A.R. further submitted that if it is considered as deemed dividend, said amount cannot be taxed in view of provisions of section 10(34) of the Act as the dividend is not taxable in the hands of shareholder in A.Y. 2006-07. Ld A.R further submitted that without prejudice to above submission, if the addition is to be made as deemed dividend, it should be limited to proportionate to share holding of the assessee in the maximum accumulated profit of HPPL.
16. We have considered submissions of ld representatives of parties and orders of authorities below.
17. We observe that assessee is a shareholder of HPPL, which is a closely held company. It is relevant to state that its earlier name was Majithia and Mehta Construction Private Limited (MMCPL), which was incorporated on 30.3.1992 to carry on real estate business with Jitendra Navneetlal Mehta, Ila Jitendra Mehta and Sonal Sudhir Majithia as shareholders. This family owned company had purchased a land at Andheri (W) and had given occupancy rights to its shareholders based on the number of shares held by them. Ld CIT(A) has stated that HPPL declared the said assets as fixed assets and distributed the same amongst shareholders to avoid tax on sale of assets. AO found that letters granting occupancy rights were given by HPPL to its shareholders on 25.3.2006 and therefore, it is covered by A.Y. 2006-07 and A.Y. 2007-08 and whereas assessee contended that occupancy rights were given to the shareholders for the year ending on 31.3.2002 and if the provisions of section 2(22)(a) are applied, no addition could be made as deemed dividend because HPPL did not have any accumulated profits as on 31.3.2002. However, AO, as mentioned hereinabove, held that assessee by its letter dated 25.3.2006 has been granted occupancy rights to its shareholders and adopted market value of the property as per Stamp Duty Reckoner and added the same u/s.2(22)(a) of the Act. Ld CIT(A) has also agreed with the findings of AO that occupancy right was given by HPPL to its shareholders in the assessment years 2006-07 and 2007-08.
18. At the time of hearing, our attention was drawn to the said letter dated 25.3.2006 placed at page 43 of PB. We on perusal of the said letter agree with the findings of authorities below that occupancy rights of the premises were given to the assessee in the assessment year 2006-07 as said letter addressed to the assessee categorically states that he has to pay interest free refundable deposit amount of Rs. 18 lakhs towards the proportionate land, construction and development cost. It is further stated therein that assessee is liable to pay municipal taxes and other outgoings in respect of flat for the occupancy right is given to the assessee every month. The municipal taxes are also to be paid by the assessee. We observe that it is also stated in the said letter that assessee is entitled to transfer the occupancy rights of the concerned flat by way of sale and transfer of block of shares and create third party rights subject to transferee depositing with HPPL the required amount of interest free security deposit and assessee shall also be entitled to give possession of the said flats to any transferee and HPPL have no objection for the same. It is evident that assessee has got the occupancy right of the premises by way of letter dt.25.3.2006. Hence, the authorities below have rightly held that said occupancy right is given to the assessee in A.Y. 2006-07 and not in earlier assessment years.
19. Now question arises as to whether grant of said occupancy right could be considered as deemed dividend u/s.2(22)(a) of the Act as considered by the AO or it is to be considered perquisite/benefits given by HPPL to its shareholders and as such is to be assessed u/s.2(24)(iv) of the Act or it is to be considered neither deemed dividend nor perquisite to the assessee.
20. As per grounds of appeal taken by assessee as well as by department, it is observed that assessee has disputed in its ground of appeal the findings of ld CIT(A) to hold that occupancy rights received by the assessee is benefit u/s.2(24)(iv) of the I.T. Act, 1961 at Rs.16,44,000 for assessment year under consideration i.e. A.Y. 2006-07 and Rs.17,74,000 for subsequent assessment year i.e. A.Y. 2007-08. On the other hand, department has also disputed the said order of ld CIT(A) not to accept the findings of AO that the addition is to be made in respect of occupancy rights as deemed dividend u/s.2(22)(a) of the Act. Therefore, it is evident that both parties have disputed the order of ld CIT(A) to consider the grant of occupancy rights by HPPL to its shareholders, assessee herein as perquisite/benefit u/s.2(24)(iv) of the Act.
21. On consideration of submissions of ld representatives of parties and the contents of letter dated 25.3.2006, as mentioned hereinabove, copy placed at page 43 of PB, we observe that assessee has received occupancy rights in the premises on perpetual basis and in lieu of which, assessee to hold shares in HPPL and also to give interest free refundable deposit of Rs. 18 lakhs towards proportionate land cost and development cost. Assessee is also entitled to transfer the occupancy rights by way of sale and transfer of block of assets and create third party rights subject to transferee deposit the required amount of interest free refundable security deposit and assessee thereafter to give possession to the transferee. Therefore, we are of the considered view that ld CIT(A) is not justified to hold that it is perquisite benefit given by HPPL to its shareholder and not the transfer of occupancy rights to its shareholders. Hence, we agree with ld A.R. that provisions of section 2(24)(iv) of the Act does not apply to grant of occupancy rights by HPPL to the shareholder, i.e. assessee herein, on the facts of the case before us.
22. Now coming to question as to whether said grant of occupancy rights could be treated as deemed dividend u/s.2(22)(a) of the Act in the assessment year under consideration.
23. We observe that assessee has got the occupancy right in perpetuity as assessee can transfer his occupancy rights of the premises under consideration by way of sale to a third party subject to condition that transferee is to deposit the required amount of interest free security deposit with HPPL. It is observed that the consideration to be received by the assessee on transfer of his occupancy right is not to be refunded to HPPL. It is also observed that HPPL will have no objection for creating third party rights in the occupancy right given to assessee. Further, during the course of hearing, ld A.R. also submitted that HPPL has given occupancy rights in the premises to the assessee perpetually and, therefore, it is to be considered release of assets by HPPL. Ld D.R. also in his submission submitted that assessee has got in guise of occupancy rights full ownership with small amount of security deposit and, therefore, it is to be considered as deemed dividend u/s.2(22)(a) of the Act. Section 2(22)(a) also provides that any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets, it is a deemed dividend. Considering above submissions of ld representatives of parties and the contents of letter dated 25.3.2006, we are of the considered view that AO has rightly held that the value of flats received are nothing but dividend given in the form of assets by HPPL. Hence, we uphold the order of AO that said occupancy right of the premises allotted by HPPL to assessee amounts to deemed dividend u/s.2(22)(a) of the Act.
24. Now the question arises as to whether said deemed dividend should be assessed in the assessment year under consideration i.e. A.Y. 2006-07 or is to be considered to be assessed in assessment year 2003-04 as contended by ld authorized representative. On the basis of facts considered in the light of letter dated 25.3.2006, wherein, it is stated that assessee has agreed to give occupancy rights of the first floor of residential building bearing No.2, inter alia, on payment of interest free refundable deposit amount of Rs.18,00,000/- and admittedly assessee has paid 51% of the said amount in the assessment year under consideration, we hold the action of AO to consider the market value of the said occupancy rights as deemed dividend in the assessment year 2006-07 is in order and no interference is called for. However, the issue as to whether said deemed dividend could be taxed in assessment year under consideration or not will be considered by the AO as per provisions of law at the time of giving effect to our above order.
25. In view of above, grounds taken by assessee as well as department are allowed by confirming the action of AO and reversing the order of ld CIT(A) for assessment year 2006-07.
26. Now we take up cross appeals in the case of Shantikumar D Majithia for assessment year 2007-08 and cross appeals in the case of Smt Sobhana Majithia for assessment year 2006-07.
27. At the time of hearing, it was submitted that the facts and issue involved in all these appeals are identical to assessment year 2006-07 in the case of assessee Shantikumar D Majithia and whatever decision is taken in those appeals will apply mutatis mutandis to cross appeals for assessment year 2007-08 in the case of Shantikumar D Majithia and cross appeals in the case Sobhana Majithia for assessment year 2006-07.
