By Mr v. Chandrasekhar, Adv., For

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 10TH DAY OF FEBRUARY 2071 PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE NATARAJ RANGASW AMY BETWEEN: LT.A. NO.43 OF 2013 SMI. JAMUNA VERNEKAR#107, 2ND MAINKORAMANGALA, I BLOCKBANGALORE-5600 34. (BY MR. V. CHANDRASEKHAR, ADV., FOR| MR. M. LAVA, ADV.,) .... APPELLAN/ AND* THE DEPUTY COMMISSIONER OF INCOME TAXCIRCLE-12(5), R.P. BHAVANNRUPATHUNGA ROADBANGALORE-56000 1. (BY MR. E.I. SANMATHI, ADV.,)— .., RESPONDENT THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX|ACT 1961, ARISING OUT OF ORDER DATED 31.08.2012 PASSEDIN ITA NO.494/BANG/2011 FOR THE ASSESSMENT YEAR 2007-08,PRAYING TO: | (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW,STATED THEREIN. | (ii) ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO.THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY.THE TRIBUNAL IN ITA NO.494/BANG/2011 DATED 31.08.2012. THIS I.7T.A. COMING ON FOR’ HEARING, THIS’ DAY, | ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260-A of the Income TaxAct, 1961 (hereinafter referred to as ‘the Act’, for short).has been filed by the revenue against the judgment|dated 31.08.2012 passed by the Tribunal (nereinafterreferred to as the Tribunal for short). Tne subjectmatter of the appeal pertains to the Assessment Year2007-08. The appeal was admitted by a Bencn of this.Court vide order dated 10.07.2013 on the following:substantial question of law: “Whether the Tribunal was Justified in lawInholdingthat|theamountofRs.59,37,455/- received in lieu of SecurityDeposit and Lease Rentals were loans oradvances witnin the meaning of Section2(22)(e) of the Act on the facts andcircumstances of the case? 2. Facts leading to filing of this appeal brieflystated are that the assessee is an Individual and Is a' Director in a company viz., M/s. Vernaker AssociatesPvt. Ltd., where she holds more than 10% of shares.The assessee was the owner of plot situated at No.8, 1stA Main, Stag Extension, S.T.Bed, Koramangala Block,|Bengaluru which was purchased on 20.01.2004. The|company agreed to take the building on rent if the|building was constructed on the aforesaid plot of land.For the purposes of construction of building, the|company agreed to pay certain amounts dependingupon the availability of the funds. It was further agreedbetween the parties that the amount advanced by thecompany for the purposes of construction shall be.adjusted towards security deposit and the balancetowards rent payable by the company to the assessee.The payments were directly made by the company tothe suppliers or the contractors and construction of thebuildingWaScompleted InNovember2007|andtnereafter, the assessee executed a lease deed on15.12.200/7 on certain terms and conditions. Tne| assessee filed return of income for the Assessment Year|2007-08 on 30.07.2007 itn which taxable income wasdisclosed as Rs.13,40,060/-. The return of income was.processedunder.Section143(1).oftheActOn|01.03.2009. The case of the assessee was selected for|scrutiny and notice under Section 143(2) of the Act was.issued to the assessee on 19.09.2008. The Assessing|Officer, by an order dated 14.12.2009, completed theassessment and determined tne total income of tne'assessee at Rs./2,/7,415/- by making an addition of Rs.59,37,455/- as deemed dividend under Section)2(22)(e) of the Act. 3. Tne assessee thereupon filed an appeal beforethe Commissioner of Income Tax (Appeals), wno Dy an.order dated 30.12.2020,inter alia,held that the.amounts paid by the company did not amount todeemed dividend within the meaning of Section 2(22)(e)of the Act. It was further held that the provisions of 3. Tne assessee thereupon filed an appeal beforethe Commissioner of Income Tax (Appeals), wno Dy an.order dated 30.12.2020,inter alia,held that the.amounts paid by the company did not amount todeemed dividend within the meaning of Section 2(22)(e)of the Act. It was further held that the provisions of Section 2(22)(e) of the Act can be applied only to loans.and advances and cannot be applied to deposits. With.regard to balance amount of Rs.19,37,355/-, the|Commissioner held that the appellant has recovered therent dues subsequently which are nothing Dut trade debtarising during the course of the business. It was further|held that the entire Duilding measuring 8,500 square|feet had been leased out at a nominal rent of!Rs.2,00,Q000/- per month wnich works out to Rs.23.50/-per square feet as against the prevailing market value of.Rs.35/- per square feet. Therefore, it was held that therecovery of amounts to trade advances were fromrentals in the normal course of business and are not.liable to be taxed as envisaged under Section 2(22)(e)of the Act. Thus, the appeal preferred by the assesseewas allowed. Being aggrieved by the aforesaid order of |the Commissioner of Income Tax (Appeals), the revenue.filed an appeal before the Tribunal. The Tribunal, by an.order dated 31.08.2012, allowed the appeal preferred the revenue. In the aforesaid factual background, the|appeal has been filed by the assessee. 