Section 2(22)(e) is applicable only to registered share holders — as held by DelTrib in ITO v International Land Development (P) Ltd — In favour of: The Assessee ; ITA Nos. 3390/Del/2010 and 3391/Del/2010 : Assessment Years: 2005–2006 and 2007–2008
ITO v International Land Development (P) Ltd.1
ITAT, New Delhi
ITA Nos. 3390/Del/2010 and 3391/Del/2010
Assessment Years: 2005-06 and 2007-2008
C.L. Sethi, JM and K.D. Ranjan, AM
Decided on: 6 May 2011
Counsel appeared:
Mona Mohanty, Sr. DR, for the appellant
C.S. Aggarwal, Sr. Adv. and R.P. Mall, Adv., for the respondent
Order
Bench:
These two appeals, filed by the Revenue are directed against the common order dated 30.4.2010
passed by learned CIT(A) in the matter of an order passed u/s 201/201(1A) of the Income-tax
Act, 1961 for the FY 2003-04, 2004-05 and 2006-07 relevant to the AY 2004-05, 2005-06 and
2007-08 respectively. In these appeals, we are concerned only with the AY 2005-06 and 2007-08.
2. The assessee has also filed cross-objections arising from the said appeals.
3. We shall first take the appeal filed by the Revenue pertaining to the FY 2004-05 relevant to
AY 2005-06.
4. The grounds of appeal raised by the Revenue are as under:-
"On the facts and in the circumstances of the case as well as in law, the learned CIT(A)
has erred in
(i) Holding that the relevant payments could not be treated as deemed dividend in view of
the fact that payment under consideration has not been assessed as deemed dividend in
the hands of the recipients in the relevant assessment year. Such finding of the ld. CIT(A)
1
International Land Development (P) Ltd. v ITO
Cross-Objection Nos. 218/Del/2010 and 219/Del/2010
Assessment Years 2005-06 and 2007-2008
is incorrect in law because assessment of income in the hands of recipient is not a pre
condition to determine the liability of TDS. The liability to deduct tax, which is only a
mode of collection arises once the nature of payments fulfills the conditions mentioned in
the relevant section.
(ii) Ignoring the section 194 makes the principal officer of a company responsible to
deduct tax before making any payment of any dividend within the meaning of section
2(22)(e) of the I.T.Act which no where talks of assessment of such dividend in the case of
recipient.
(iii) Holding that payment to M/s ALM Infotech City (P) Ltd. and International Land
Developers Ltd. could not be treated as deemed dividend on the ground that payment to
above entities (ALM and Intl) is very much covered in the definition of dividend u/s
2(22)(e) of I.T.Act in view of language of that section "......... Or to any concern in which
such shareholder is a member of a partner and in which he has a substantial
interest.........."
(iv) Ignoring the fact that Sh. Alimuddin who is "such shareholder" (as he holds 36.79%
of shares of assessee company) holds 21.19% share in ALM Infotech City (P) Ltd and
therefore has substantial interest in that concern and accordingly the payment to that
concern (ALM Infotech City (P) Ltd) is to be treated as dividend.
(v) Holding that payments to Alimuddin and Goldman Malls Pvt. Ltd. were made for
business exigencies/purposes ignoring the fact that no such contention was taken before
the AO during the proceedings u/s 201 of Income Tax Act. Moreover, the payment has
been shown in the loans and advances account by the assessee company itself in its books
of accounts."
5. In this case, a survey u/s 133A of the Income-tax Act was conducted in the business premises
of the assessee on 30.3.2007 in order to verify the compliance of various provisions of tax
deduction at source as per Chapter XVII of the Act. It has been alleged by the Revenue that the
assessee company had made certain advances to individual and companies, which were its
shareholders, and these payments were in the nature of deemed dividend as defined in Section
2(22)(e) of the Act but assessee has not deducted tax at source as required u/s 194 of the Act.
6. The assessee was incorporated on 22.6.1993 and which is engaged in the business of real
estate. The AO initiated the proceedings u/s 201/201(1A) of the Act in the course of which
assessee's authorized representative appeared and filed various details for FY 2002-03 to 2006-
07.