28. In view of above submissions of ld representatives of parties and for the reasons given by us in cross appeals in the case of Shantikumar D Majithia for assessment year 2006-07 in paras 16 to 25, we confirm the action of AO and reverse the order of ld CIT(A) for assessment year 2007-08 in the case of shantikumar D Majithia and cross appeals for assessment year 2006-07 in the case of Sobhana Majithia by allowing grounds of appeal taken by assessee and department.
29. In the result, cross appeals filed in the case of assessee Shantikumar D Majithia for assessment years 2006-07 and 2007-08 and cross appeals filed in the case of Sobhana Majithia for assessment year 2006-07 are allowed.
IT : Where assessees after receiving entire sale consideration entered into an agreement with one 'E' for sale of their land and also executed a general power of attorney in its favour and thereafter they entered into a tripartite agreement with one 'S' and 'E' as a confirming party to convey aforesaid land in favour of 'S', sale proceeds under tripartite agreement was liable to capital gains tax in hands of assessees
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[2012] 28 taxmann.com 102 (Madras)
HIGH COURT OF MADRAS
Commissioner of Income-tax, Chennai
v.
P. Srinivasan*
Mrs. CHITRA VENKATARAMAN
AND K. RAVICHANDRABAABU, JJ.
TAX CASE APPEAL NOS. 635 TO 637 OF 2005†
JUNE 11, 2012
Section 2(47) of the Income-tax Act, 1961, read with section 53A of the Transfer of Property Act, 1882 - Capital gains - Transfer - Part performance of contracts - Assessment years 1993-94 and 1995-96 - Assessees agreed to sell their plots of land to a company 'E' - They after receiving entire sale consideration entered into an agreement dated 23-10-1991 with 'E' for sale of land - They also executed a general power of attorney dated 5-11-1991 in favour of 'E' - Under power of attorney, 'E' was authorised to sell aforesaid land in part or full and to receive sale consideration on behalf of assessees - 'E' was also authorized to take possession of land and administer same - Subsequent to execution of power of attorney, assessees entered into a tripartite agreement dated 27-10-1994 with one 'S' and 'E' as a confirming party; wherein they agreed to convey balance of 83.96 per cent undivided share of aforesaid land in favour of 'S' - Said agreement pointed out that confirming party 'E' was entitled to market existing incomplete constructions together with 16.04 per cent undivided share in land to third parties - Accordingly sale deed was executed in favour of 'S' through power of attorney 'E' - Assessees did not admit capital gains tax liability on sale consideration of Rs. 90 lakhs paid by 'S' on plea that land was handed over to 'E' in year 1991 - Whether since assessees could not produce any material to show that in pursuance of sale agreement dated 23-10-1991 they had put 'E' into possession of land, provisions of section 53A would not apply to instant case - Held, yes - Whether one and only agreement on which assessees had divested their interest to extent of 83.96 per cent of undivided share in land in favour of 'S' was agreement dated 29-10-1994 and 'E' acted only as a power of attorney holder on behalf of assessees - Held, yes - Whether, therefore, assessees were liable to capital gains tax on sale proceeds under tripartite agreement - Held, yes [Paras 20 & 22] [In favour of revenue]
FACTS
Facts
• The assessees were owners of two plots of land. They agreed to sell the said plots to a company 'E'. Accordingly they after receiving the entire sale consideration entered into an agreement dated 23-10-1991 with 'E' for sale of plots of land. They also executed a general power of attorney dated 5-11-1991 in favour of 'E'.
• Apart from these assessees, there were other neighbouring land holders, who had also entered into similar agreement with 'E' for sale of their plots of land. They also executed the power of attorney in favour of 'E'.
• Under the power of attorney, 'E' was authorized to sell the aforesaid property/plots of land in part or full and to receive sale consideration on behalf of the assessees and the neighbouring land holders, i.e., vendors. 'E' was also authorized to take possession of the property and administer the same.
• Subsequent to the execution of power of attorney, the vendors entered into a tripartite agreement dated 27-10-1994 with one 'S' and 'E' as a confirming party, wherein the vendors agreed to convey the balance of 83.96 per cent undivided share of the land in favour of the purchaser 'S'.
• The agreement dated 27-10-1994 provided that the confirming party 'E' due to paucity of funds desired to relinquish its role as contractors of vendors and the vendors desired to develop the land through the purchaser 'S'.
• The aforesaid agreement pointed out that the confirming party 'E' was entitled to market the existing incomplete constructions together with 16.04 per cent undivided share in the land to third parties for such consideration that the confirming party would fix to its own account and the vendors had agreed to reconstitute their respective holdings in the land as one bit and further agreed to execute all documents, etc. as and when required by the purchaser. The vendors and confirming party 'E' would deliver vacant possession to the purchaser within one week of receipt of no objection certificate from the Income-tax department. Accordingly, the sale deed was executed in favour of 'S' through power of attorney 'E' on behalf of the vendors. The sale deed also referred to the sale consideration of Rs. 90 lakhs.
• The assessees did not admit capital gains tax liability on sale consideration of Rs. 90 lakhs on the plea that the possession of the land was handed over to 'E' in the year 1991.
• The Assessing Officer held that 83.96 per cent of the undivided share of the land was sold by the assessees and the other land owners in favour of 'S'. Thus the assessees were to be assessed on the capital gains arising under the consideration for the sale of the assessee's interest of 83.96 per cent of undivided share in the property.
• On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer.
• On second appeal, the Tribunal held that vide agreement dated 23-10-1991 the assessees had agreed to sell the entire land to 'E' and accordingly the possession of the said land was given to 'E'. Subsequently 'E' wanted to release the remaining 83.96 per cent of undivided share in favour of 'S' which was very clear from the agreement dated 27-10-1994. Therefore, there was no justification in the contention of the revenue that the entire sale consideration in respect of 83.96 per cent of the undivided share should be assessed at the hands of the assessees.
• When physical possession was handed over to 'E' by the assessees in the year 1991 as part performance of the agreement after receiving the entire sale consideration, no amount arising out of sale consideration could be assessed at the hands of the assessees.
• When possession was handed over to 'E' in pursuance of an agreement of sale and the ingredients of section 53A of the Transfer of Property Act, 1882 stood satisfied, after payment of sale consideration, the assessees could no longer claim possessory rights over the land as against the claim of the purchaser.
• The confirmation letter written by 'E' to the Commissioner (Appeals) pointed out that the entire sale consideration was received by it from 'S'.
• Therefore, no capital gain arose in the hands of the assessees.
Revenue's arguments
• The question of applicability of section 53A of the Transfer of Property Act, 1882 did not arise in the facts and circumstances of the case.
• In the general power of attorney executed by the assessees in favour of 'E' on 5-11-1991, there was no reference at all to the agreement dated 23-10-1991.
• The possession given in the power of attorney never contemplated any transfer of interest in favour of 'E'.
• The tripartite agreement dated 27-10-1994 entered into between the assessees through 'E' with 'S' as a purchaser included 'E' as a confirming party for the purpose of giving sale of undivided share of 83.96 per cent of land and the document of the year October, 1991 was only a created one and no reliance could be placed on this.
• The receipt produced by the assessees evidencing the payment of sale consideration also could not be accepted in the background of the facts available through the documents.
• The Tribunal had committed a serious error in holding that the assessees could not be mulcted with any liability on account of sale in favour of 'S'.
Assessees' arguments
• When the agreement dated 23-10-1991 contemplated possession being given to the promoter for the purpose of giving sale of the property, a fact which had not been denied by the revenue, the assessment could not be sustained.
• Going by the sale agreement dated 23-10-1991 possession of land had been handed over to 'E' which fulfilled the requirements contemplated under section 53A and consequently they could not be held liable for any capital gains.
• The letter from 'E' to the Commissioner (Appeals) clearly pointed out that the consideration of Rs. 90 lakhs in respect of 83.96 per cent undivided share was received by it and, thus, the consideration of Rs. 90 lakhs was never passed on to any of the persons.
• Their names were included in the sale agreement for obtaining no objection certificate.
Issue involved
• Whether the assessees had transferred the entire land to 'E' under the agreement dated 23-10-1991?
• Whether the sale proceeds under the tripartite agreement dated 27-10-1994 executed between the assessees, 'E' and 'S' could be brought to tax at the hands of the assessees?
HELD
• There was no reference in the power of attorney dated 5-11-1991 about the so called sale agreement dated 23-10-1991. Thus, there was no justification to accept the claim of the assessees that they had entered into agreement with 'E' for sale of the entire land in pursuance of which the possession was handed over to 'E'. [Para 15]
• Subsequently a tripartite agreement was entered into on 27-10-1994 between the assessees and the neighbouring land owners [vendors], 'E' confirming party and one 'S' as a purchaser; wherein the vendors agreed to convey the balance of 83.96 per cent undivided share of the land in favour of 'S'. The agreement states that the confirming party due to paucity of funds desired to relinquish its role as contractors of vendors and the vendors desired to develop the land through the purchaser. The agreement also refers to the construction put up by the confirming party of an extent of 20718.75 sq. ft. which in turn would require 16.04 per cent undivided share of the property. [Para 17]
• The aforesaid agreement dated 27-10-1994 states that the vendors and the confirming party shall deliver vacant possession of the land to the purchaser within one week of receipt of no objection certificate from the Income-tax department. The agreement speaks about the mode of payment. Based on the said agreement, possession was handed over to 'S'. A scrutiny of all these documents lead to the conclusion that 'E' as a power agent of the vendors had acted on the said agreement to sell an undivided share of an extent of 83.96 per cent in favour of 'S' for a consideration of Rs. 90 lakhs. [Para 18]
• Thus, whatever be the rights the assessees may claim in respect of the agreement dated 23-10-1991, there is no material existing to hold that the assessees, in fact, put the alleged purchaser 'E' in possession of the property so as to substantiate the claim in the context of section 53A of the Transfer of Property Act. [Para 19]
• The assessees could not produce any material to show that in pursuance of the alleged sale agreement dated 23-10-1991, they had put the said 'E' into possession of the property. Even in the agreement dated 27-10-1994 it is stated that the vendors and confirming party assure the purchaser that they would deliver vacant possession of the property to the purchaser within one week from the receipt of no objection certificate from the Income-tax department. [Para 20]
• As regards the so called construction put up by the confirming party is concerned, one has to see whether any rights flow from the assessees to the confirming party under the power of attorney executed on 5-11-1991. If the power of attorney holder is already having any interest in the property as per the deed dated 23-10-1991, then the deed of power of attorney must carry some reference to the first of the agreements to accept the contention of the assessees that they had divested their rights over the property in favour of the power of attorney holder and that they had handed over the property in part performance of the agreement and hence the sale consideration could not be assessed to capital gains at the hands of the respective assessees. [Para 21]
• Therefore, the one and only agreement on which the assessees had divested their interest to the extent of 83.96 per cent in favour of 'S' for which consideration of Rs. 90 lakhs was fixed is the agreement dated 29-10-1994 and that 'E' acted only as a power of attorney holder on behalf of the vendors. [Para 22]
• As regards the reliance placed on the letter addressed to the Commissioner (Appeals) that the sale consideration of Rs. 90 lakhs was retained by 'E', except treating as statement that the consideration received was never passed on to any of the vendors no weightage could be given to the letter sent by 'E'.
• Therefore, the contention of the assessee that possession was handed over to 'E' in the year 1991 itself was liable to be rejected. [Para 23]
• Therefore, the order of the Tribunal was liable to be set aside. [Para 24]
CASES REFERRED TO
D. Kasturi v. CIT [2001] 251 ITR 532/[2002] 121 Taxman 2 (Mad.) (para 9), Smt. D. Kasturi v. CIT [2010] 323 ITR 40 (Mad.) (para 10), CIT v. Jeelani Basha [2002] 256 ITR 282/122 Taxman 509 (Mad.) (para 11) and Suraj Lamp & Industries (P.) Ltd. v. State of Haryana [2012] 340 ITR 1/[2001] 202 Taxman 607/14 taxmann.com 103 (SC) (para 11).
T. Ravikumar for the Appellant. P.J. Rishi Kesh and Philip George for the Respondent.
JUDGMENT
Mrs. Chitra Venkataraman, J. - The Revenue is on appeal as against the order of the Income Tax Appellate Tribunal relating to the assessment years 1993-94 and 1995-96. The following are the substantial questions of law raised in these appeals:-
1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee had transferred the entire land to M/s. Emerald under the agreement dated 23.10.1991 for a sale consideration of Rs. 4,50,000/-?
2. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the sale proceeds under the tripartite agreement dated 27.10.1994 executed by the assessee, M/s. Emerald and M/s. Sudsun cannot be brought to tax at the hands of the assessee ?
2. Since the issues raised in all these appeals are common and the Tribunal had also considered the issues in respect of Assessment Years under a common order we feel, it is better that the entire case is dealt with under a common order.
3. The assessees are individuals. One P. Srinivasan, the respondent in T.C.A. No. 635 of 2005 purchased a piece of land measuring about 46 cents at Mogappair village for a sale consideration of Rs. 92,000/- under Registered Sale deed and T.R. Harikrishnan, the respondent assessee in T.C.A.No.636 and 637 of 2005 purchased the land to an extent of 43.50 cents in Mogappair village for a sale consideration of Rs.87,000/- under a registered sale deed. Incidentally, it is pointed out that P. Srinivasan, the respondent in T.C.No.635 of 2005 is the Managing Director of the Emerald Promoter Pvt. Ltd. It is seen from the facts herein that the assessees agreed to sell the property for a sale consideration of Rs.4,50,000 in the case of P. Srinivasan and Rs. 4,00,000 in the case of Mr. T.R. Harikrishnan in favour of Emerald Promoter Pvt. Ltd. Accordingly, after receiving the entire sale consideration an agreement dated 23.10.1991 and a general power of attorney dated 5.11.1991 were executed by the assessees, T.R. Harikrishnan and P. Srinivasan respectively and in terms of which possession was handed over to M/s. Emerald Promoter Pvt. Ltd. Apart from these two assessees, there were other neighbouring land holders, who had also entered into similar agreement with M/s. Emerald Promoter Pvt. Ltd. for sale of their plots. They also executed the power of attorney in favour of M/s. Emerald Promoters Pvt. Ltd. under document dated 5th November 1991.
4. A perusal of the power of attorney executed by the assessee T.R. Harikrishnan which is placed before us shows that M/s. Emerald Promoters Pvt. Ltd. has been authorised to sell the property in part or full, or sub-divide or undivided share and to receive sale consideration on behalf of the assessee T.R. Harikrishnan. The said Power of Attorney also pointed out that M/s. Emerald Promoters Pvt. Ltd. was authorised to take possession of the Schedule property and administer the same, to make house plots, construct houses/ flats develop the schedule property, to apply for housing/Residential flats/ commercial flats, building plan before all the statutory housing authorities. However, subsequent to this General power of attorney, the assessees herein along with other owners entered into a tripartite agreement with M/s. Sudsun Housing Development (I) Ltd. and M/s. Emerald Promoters Pvt. Limited, the assessee's General power of attorney as the confirming party under the deed of agreement dated 27.10.1994 wherein it is stated that the confirming party due to paucity of funds, desired to relinquish their role as contractors of vendors 1 to 5, which included the assessees before this court and the vendors desired to develop the Schedule 'A' Property through the purchaser viz., M/s.Sudsun Housing Development (I) Ltd. . The said deed of agreement also referred to sale of undivided share of 0.4650%, 0.4650% and 0.4636% undivided shares in favour of three other vendors, who are parties to this agreement. Accoridngly, the sale deeds were executed through power of attorney on behalf, of the vendors 1 to 5. As already pointed out the assessees before this court are two among the five vendors. The deed also refers to the sale consideration of Rs. 90 lakhs and the mode of payment of Rs. 90 lakhs as follows:
(a) Rs. 20.00 lakhs paid by cheque as per following details as advance, the receipt whereof, the vendors 1 to 5 do hereby admit and acknowledge;
(i) Rs. 10.00 lakhs paid by Cheque No.962122 dated 7.10.94 drawn on Bank of Madura payable at Madras.