7. On examination of details, it was noted by the AO that assessee has made payment of
Rs.5,50,000/- to M/s ALM Infotech City (P) Ltd. and sum of Rs.7 lakhs to one Shri Alimuddin on
which the assessee failed to deduct tax at source. The aforesaid payment made to M/s ALM
Infotech City (P) Ltd. and Shri Alimuddin has been treated to be in the nature of deemed dividend
as defined in Section 2(22)(e) of the Act by the AO. The AO, therefore, worked out the TDS
liability of Rs.2,61,375/- and interest payable thereupon u/s 201 amounting to Rs.86,253/-,
aggregating to Rs.3,47,628/-. The AO, therefore, issued demand notice to the assessee to make
the payment of Rs.3,47,628/-.
8. Being aggrieved, the assessee preferred an appeal before the learned CIT(A).
9. Before the learned CIT(A), the assessee stated that payment made to International Land
Developers Ltd. is not covered under the provisions of section 2(22)(e) of the Act inasmuch as
the said recipient is not a shareholder of the assessee company. It was further submitted by the
assessee before the learned CIT(A) that payment made to Shri Alimuddin is also not covered
under the provisions of section 2(22)(e) of the Act inasmuch as the payment was made purely for
commercial consideration and for the commercial exigencies made in the regular course of
assessee's business activities. In support of the aforesaid submissions, the learned counsel for the
assessee relied upon various decisions.
10. After considering the assessee's submission, various decisions cited by the assessee and AO's
order, the learned CIT(A) has taken a view that the payment made by the assessee to M/s ALM
Infotech City (P) Ltd. and Shri Alimuddin is not covered by the provisions contained in section
2(22)(e) of the Act. The operative portion of the learned CIT(A)'s consolidated order runs as
under:-
"5. I have considered the submissions made by the assessee, the order of the assessing
officer as well as the remand report sent by the AO in this matter and I am convinced
with the assessees arguments for two reasons:-
1. M/s ALM Infotech City Pvt. Ltd. and M/s International Land Developers Ltd. are not a
share holder in the assessee company, therefore provisions of section 2(22)(e) of the IT
Act are not applicable in respect of the payment of advance/security deposit made by the
assessee company and also in view of the fact that assessments of the recipient for the
year under reference have already been completed and deemed dividend has not been
assessed in their hands.
2. In the case of Alimmuddin and Goldman Malls P.Ltd. although both are share holders
in the assessee company, it has been demonstrated with evidence that the payments were
made for business exigencies/purposes and in view of the decision of Hon'ble Delhi High
Court in the case of CIT v. Sunil Sethi, ITA 569/2009 these payments cannot be treated as
deemed dividend and in any case the assessment of ALM Infotech City Pvt. Ltd. and
Allimuddin has since been completed and no income on account of been dividend has
been assessed in the hands of either ALM Infotech City Pvt. Ltd. or Allimuddin.
In view of facts as discussed above I hold that the assessee company cannot be held as
assessee in default u/s 201/201(1A) read with section 194 of IT Act for non deduction of
TDS on total payment of Rs.95,196/- for F.Y. 2003-04, Rs.3,47,628/- for F.Y. 2004-05
and Rs.36,83,053/- for F.Y. 2006-07. I, therefore delete the above demand of raised by
the u/s 201/201(1A) of I.T.Act."
11. Hence, the department is in appeal before us.
12. We have heard both the parties and carefully gone through the orders of the authorities below.
We have deliberated upon the various decisions cited by the learned counsel for the assessee,
copies of which have been produced before us in the compilation of judgments containing ten
judgments running into 72 pages. Insofar as payment made to M/s ALM Infotech City (P) Ltd. is
concerned, we are of the considered view that this payment is not covered by the provisions of
section 2(22)(e) of the Act inasmuch as M/s ALM Infotech City (P) Ltd. is not a shareholder of
the assessee company. It is altogether a different matter that some shareholder of M/s ALM
Infotech City (P) Ltd. may be a shareholder in the assessee company but the twin conditions
contemplated u/s 2(22)(e) as held by the Special Bench of the Tribunal in the case of ACIT v.
Bhowmick Color Pvt. Ltd. - 118 ITD 1(SB)(Mum) are not satisfied. In the case of Bhowmick
Color Pvt. Ltd. (supra), it has been held by the Special Bench that following two conditions are
precedent for invoking section 2(22)(e) of the Act:-
(i) The shareholder should be a registered shareholder, and
(ii) The shareholder should also be a beneficial owner of the shares.