(ii) Rs. 10 lakhs paid by Cheque No. 086851 dated 27.10.1994 drawn on Bharat Overseas Bank payable at Madras.
(b) Rs.17,00,000 (Rupees Seventeen Lakhs only) paid to the vendors 1 to 5 through the Confirming Party, by the Purchaser within two months from the date of receipt of No Objection Certificate from the appropriate authority, Income Tax Department or within six months from this date whichever is later.
(c) The balance sum of Rs. 53,00,000/- (Rupees Fifty Three Lakhs only) will be paid by the Purchaser to the Vendors 1 to 5 through the confirming party in three equal instalments to be paid on or before the end of 9th, 12th and 15th month from this date.
5. The agreement pointed out that the confirming party viz., M/s. Emerald Promoters Pvt. Ltd. are entitled to market the existing incomplete constructions, after completion together with 16.04 % undivided share in the Schedule A lands to third parties for such considerations that the confirming party would fix to its own account. and the vendors 1 to 5 had agreed to reconstitute their respective holdings in the Schedule A lands as one bit and further agreed to execute all documents etc., as and when required by the purchaser. Clause 6 of the agreement points out that the Vendors 1 to 5 and Confirming party would deliver vacant possession to the purchaser within one week of receipt of No Objection Certificate from the Income Tax Department.
6. With these background of facts, the Assessing Authority pointed out that Notices under Sections 143(2) and 142(1) were issued to the assessees to explain as to why the profit on sale of land by the assessees to M/s. Sudsun Housing Development Private Ltd. should not be assessed to tax as income which has escaped assessment. The assessing authority in the case of P. Srinivasan pointed out that the return of income filed for the Assessment Year 1996-97 on 7.3.1997 would show that the assessee had admitted capital gain on sale of the land at Mogappair for a consideration of Rs.4,50,000 and a capital gain of Rs.1,32,822 and claimed exemption under section 54.
7. In the assessment order relating to the assessee Harikrishnan, the Assessing Authority pointed out that during the assessment proceedings for the assessment year 1992-93, the assessee filed the receipt for cash of Rs. 4/- lakhs as sale consideration and considering the major development work done to the tune of Rs.3 lakhs, the transactions resulted in a capital loss. After giving opportunity to the assessees' representative, the Assessing Authority came to the conclusion that 83.96% of the undivided share was sold by the assessees and four other land owners in favour of M/s.Sudsun Housing Development. The agreement dated 27.10.1994 made no reference to the first of the sale agreements dated 23.10.1991 relating to the sale consideration of Rs. 4,50,000 and Rs.4,00,000 as the case may be. The agreement dated 27.10.1994 clearly mentioned that the assessees were the owners and vendors of the property. M/s. Sudsun Housing Development (I) Ltd. had confirmed the above transaction in their letter dated 14.3.2002 by stating that they had taken possession of the lands during November 1994 soon after the execution of agreement in their favour. On 30.10.1995 the assessee P. Srinivasan and four others had executed a sale deed in favour of one Mrs. Mary Bala Gowri D Almeida conveying 546 sq.ft undivided share out of the 83.96% undivided share in the lands described in Schedule C. However, the said sale deed referred to the agreement dated 27.10.1994 entered into with Sudsun Housing (I) Ltd. Thus going by the said agreement, the Assessing Authority held that the assessees were to be assessed on the capital gains arising under the consideration for the sale of the asseessees' interest of 83.96% of undivided share in the property. Aggrieved by the said assessment, the assessees went on appeal before the Commissioner of Income Tax (Appeals) who held that the assessees had allowed M/s. Emerald Promoters Pvt. Ltd. to build flat in 16.04% of each undivided share of interest for which they had received Rs.4.5/- lakhs and Rs.4 lakhs respectively, on 13.11.92 and the balance land of 83.96% has been transferred as part performance of agreement dated 27.10.1994 to Sudsun Housing (I) Ltd. for a consideration of Rs. 18,30,370/- and hence the consideration received in respect of this transfer is liable to be assessed to tax. Thus, the Commissioner of Income Tax (Appeals) dismissed the appeals. Aggrieved by the said order, the Revenue went on appeal before the Income Tax Appellate Tribunal.
8. On a consideration of the materials placed before the Tribunal, it held that the assesees were to be assessed in respect of the sale consideration received relating to 16.04% of undivided share of the property only in which M/s. Emerald Promoter Pvt. Ltd. put up a construction. It also pointed out that in November 1991 itself there was a transfer between the assessees and M/s. Emerald Promoter Pvt. Ltd. in respect of the very same land. Going by the agreement dated 23.10.1991, the Tribunal pointed out that the assessee had agreed to sell the entire land of 46 cents of land to M/s. Emerald Promoter Pvt. Ltd. and accordingly the possession of the said land was given to the M/s. Emerald Promoter Pvt. Ltd. Subsequently, M/s. Emerald Promoter Ltd. wanted to release the remaining 83.96% of undivided share in favour of M/s. Sudsun Housing Development (I) Ltd. which is very clear from the agreement dated 27.10.1994. Therefore, there is no justification in the contention of the Revenue that the entire sale consideration in respect of 83.96% of the undivided share should be assessed at the hands of the assessee. Referring to Section 2(47)(v) of the Income Tax Act the Tribunal held that when physical possession was handed over to M/s. Emerald Promoter Pvt. Ltd. by the assessees in the year 1991 as part performance of the agreement, after receiving the entire sale consideration, no amount arising out of sale consideration could be assessed at the hands of the assessees.
9. As regards Mr. P. Srinivasan, the Managing Director of M/s. Emerald Promoter Pvt. Ltd. the Tribunal held that the company being an artificial person is also assessable as an independent unit under the Income Tax Act. After the agreement was entered into P. Srinivasan handed over possession of the land along with other owners. Thus, when Emerald Promoter Pvt. Ltd. took possession of the land from the assessees the question of the vendors retaining possession did not arise. The Tribunal also referred to the decision of this court reported in (D. Kasturi v. CIT [2001] 251 ITR 532/[2002] 121 Taxman 2 (Mad.) and held that when possession was handed over in pursuance of an agreement of sale and the ingredients of Section 53A of the Transfer of Property Act stood satisfied, after payment of sale consideration, the assessee could no longer claim possessory rights over the land as against the claim of the purchaser. The Tribunal further referring to the confirmation letter written by the M/s. Emerald Promoter Pvt. Ltd. pointed out that the entire sale consideration was received by them from M/s. Sudsun Housing Development (I) Ltd.. In the facts of the admitted case, the Tribunal agreed with the assessee and thereby allowed the appeal holding that no capital gain arose in the hands of the assessees. Aggrieved by the said order, the present appeals have been filed by the Revenue before this court.
10. As far as the decision of this court reported in D. Kasturi (supra) is concerned the same was confirmed by the Division Bench of this court in the decision reported in Smt. D. Kasturi v. CIT [2010] 323 ITR 40 wherein this court held that for application of Section 53A of the Transfer of Property Act, the relevant consideration would be the clauses in the agreement between the parties to the agreement and their performance in terms of the agreement. The subsequent act of the assessee in executing the power of attorney and the sale deeds executed by the power holder on the basis of such power of attorney would not in any way alter the status of the parties to the agreement dated March 29, 1993 for applicability of section 53-A as has been rightly held by the learned single Judge. The assessee could not longer assert possessory rights against the firm to which possession was already given pursuant to the agreement and that too after receiving the full sale consideration.
11. In the decision in CIT v. Jeelani Basha [2002] 256 ITR 282/122 Taxman 509 (Mad.) which was referred to by the learned Standing Counsel this court also considered Section 53A of the Transfer of Property Act and Section 2(47)(v) of the Income Tax Act and held that the conditions which would warrant application of Section 53A are that (1) such a delivery of possession should be in the nature of a doctrine of part performance under Section 53A for which there should be an agreement between the parties, (2) such agreement should be in writing (3) a completed contract has to be spelt out from that agreement and the most important (4) the transfer of possession of the property in pursuance of the said agreement. Keeping these conditions in mind, learned Standing Counsel appearing for the Revenue pointed out that even in the background of the decision of the Apex Court in (Suraj Lamp & Industries (P.) Ltd. v. State of Haryana [2012] 340 ITR 1/[2011] 202 Taxman 607/14 taxmann.com 103, the transactions of the nature of general power of attorney sales or sale agreements, do not convey title and do not amount to transfer nor could be recognised as valid modes of transfer of immovable property. In the general power of attorney dated 5.11.1991 there is no reference at all as to M/s. Emerald Promoters Private Limited having entered an agreement of sale on 23.10.1991 in pursuance of which the possession was taken up by them . The Commissioner of Income Tax (Appeals) has gone into the recitals contained in the general power of attorney and rendered a finding that there is no reference in the general power of attorney about the agreement dated 23.10.1991.
12. Learned Standing Counsel for the Revenue submitted that the question of applicability of Section 53A of the Transfer of Property Act does not arise in the facts and circumstances of the case. Secondly, he also referred to the General Power of Attorney executed by the assessee in favour of M/s. Emerald Promoter Pvt. Ltd. dated 5.11.1991, where there is hardly any reference at all to the agreement dated 23.10.1991. Further, the possession given in the power of attorney never contemplated any transfer of interest in favour of M/s. Emerald Promoters Pvt. Ltd. Learned Standing Counsel also submitted that the tripartite agreement dated 27.10.1994 entered into between the assessee herein through the Power of Attorney M/s. Emerald Promoters Pvt Ltd. with M/s. Sudsun Housing Development (I)Ltd. as a purchaser includes Emerald Promoters P) Ltd. as a confirming party for the purpose of giving sale of undivided share of 83.96 %. Going by the conduct of the assessee, it is clear that the document of the year October 1991 is only a created one and no reliance can be placed on this. Consequently, the receipt produced by assessees, evidencing the payment of sale consideration also could not be accepted in the background of the facts available through the documents. The Tribunal had committed a serious error in holding that the assessee could not be mulcted with any liability on account of sale in favour of M/s. Sudsun Housing Development (I) Ltd.
13. Countering the said submission and supporting the order of the Tribunal learned counsel for the assessee made legal submissions in the context of Section 53A of the Transfer of Property Act. He pointed out that when the agreement dated October 1991 contemplated possession being given to the promoter for the purpose of giving sale of the property a fact, which has not been denied by the Revenue, the assessment could not be sustained. Even though a copy of the said agreement is not placed before this court nevertheless the same were placed before the authorities below for their consideration and going by this sale agreement dated 23.10.1991 possession had been handed over to M/s. Emerald Promoters Pvt. Ltd. which fulfills the requirements contemplated under Section 53A of Act and consequently the assessee could not be held liable for any capital gains.
14. Learned counsel for the assessee in respect of T.C.A. 636 of 2005 taking us through the documents emphasised that the letter from the Emerald Promoters Pvt. Ltd. dated 18.11.2003 to the Commissioner of Income Tax (Appeals) clearly pointed out that the consideration of Rs. 90/- lakhs in respect of 83.96% undivided share was received by them and they were retained by them only. Thus, the consideration of Rs. 90/- lakhs was never passed on to any of the persons. The transactions are recorded in the books of accounts . The sale agreement pertaining to sales made to M/s. Sudsun Housing was only executed by them. The registration was done only by Emerald Promoters Pvt. Ltd. as they had the power of attorney. The name of the assessee was included in the sale agreement and the Form 371 for obtaining NOC only for the reason that he is the owner as per the registered documents. Except this letter, no other document was filed to establish and prove that the sale of the entire land was made in favour of M/s. Emerald Promoters Pvt. Ltd. even during November 1991.
15. Except the agreement dated 23.10.1991 entered into with M/s. Emerald Promoters Pvt. Ltd., the documents such as General Power of Attorney executed by the assessee in favour of M/s. Emerald Promoters Pvt. Ltd. dated 5.11.1991, the receipt issued by the assessee, the second agreement executed by the assessees and M/s. Emerald Promoters Pvt. Ltd. as a conforming party in favour of M/s. Sudsun Housing Development Limited dated 27.10.1994 are placed before us for consideration. The absence of the deed dated 23.10.1991, however, does not stand in the way of our agreeing with the Revenue as regards the sale effected by the assessee. As already pointed out on 5.11.1991 the assessee executed a power of attorney in favour of M/s. Emerald Promoters P Ltd. A reading of the said document would show that there was no reference therein about the so called sale agreement dated 23.10.1991. Thus, reading the power of attorney, we do not find any justification to accept the claim of the assessee that he had entered into an agreement with M/s. Emerald Promoters Pvt. Ltd. for sale of the entire land in pursuance of which the possession was handed over to the said M/s. Emerald Promoters Pvt. Ltd.
16. Clauses 1 to 5 of the power of attorney contemplated that M/s. Emerald Promoters Pvt. Ltd. shall act to sell the property in part or full and issue receipts . The said clauses read as follows:-
(1) to sell the property in part or full, or sub-divide or undivide share and to receive consideration on my behalf and issue receipts.
(2) to enter into contracts for sale, lease, mortgage and to receive the consideration.
(3) to execute all documents, deeds, papers in regard to sale, lease and mortgage of the Schedule Property and present before the Registration Office and do necessary acts on my behalf.
(4) to take possession of the Schedule property and administer the same.
(5) to make house plots, construct houses/ flats develop the schedule property.
The rest of the clauses in the General Power of Attorney relate to applying for residential flats/ commercial flats, building plan etc., The General Power of Attorney shows no reference at all to the alleged sale consideration paid under the document dated 23.10.1991. All that we have is the copy of the receipt placed before us indicating the receipt of the payment towards the cost of the undeveloped land at Rs. 4 lakhs by way of cash on three different dates i.e. 23.10.1992, 26.2.1992 and 13.11.1992. There is absolutely no clue as to whether the said receipt was issued under the execution of the General Power of attorney. The receipt further reads that the vendor has no right over the property and the same is in possession of M/s. Emerald Promoters Pvt. Ltd.
17. Subsequently, a tripartite agreement was entered into on 27.10.1994 between the vendors P. Srinivsan, R. Dhanapal, T.T.V. Dhinakaran T.R. Harikrishnan G. Balasundaram, R. Annamalai, K. Sadagopal and M.K. Saravanan represented by the Power of Attorney M/s. Emerald Promoters Pvt. Ltd., who in turn also appeared as a confirming party and M/s. Sudsun Housing I Ltd. as a purchaser, wherein the above said vendors agreed to convey the balance of 83.96% undivided share of the lands in favour of the purchaser. The agreement states that the Confirming Party due to paucity of funds desired to relinquish their role as contractors of vendors 1 to 5 and the vendors desired to develop the Schedule 'A' property through the purchaser. The agreement also refers to the construction put up by the confirming party of an extent of 20718.75 sq.ft which in turn would require 16.04% undivided share of the property and the confirming party as power of attorney of the vendors 1 to 5 executed the registered sale deeds in respect of 0.4650%, 0.4650% and 0.4636% undivided shares in the Schedule 'A' lands in favour of the vendors 6,7, and 8 to enable them to hold their respective apartments in their own names.