13. Since M/s ALM Infotech City (P) Ltd. is admittedly not a registered shareholder of the
assessee company notwithstanding the fact that its shareholder Shri Alimuddin holds shares in
M/s ALM Infotech City (P) Ltd., the provisions of Section 2(22)(e) cannot be applied to any
payment made to M/s ALM Infotech City (P) Ltd. In this connection, reliance may be placed
upon the decision of Hon'ble Rajasthan High Court in the case of CIT v. Hotel Hilltop - 313 ITR
116 where the Hon'ble High Court held that where the firm was not a shareholder in Hotel Hilltop
and only its two partners were shareholders in Hotel Hilltop holding 23% and 25% shares, the
advance paid to firm could not be assessed in the firm's hands as deemed dividend. This could be
deemed dividend in the hands of its partners. In the case of CIT v. Universal Medicare - 190
Taxman 144 (Mum), the Hon'ble Bombay High Court has also taken a view that all payments by
way of dividend have to be taxed in the hands of the recipient of the dividend, namely, the
shareholder. The legal position is that a dividend has to be taxed in the hands of a shareholder.
Consequently, in that case, the payment, even assuming that it was dividend, would have to be
taxed not in the hands of the assessee but in the hands of the shareholder. In this view of the
matter, we, therefore, hold that Section 2(22)(e) is not applicable insofar as payment made to M/s
ALM Infotech City (P) Ltd. is concerned as M/s ALM Infotech City (P) Ltd. is not the
shareholder.
14. It was further contended by the learned counsel for the assessee before the learned CIT(A)
that the payment to M/s ALM Infotech City (P) Ltd. was made on commercial consideration. This
fact emphasized by the assessee was brought to the knowledge of the AO by the learned CIT(A)
with a direction to send a remand report. A copy of MoU dated 15.3.2002 entered into with M/s
ALM Infotech City (P) Ltd. has been placed in the paper book at pages 23 to 29 filed before us
under which the assessee had agreed to advance a sum of Rs.30 lakhs to M/s ALM Infotech City
(P) Ltd. to enable it to acquire the title and ownership right of the lands for the projects. However,
in the remand report, the AO has reiterated his order passed u/s 201/201(1A) and has not disputed
the facts so submitted by the assessee before the learned CIT(A). Therefore, the learned CIT(A)
has taken a view that M/s ALM Infotech City (P) Ltd. is not a shareholder in the assessee
company and provisions of section 2(22)(e) are not applicable in respect of the payment of
advance/security deposit made by the assessee company. In the course of hearing of this appeal,
the learned counsel for the assessee has submitted that the payment to M/s ALM Infotech City (P)
Ltd. was made under a MoU dated 15.3.2002 to acquire land on behalf of the assessee and was
not an amount advanced by way of loan. This fact has not been disputed by the AO in his remand
report as so stated by the CIT(A) in his order. It was further contended by the learned counsel for
the assessee before the learned CIT(A) that the payment made to M/s ALM Infotech City (P) Ltd.
has not been assessed as deemed dividend in its hands while completing the assessment u/s
143(3) of the Act and learned CIT(A) has taken this fact into account, and he set aside the order
of the AO also in view of the fact that deemed dividend has not been assessed in the hands of M/s
ALM Infotech City (P) Ltd. In the light of discussions made above, we, therefore, do not find any
infirmity in the order of learned CIT(A) in vacating the demand of TDS with regard to payment
made to M/s ALM Infotech City (P) Ltd.
15. With regard to payment made to Shri Alimuddin, the assessee submitted before the learned
CIT(A) that the payment made to Shri Alimuddin was not in the nature of any loan or advance
but was made in the regular course of assessee's business in terms of MoU for the acquisition of
land on behalf of the assessee) and, therefore, the payment is not covered by section 2(22)(e) of
the Act. In support of the contention that the money advanced in the regular course of business
cannot be treated as deemed dividend, number of decisions were cited by the learned counsel for
the assessee before the learned CIT(A).
16. After considering the assessee's submission and AO's order, the learned CIT(A) has observed
that it has been demonstrated with evidence that the payment was made for business
exigencies/purposes and in view of the decision of Hon'ble Delhi High Court in the case of CIT v.