18. Clause 6 of the agreement states that the vendors 1 to 5 and the confirming party shall deliver vacant possession of the lands to the purchaser within one week of receipt of No Objection Certificate from the Income Tax Department. As already pointed out, the agreement speaks about the mode of payment. Based on the said agreement, possession was handed over to Sudsun Housing Development (I) Limited. A scrutiny of all these documents enables us to come to the conclusion that Emerald Promoters Pvt. Ltd. as a power agent of the vendors, the assessees herein and others had acted on the said agreement to sell an undivided share of an extent of 83.96% in favour of Sudsun Housing (I) Limited for a consideration of Rs. 90/- lakhs. It is no doubt true that the said consideration was to be shared by more than one vendor. However, there are hardly any materials available before this court as to when the assessees along with the other vendors had executed the sale deed in favour of the vendors 6,7,8 for which there is no reference in the agreement dated 27.10.1994.
19. Quite apart, the assessment order passed in the case of P. Srinivasan would show that a sale deed was executed on 30.10.1994 by the assessee P. Srnivasan and four others in favour of one Mary Bala Gowri D Almeida in respect of a plot in an extent of 546 sq. ft out of 83.96% undivided share transferred to Sudsun Housing (I) Ltd. and the sale deed refers to the tripartite agreement dated 27.10.1994. Thus, whatever be the rights the assessee may claim in respect of the agreement dated 23.10.1991, we do not find any materials, existing as on today, to hold that the assessee, in fact, put the alleged purchaser viz., Emerald Promoters Pvt. Ltd. in possession of the property so as to substantiate the claim in the context of Section 53A of the Transfer of Property Act.
20. It is a matter of record that Harikrishnan is stated to have purchased the property on 2.9.1991. The receipts are filed before this court. The stamped receipt from Emerald Promoters Pvt. Ltd. would show the date of purchase of the stamp paper as 3.4.1990. The said receipt shows that M/s. Emerald Promoters Pvt. Ltd. had made cash payment of Rs. 4,00,000/- on 23.10.1992, 26.10.1992 and 13.11.1992 towards the full cost of the undeveloped land. Except for this, we have no materials placed before this court to show that as to whether the assessee had subsequently put M/s Emerald Promoters Pvt. Ltd. into possession in pursuance of the agreement of sale at all. On the contrary, the Power of Attorney dated 5.11.1991, executed by the said Harikrishnan in favour of M/s. Emerald Promoters Pvt. Ltd. shows that the Power of attorney was to take possession of the property and administer the same in and on behalf of the assessee herein to make house plots, construct houses/flats develop the schedule property, to enter into contracts for sale, lease mortgage and to receive the consideration on behalf of the assessee. Beyond this, learned counsel for the assessee could not produce any material to show that in pursuance of the alleged sale agreement, the assessee had put the said Emerald Promoters Pvt. Ltd. into possession of the property. Even in the agreement dated 27.10.1994, it is stated that the vendors 1 to 5 and confirming party assure the purchaser that they would deliver vacant possession of the schedule property to the purchaser within one week from the receipt of No Objection Certificate from the Income Tax Department.
21. As regards the so called construction put up by the confirming party is concerned, one has to see whether any rights flow from the assessees to the confirming party under the Power of attorney executed by the assessee on 5.11.1991. As already seen, if the power of attorney holder is already having any interest in the property as per the deed dated 2.9.1991, then the deed of power of attorney must carry some reference to the first of the agreements to accept the contention of the assessees that they had divested their rights over the property in favour of the power of attorney holder and that they had handed over the property in part performance of the agreement and hence the sale consideration could not be assessed to capital gains at the hands of the respective assessees.
22. Going by the above facts, we have no hesitation in accepting the plea of the Revenue that the one and only agreement on which the assessee had divested its interest to atleast to the extent of 83.96% in favour of M/s. Sundsun Housing Development (I) Ltd. for which consideration of Rs.90 lakhs/- was fixed is the agreement dated 29.10.1994 and that Emerald Promoters Private Limited acted only as a power of attorney holder on behalf of the vendors.
23. As regards the reliance placed on the letter addressed to the Commissioner of Income Tax (Appeals), that the sale consideration of Rs. 90/- lakhs was retained by Emerald Promoters Pvt. Ltd. except treating as statement that the consideration received was never passed on to any of the vendors, we do not think any weightage could be given to the letter sent by the said Emerald Promoters Pvt. Ltd. Going by the above said findings, we have no hesitation in agreeing with the Revenue's contention that the Tribunal has committed serious error in not analysing the documents in proper perspective, particularly, in the face of the power of attorney and the tripartite agreement not making any reference at all to the first of the agreements dated 23.10.1991 entered into by the assessee with M/s. Emerald Promoters Pvt. Ltd. to accept the contention of the assessee that possession was handed over to Emerald Promoters Pvt. Ltd. in November 1991 itself.
24. In the light of the above discussions, we set aside the order of the Tribunal and confirm the assessment orders. Accordingly, the Tax Case Appeals are allowed. No costs.
IT : In absence of requisite permission to carry on money lending business, loans advanced by a company mainly to assessee-director was rightly added under section 2(22)(e)
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[2012] 28 taxmann.com 133 (Agra - Trib.)
IN THE ITAT AGRA BENCH
Krishna Gopal Maheswari
v.
Additional Commissioner of Income-tax, Range-5, Firozabad*
BHAVNESH SAINI, JUDICIAL MEMBER
AND A.L. GEHLOT, ACCOUNTANT MEMBER
IT APPEAL NO. 82 (AGRA) OF 2012
[ASSESSMENT YEAR 2008-09]
OCTOBER 23, 2012
Section 2(22) of the Income-tax Act, 1961 - Deemed dividend - Loans or advances - Assessment year 2008-09 - Assessee took an unsecured loan from a company in which he was a director and was holding 10 per cent voting power - He submitted that substantial part of business of said company was of money lending - However, Assessing Officer made addition under section 2(22)(e) - Whether since said company had not obtained requisite permission to carry on money lending business and major part of loan was advanced to assessee, addition under section 2(22)(e) was justified - Held, yes [Para 10] [In favour of revenue]
FACTS
Facts
• The assessee, a director and was holding not less than 10 per cent voting power in a company, took unsecured loan from said company.
• The Assessing Officer found that substantial part of amount of loans and advances was given to assessee and company had no licence to carry on money lending business. He made addition under section 2(22)(e).
• Commissioner (Appeals) confirmed said addition.
Argument of assessee
• The case of the assessee fell under clause (ii) of section 2(22)(e).
Issue involved
• Whether loan and advance received by the assessee was covered under the exceptional circumstances provided in section 2(22)(e) ?
HELD
No permission for doing money lending business
• For doing money lending business, one has to obtain necessary permission from competent authority. The assessee has failed to furnish any single evidence to support that the company has followed such procedure based on which it can be said that the substantial part of the business of the company was money lending. [Para 9]
Aspect of business activities
• From aspect of business activities, there are accepted principles that the business activities and transaction are recorded in the books of account. In the case under consideration, the total loan and advances are only in respect of three parties, the assessee and other two parties. [Para 9]
• The loan amount in respect of one of the parties has been shown as investment in the balance sheet and not under the loans and advances. The assessee did not take interest bearing loans and advances from different parties. The auditor has also in his report clarified that the company has not granted but taken unsecured loans, interest free, from other parties covered in the register maintained under section 301 of the Companies Act, 1956. In money lending business, the transactions are taking and giving money on finance. This is a fundamental characteristic of money lending business. [Para 10]
Conclusion
• The assessee has failed to establish that the substantial part of business of the company is money lending and the loans and advances received by the assessee is in the ordinary course of money lending business. [Para 11]
CASE REVIEW
Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) and CIT v. Laxmi Sugar & Oil Mills Ltd. [1986] 161 ITR 168/27 Taxman 284 (SC) (para 9) distinguished.
CASES REFERRED TO
Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) (para 5), CIT v. Laxmi Sugar & Oil Mills Ltd. [1986] 161 ITR 168/27 Taxman 284 (SC) (para 5), Dy. CIT v. Taj Nedou Hotel (P.) Ltd. [2002] 77 TTJ 673 (Asr.) (para 5), CIT v. Parle Plastics Ltd. [2011] 332 ITR 63/196 Taxman 62/8 taxmann.com 155 (Bom.) (para 5), State of Gujarat v. Raipur Manufacturing Co. Ltd. [1967] 19 STC 1 (SC) (para 10) and Sole Trustee Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC) (para 10).