Sunil Sethi - ITA No.569/2009, payment made to Shri Alimuddin cannot be treated as deemed
dividend. The learned CIT(A) further observed that the payment made to Shri Alimuddin has not
been assessed as deemed dividend in his hands.
17. In the course of hearing of this appeal, the learned counsel for the assessee submitted that an
agreement was executed between assessee and proprietary concern of Shri Alimuddin to acquire
loan suitable for the forthcoming project of the assessee company and the said amount was not
utilized by Shri Alimuddin for his personal purposes. It was thus contended that the payments
made by the assessee were for business exigencies as per agreement executed between the parties.
A copy of memorandum of understanding executed on 5.7.2002 with M/s ALM International, a
proprietary concern of Shri Alimuddin has been placed before us at pages 75 to 78 of the paper
book filed by the assessee where under the assessee had agreed to advance upto Rs.1 crore to him
to enable him to acquire the title and ownership rights of the land for the projects and to incur
other costs and expenses in relation thereto. This agreement is not found to be bogus or sham by
the AO by making any comment in the remand report. It was further submitted that these facts
were placed before the AO, and AO has not made any comment on the assessee's submission, but
merely stated that he supported the order passed by him.
18. It is not in dispute that the moneys advanced in the regular course of business cannot be
treated as deemed dividend as held in the following cases:-
(i) CIT v. Ambassador Travels (P) Ltd. - 173 Taxman 407 (Del).
(ii) CIT v. Raj Kumar - 181 Taxman 155 (Del).
(iii) CIT v. Nitin Shantilal Parikh - Income Tax Reference No.66 of 1999 (Gujarat).
(iv) CIT v. Creative Dyeing and Printing (P) Ltd. - 184 Taxman 483 (Del).
(v) CIT v. Sunil Sethi - ITA 569/2009.
(vi) Atul Mittal in ITA No.3863/Del/2002 (ITAT Del).
(vii) Nigam Chawala (page 303 of the paper book).
19. In the case of CIT v. Sunil Sethi - ITA No.569/2009, the Hon'ble High Court of Delhi has held
that since the amount of Rs.30 lakhs which was given to the assessee was in the nature of imprest
payment, the same could not be treated as deemed dividend u/s 2(22)(e) of the Act. In this case, a
sum of Rs.30 lakhs was given to the assessee for the purpose of making advance in respect of
certain land dealings which were proposed to be entered into by the company through the
assessee and the Tribunal noted that no material was brought on record to suggest that whatever
was explained by the assessee was incorrect.
20. In the case of CIT v. Creative Dyeing and Printing (P) Ltd. - 184 Taxman 483, the Hon'ble
High Court has held that the amount advanced for business transaction between the parties would
not fall within the definition of deemed dividend u/s 2(22)(e) of the Act. In this case, the Hon'ble
Delhi High Court has followed its own decision in the case of CIT v. Raj Kumar - 181 Taxman
155 (Del). In the course of hearing of this appeal, the learned DR has not been able to controvert
the fact that the payment was made by the assessee to Shri Alimuddin under MoU for the
acquisition of land on behalf of the assessee nor this fact was disputed by the AO in his remand
report.
21. The AO's remand report dated 27.9.2009 has been placed at pages 297 to 299 of the paper
book filed by the assessee. In this remand report, the AO has admitted the fact that the assessee
has filed the copy of agreements and memorandum of undertaking executed by the parties and
other connected papers, and the order of the party for the relevant assessment year was also filed.
The AO further stated that assessee has also explained the business exigencies under which such
amounts were paid. He further stated that assessee has in support relied upon the decisions passed
at ITAT Delhi Bench in the case of Smt.Nigam Chawala - 28 SOT 503 (Del), Bombay Oil
Industries Ltd. - 28 SOT 383 (Mum). The AO, therefore, concluded that the assessee has
supported its contentions by decisions. The AO stated merely in the remand report that he has
made the addition within the ambit of section 2(22)(e) of the act. It is thus clear that no adverse
comments have been given by the AO in respect of the agreements and memorandum of
undertaking executed by the parties on which reliance was placed by the assessee.
22. In the light of the discussions made above, we, therefore, hold that CIT(A) was justified in
vacating the demand in respect of payment made to M/s ALM Infotech City (P) Ltd. as well as to
Shri Alimuddin.
23. Now, we shall come to the appeal for AY 2007-08.
24. In this year, the AO has treated the following payment in the nature of deemed dividend u/s
2(22)(e) of the Act:-
(i) Payment to International Land Developers Ltd. - Rs.3,15,515/-.
(ii) ILD Trade Centres - Rs.37,17,194/-.
(iii) Shri Alimuddin - Rs.10 lakhs.
(iv) Goldman Malls Pvt. Ltd. - Rs.1,00,25,000/-.
25. With regard to the payment of Rs.3,15,515/- paid to International Land Developers Ltd., the
assessee submitted before the learned CIT(A) that payment to M/s International Land Developers
Ltd. is not covered by Section 2(22)(e) of the Act inasmuch as this concern is not a shareholder of
the assessee company. The learned CIT(A) deleted the addition for this reason also. In the light of
our view taken in AY 2005-06, we hold that payment made to International Land Developers Ltd.
does not come under the ambit of section 2(22)(e) of the Act inasmuch as International Land
Developers Ltd. is not a shareholder of the assessee company.
26. Now, we come to payment of Rs.37,17,194/- made to ILD Trade Centres a business concern
of M/s ALM Infotech City (P) Ltd. In this respect, the learned counsel for the assessee has invited
our attention to the copy of agreement executed between the assessee and M/s ALM Infotech City
(P) Ltd. dated 20.10.2006 placed at pages 161 to 202 of the paper book. This is a developer buyer
agreement dated 20.10.2006 entered into by the assessee with M/s ALM Infotech City (P) Ltd.
M/s ALM Infotech City (P) Ltd. was developing and constructing a retail cum commercial
complex called "ILD Trade Centre". The assessee being allottee had agreed to purchase
shop/office unit No.705 measuring 1133.74 sq.ft. for a total consideration of Rs.39,68,090/-, out
of which, a sum of Rs.37,17,194/- was paid on 20.10.2006 and the balance sum of Rs.2,50,896/-
was agreed to be paid on delivery of possession. Thus, it is a case of business/commercial
transaction and is not covered by section 2(22)(e) of the Act.
27. Now, we come to the payment of Rs.10 lakhs made to Shri Alimuddin. The nature of this
payment has already been examined and decided by us in the AY 2005-06. The facts are identical
in this year. Therefore, in the light of our decision for AY 2005-06 vide this common order, we
uphold the order of CIT(A) in holding that the payment of Rs.10 lakhs to Shri Alimuddin is not
covered by section 2(22)(e) of the Act.
28. Next payment is of Rs.1,00,25,000/- made to Goldman Malls Pvt. Ltd. The learned CIT(A)
has vacated the demand with regard to payment made to Goldman Malls Pvt. Ltd. for the reason
that the payments were made for business exigencies as well as Goldman Malls Pvt. Ltd. is not
shareholder of the assessee company. We have perused the memorandum of understanding
executed on 1.12.2006 between the assessee company and Goldman Malls Pvt. Ltd. placed at
pages 255 to 260 of the paper book filed by the assessee. Under this agreement, the assessee had
agreed to advance upto Rs.5 crores to Goldman Malls Pvt. Ltd. to enable it to acquire the title and
ownership rights of the land for the projects and to incur other costs and expenses in relation
thereto. This agreement was produced before the CIT(A) and was sent to the AO for his
comments. Though the AO stated in the remand report that the assessee has filed the copy of the
agreements and memorandum of understanding executed by the parties and other connected
papers, he has not given any adverse comment on this except reiterating that AO has made the
addition within the ambit of section 2(22)(e) of the Act. Moreover, Goldman Malls Pvt. Ltd. is
not a shareholder of the assessee company. Therefore, the learned CIT(A) has rightly vacated the
demand in respect of the payment made to Goldman Malls Pvt. Ltd.
29. For the reasons and discussions made above, we, therefore, uphold the order of CIT(A) in
vacating the demand pertaining to the AY 2007-08.
30. The assessee has also filed cross-objections in both the assessment years. However, in the
light of our order in the departmental appeal where the order of learned CIT(A) has been upheld
in vacating the demand raised by the AO u/s 201/201(1A), the cross-objections filed by the
assessee have become redundant and need no adjudication at this stage.
31. In the result, both the appeals filed by the Revenue are dismissed, and cross-objections of the
assessee are treated to be infructuous.