Mahesh Agarwal for the Appellant. K.K. Mishra for the Respondent.
ORDER
A.L. Gehlot, Accountant Member - This is an appeal filed by the assessee against the order dated 04.10.2011 passed by the ld. CIT(A)-II, Agra for the Assessment Year 2008-09.
2. The assessee has raised the following grounds of appeal:-
"1. That the Ld. CIT(A) has erred in law and on facts in confirming the addition of Rs. 37,28,059/- made by the assessing officer u/s 2(22)(e) of the Act in relation to the loan taken from M/s Krishna Bead Industries Pvt. Ltd.
2. That while confirming the addition aforesaid Ld. CIT(A) has erred in law and on facts to hold that money lending was not substantial part of business of the lending company and as such the impugned loan was not covered by the exclusion as provided in Clause (ii) of Sec. 2(22)(e).
3. That the Ld. CIT(A) has erred in law while so upholding simply on the basis of presentation of accounts in the Balance Sheet and Profit & Loss account of the company without appreciating the true nature and character of such accounts.
4. That under the facts and in law ld. CIT(A) ought to have deleted the addition made by the AO u/s 2(22)(e)."
3. The brief facts of the case are that the assessee enjoys income from house property, share from firm and trading of shares of companies. During the assessment proceedings, the A.O. noticed that the assessee has taken unsecured loan from Krishna Beads Industries Private Limited of Rs. 37,28,059/-. The assessee is a Director and having substantial interest in the company Krishna Beads Industries Private Limited. The assessee was holding not less than 10% of the voting power in the said Company. The A.O. asked the assessee why the amount of Rs. 37,28,659/- be not treated as deemed dividend as per the provisions of section 2(22)(e) of the Income Tax Act, 1961 ('the Act' hereinafter). Before the A.O. it was submitted by the assessee that clause (3) of object clause of the Company was to carry on the business of financing enterprises and to finance whether by way of making loans or advances to or subscribing to the capital etc. The said object clause has been reproduced by the A.O. in his order at page no. 3. The A.O. after considering the assessee's submission noticed that the object clause of the company nowhere shows that the company's main business was of money lending. The A.O. examined the Balance Sheet of the company and noticed that the total loans and advance are only Rs. 47,90,339/-, out of which loan to the extent of Rs. 37,28,029/- was given to the assessee. The A.O. has also examined the Profit & Loss Account of the company and noticed that interest received from the assessee of Rs. 62,280/- has been shown as indirect income. The company also have no license of money lending business. The A.O. made addition of Rs. 37,28,059/- under section 2(22)(e) of the Act.
4. The Order of the A.O. has been confirmed by the CIT(A) as under :- (Page nos. 5, 6, 7 & 8)
"2.1 After going through the records and carefully considering the submission of Ld. AR, I am, of the opinion that provisions of sec. 2(22)(e) are clearly applicable in the appellant's case. Before I discuss the facts of the case of the appellant it is considered necessary to refer provisions of sec. 2(22)(e). As per these provisions any loan or advance to a share holder or a concern is treated as dividend in certain cases to the extent of accumulated profits. The applicability of sec. 2(22)(e) depends on fulfillment of following conditions -
(i) The company should be one in which the public are not substantially interested.
(ii) The equity shareholder, who is beneficial owner of shares holding not less than ten percent of voting power, or
(iii) Any concern in which share holder (holding not less 10% voting power) is a member or partner and in which he has a substantial interest, or
(iv) Any person, on behalf, or for the individual benefit of such shareholder. Such shareholder here means a shareholder who is beneficial owner of shares holding not less than 10% voting power.
The loan and advance given to such person shall be deemed to be dividend only to the extent to which it is shown that the company possesses accumulated profits on the date of loan etc. There are certain exceptions also provided in the subsection one of which is that any advance or loan to a share holder or specified concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company will not attract the provisions of sec.2(22)(e) - This exception shall apply only when two cumulative conditions are fulfilled - first, the loan should have been made by the company in the ordinary course of business and secondly, money lending should be substantial part of the company's business. Thus, the effect of sub-clause (e) of sub section (22) of sec. 2 is to create a fiction and treat the loans or advances to a shareholder who is the beneficial owner of shares holding 10% or amore of voting power of the company as dividend. It also includes payments made by the company on behalf or for the individual benefit of such share holder. It further includes advances or loans made to any concern in which such share holder is a member or partner and in which he has a substantial interest. Now, coming to the facts of the case in hand it is seen that the total income as per P&L account as on 31.3.08 shown by M/s Krishna Beads (P) Ltd. on account of sales and other income is Rs. 2657609/-. The break up of which as per Schedule 9 is as under :-
| Sales (Net) | 46465 | 118143939 | |
| Exchange difference | 21763 | 1195445 | |
| Other income | 2589381 | 1157186 | |
| 2657609 | 120496570 |
The break up of other income of Rs.2589381/- as given in annexures to the accounts is as under -
| Interest accrued on investment | 420000 | 420000 | |
| Interest on FDR | 472591 | ||
| Interest on FD | 0 | 267776 | |
| Balance written off | 1219725 | ||
| Vat refund | 343340 | ||
| Duty drawback red | 71445 | 469410 | |
| Indirect income | 62280 |
Whereas breakup as given by Ld. AR during the appellate proceedings vide his written submissions is as under-
| Sales | 46,465 | |
| Exchange Difference | 21,763 | |
| Balance Written off | 12,19,725 | |
| Vat Refund | 3,43,340 | |
| Duty Draw Back | 71,445 | |
| Interest on FDRs | 4,72,591 | |
| Interest on Loans | 4,82,280 |
A comparison of figures as given in annexures to the audited accounts and as given during the appellate proceedings throws some interesting facts what has been stated to interest on loans amounting to Rs.482280/- by the Ld. AR is in fact composed of two items as per audited accounts as under -
| (i) Interest accrued on investment | - 420000 | |
| (ii) Indirect incomes | - 62280 |
Other items of income as per the annexures are -
| Balances written off | 1219725 | |
| Interest on FDR | 472591 | |
| Balances written off | 1219725 | |
| Vat refund | 343340 |
Thus the above analysis shows that not a single rupee income has been shown from money lending activity. The interest earned on FDRs and interest accrued on investment can by no stretch of imagination can be said to have been earned from money lending business. What is now being claimed as interest earned of Rs. 62280/- from the appellant on the advances given to him is in fact shown as 'indirect income' in the annexures. If the money lending was a dominant business activity of the company then how the income earned from such activity can be 'indirect income' is beyond ones comprehension. The explanation being offered is contrary to facts on record and utterly misleading. The explanation is a blatant subterfuge. There was hardly any money lending business carried out by the company i.e. M/s Krishna Beads Ind. (P) Ltd. is also borne out from the fact that total loans and advances as per the balance sheet of the company are to the extent of Rs. 4790339/- out of which Rs. 3728029/- has been given to the appellant, that also interest free in view of the discussion above that sum of Rs. 62280/- has been shown as indirect income in the audited accounts. On these facts it is oxymoron to claim that major part of the activity of the company M/s Krishna Beads Ind. (P) Ltd. was money lending. Thus, I am of the considered opinion that the case of the appellant is far removed from the exception as provided in sub clause (ii) of clause (e) sub section (22) of sec. 2 (i.e. 2(22)(e)(ii). The AO has rightly made the addition and the same is upheld. Grounds raised are dismissed."
5. The ld. Authorised Representative reiterated the submissions made before the A.O. and submitted that the dispute is only whether loan and advance received by the assessee is covered under the exceptional circumstances provided in section 2(22)(e) of the Act, as provided under clause (ii) of section 2(22)(e) of the Act that any advance or loan made to a share holder by a company in the ordinary course of its business, where the lending of money is substantial part of the company. The ld. Authorised Representative submitted that the assessee received the loans and advances from company in the course of its business as the substantial part of business of the company is lending of money. Ld. Authorised Representative tried to demonstrate referring items of Balance Sheet and Profit & Loss account that in the year under consideration interest income has been increased. Ld. Authorised Representative further submitted that the CIT(A) failed to appreciate the true nature of transaction. The CIT(A) wrongly came to the conclusion on this basis and it is appearing in the Profit & Loss account and Balance Sheet. The ld. Authorised Representative submitted that for examining the true nature of the transaction the entries in the books of account are not relevant. The ld. Authorised Representative in support of his contention relied upon the judgement of Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 and CIT v. Laxmi Sugar & Oil Mills Ltd. [1986] 161 ITR 168/27 Taxman 284. The ld. Authorised Representative has also relied upon the decision of Amritsar Bench of I.T.A.T. in the case of Dy. CIT v. Taj Nedou Hotel (P.) Ltd. [2002] 77 TTJ 673 (Asr.). The ld. Authorised Representative submitted that since the money lending is substantial business of the assessee, therefore, provisions of section 2(22)(e) of the Act is not applicable. Ld. Authorised Representative in support of his contention relied upon the judgement of Hon'ble Mumbai High Court in the case of CIT v. Parle Plastics Ltd. [2011] 332 ITR 63/196 Taxman 62/8 taxmann.com 155 (Bom.)
6. The ld. Departmental Representative, on the other hand, relied upon he order of CIT(A).
7. We have heard the ld. Representatives of the parties and records perused. The issue to be examined in the case under consideration is that whether loans and advances received by the assessee from the Company in the ordinary course of its business where the lending of money is a substantial part of business of the assessee Company. To examine the issue, we would like to see section 2(22)(e) of the Act which reads as under :-
"2(22) dividend includes—
| (a), (b), (c) and (d)** | ** | ** |
(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 the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ;
but "dividend" does not include—
(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;
[(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, [and before the 1st day of April, 1965] ;]
(ii) any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;
(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;
[(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);
(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).]
Explanation 1.—The expression "accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956.
Explanation 2.—The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, [but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous 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 ;]"
8. If we consider the object of introduction of sub-clause (e), we notice that a company in which public are not substantially interested may not declare dividends or adequate dividends and may merely give loans to shareholders and such loans, not being dividends under the general law, would not be taxable as income in the hands of shareholders. As the public would not have substantial interest in such company, those substantially interested in the company may not recover the loans or allow them to be that barred by time. The result would be that the amounts which were ostensibly received as loans or advances become the income of shareholders and yet they would not be required to pay any tax on said income under the general law. It is to avoid the evil of this nature that sub-clause (e) of section 2(22) has been enacted.
9. On a plain reading of section 2(22)(e), we find that the section is applicable for any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares holding not less than the 10% of the voting power …………….. but this deemed dividend does not include any advance or loan made to shareholder by a company in the ordinary course of its business, where the lending of money is substantial part of business of the company. On consideration of the facts of the case, we noticed that there is no dispute about the facts that all the conditions laid down under section 2(22)(e) are satisfied for application of section 2(22)(e) except condition laid down under clause (ii) of section 2(22)(e) of the Act. Only argument of the assessee was that the case of the assessee falls under clause (ii) of section 2(22)(e) of the Act. The crux of the argument of the ld. Authorised Representative that loans and advances received by the assessee from the company is during the ordinary course of business as substantial part of the business of the assessee company is lending money. In other words, money lending is a substantial part of company from whom the loan was taken by the assessee and the loan received to the assessee was in the ordinary course of this money lending business. To examine whether the said company was having substantial part of money lending business or not ? Before that it is relevant to mention that the ld. Authorised Representative submitted that the accounting entries are not relevant for examining the issue but, in this regard, we are of the considered view that the books of account maintained on the basis of principle of accountancy and same is certified by technical person like Auditor, the figures reported in financial audited statements can be considered for the purpose of income tax Act unless some contrary material facts have been brought on record, or any material brought on record showing that the books of account maintained by the assessee was not in accordance with the accounting standard and principle of accountancy. This view is supported by section 145 of the Act itself. The judgement cited by the ld. Authorised Representative in the case of Sutlej Cotton Mills Ltd. (supra) and Laxmi Sugar & Oil Mills Ltd. (supra) does not help to the assessee as the CIT(A) did not accept the figures reported in financial statement blindly. But certainly he has taken the help of determining the nature of transaction. The Courts held in those cases that Balance Sheet and financial statement prepared on the basis of books of account are not conclusive for determining the nature of transaction. The Court did not hold that one cannot take the help of those figures for determining the nature of business or transaction in determining the issue under the Income Tax Act. The issue whether the business of the company was a business of money lending or not, to examine this aspect one has to see various aspect of evidences including procedural aspect which are required to be taken under Company's Act and report to controlling Officers including Registrar of Companies, SEBI and others. For doing money lending business one has to obtain necessary permission from competent authority. We may state here that the assessee has failed to furnish any single evidence to support that the company has followed such procedure based on which it can be said that the substantial part of the business of the company was money lending. If we examine this aspect from business activities, we noticed that there are accepted principles that the business activities and transaction are recorded in the books of account. In the case under consideration, the total loan and advances as on 31.03.2008 are only in respect of three parties, Krishna Gopal Maheswary i.e. the assessee and other two parties Abhishek Enterprises & Gaurav Luminaries Pvt. Ltd. The details of loans and advances are reproduced from page no.22 of the Paper Book as under :-
| Name of the Party | Balance as on 31.03.2008 | Interest earned | Rate of Interest | Shown in the Balance Sheet as |
| Krishna Gopal Maheswari | 3790339 | 62280 | 12% | Deposits, Loans & Advances |
| Abhishek Enterprises | 3500000 | 420000 | 12% | Investments |
| Gaurav Luminaries Pvt. Ltd. | 1000000 | Deposits, Loans & Advances |
10. Further in respect of loan and advances to Abhishek Enterprises of Rs.35 lacs, this amount has been shown as investment in the balance sheet and not under the loans and advances. We may also mention that the assessee did not take interest bearing loans and advances from different parties. The auditor has also in his report clarified that the company has not granted but taken unsecured loans, interest free, from other parties covered in the register maintained under Section 301 of the Companies Act, 1956. In money lending business, the transactions are taking and giving money on finance. This is a fundamental characteristic of money lending business. The Apex Court in the case of State of Gujarat v. Raipur Manufacturing Co. Ltd. [1967] 19 STC 1 (SC) while defining the word business in taxing statute the Courts held that the word "business" used in the sense of an occupation or profession are which occupies time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealing either only continued or contemplated to be continued with a profit motive and not for support or pleasure. Whether or not a person carries on business in a particular commodity must depend upon volume, frequency continuity and regularity of transaction of purchase and sale in a class of goods and transaction must ordinary be included into that profit motive. To carry on business ordinarily the characteristic of volume, frequency, continuity and regularity indicate and intension to continue the activity of carrying on transaction must exist. This decision which was recorded in the context of Sales Tax law was relied upon and referred to in the context of Income Tax law in a decision of the Hon'ble Supreme Court in the case of Sole Trustee Loka Shikshana Trust v. CIT [1975] 101 ITR 234.
11. In the light of above discussion, we find that the assessee has failed to establish that the substantial part of business of the company is money lending and the loans and advances received to the assessee is the in the ordinary course of money lending business. Unless the assessee establishes that money lending business was the substantial part of the business of the company and the loans and advances received during the course of money lending business, the assessee will not fall under the exceptional circumstances provided in section 2(22)(e)(ii) for the purpose not to include the calculation of deemed dividend. Further, merely stating in the object clause that the business of the assessee company was money lending cannot be held that the case of assessee falls under exceptional circumstances not to treat the deemed dividend. On the basis of above discussions, we do not find any infirmity in the order of CIT(A). Order of CIT(A) is accordingly confirmed.
12. In the result, appeal filed by the assessee is dismissed.
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