4 lLearned counsel for the assessee submitted thatthe Tribunal ought to have appreciated that the payment|made by the company to the assessee was for businesspurpose and not a gratuitous payment. It is further|submitted that the security deposit does not par takethe character of loans or advances and the payment.received is by way of security deposit. It is also urged|that disallowance, if any, has to be restricted to theaccumulated profits and accumulated profits representthe profits as at the beginning of the year and does notinclude the current profits. However, the TridDunal has—failed to appreciate the aforesaid aspect of the matter.In support of aforesaid submission, reliance has been.placed on the decisions in‘COMMISSIONER OF.INCOME-TAxXVs.CREATIVEDYEINGANDPRINTING P. LTD. (2009) 318 ITR 476 (DELHI),‘COMMISSIONEROFINCOME-TAXVs. AMBASSADOR TRAVELS P. LTD." (2009) 318 ITR376 (DELHI), ‘COMMISSIONER OF INCOME-TAXVs. RAJ KUMAR’ (2009) 318 ITR 462 (DELHI),|'PRADIP KUMAR MALHOTRA Vs. COMMISSIONER|OF INCOME-TAX (2011) 338 ITR 538 (CAL),‘PRINCIPAL COMMISSIONER OF INCOME-TAX Vs.|VIKAS OBEROI’ (2020) 115 TAXMANN.COM 261.(SC), ‘BAGMANE CONSTRUCTIONS (P) LTD. Vs.COMMISSIONER OF INCOME-TAX, BANGALORE(2015)5/7TAXMANN.COM1720(KAR),‘COMMISSIONER OF INCOME-TAX Vs. C.R.DASS'|(2012)1/7TAXMANN.COM76(DELHI),‘COMMISSIONER OF INCOME-TAX, KOLKATA-1 Vs. GAYATRICHAKRABORTY’(2018)O4TAXMANN.COM 244 (CALCUTTA), COMMISSIONEROF INCOME-TAX, MUMBAI Vs. VIR VIKRAM VAID'(2015)55TAXMANN.COM431°(BOMBAY),‘COMMISSIONER OF INCOME-TAX, AGRA Vs. ATULENGINEERING UDYOG (2014) 51 TAXMANN.COM 569 (ALLAHABAD), ‘COMMISSIONER OF INCOME-TAX Vs. M.B.STOCKHOLDING (P) LTD." (2015) 64.TAXMANN.COM 138 (GUJARAT), ‘COMMISSIONEROF INCOME-TAX Vs. V.DAMODARAN' (1979) 2TAXMAN 397 (SC) GVK INDUSTRIES LTD. Vs.INCOME-TAX OFFICER’ (2011) 197 TAXMAN 337(SC) AND ‘COMMISSIONER OF INCOME-TAX Vs.B.C.SRINIVASA SETTY' (1981) 5 TAXMAN 1 (SC). 5. On the other hand, learned counsel for the|revenue submitted that the findings recorded by the|Tribunal with regard to deemed dividend are the findings|based on appreciation of evidence on record and tneTribunal, while recording tne aforesaid finding, nas notignored any materials. It is further submitted that theassessee has neither pleaded nor has raised substantialquestion of law on perversity, in the memorandum of.appeal. Tnerefore, no substantial question of law arises.for consideration in this appeal and the findings recordedby the Tribunal are findings of fact wnich cannot be said. to be perverse. It is further submitted that the)withdrawals were made by the assessee from thecompany which amounted to grant of loan advance by the company to the share holder and therefore, the legalfiction under Section 2(22)(e) of the Act was rightly|applied by the Tribunal. It is further submitted thatnexus between the aqmount withdrawn and utilizationtowards the alleged business purpose, has not been.proved by the assessee. It is further submitted that theassessee has not argued before the Commissioner of Income Tax (Appeals) regarding the accumulated.profits. In support of aforesaid submission, reliance hasbeen placed on the decision § i'VIJAY KUMAR|TALWAR Vs. COMMISSIONER OF INCOME-TAX' 3.30ITR 1 AND 'COMMISSIONER OF INCOME TAX Vs.|MUKUNDRAY K SHAH’ (2007) 290 ITR 433.6. We have considered the submissions made onboth sides and Nave perused the record. The only issue,which arises for consideration in this appeal is whether. loan or advance given to a shareholder can be treated|as deemed dividend under Section 2(22)(e) of the Act,which reads as under: any payment by a company, not being a|company in which the public are substantially|interested,ofhy|SUTY(whetheraS|representing a part of the assets of thecompany or otherwise) 5 made after the 31st.day of May, 1987 , by way of advance or loan.to a snareholder, being a person who is tne.beneficial owner of shares (not being sharesentitled 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 votingpower, or to any concern, in whicn” suchsnarenoider is a member or a partner and in.wnicn he nas a substantial interest (nereafterin 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 thecompany in eitner case possesses accumulatedprofits; 7Thus, from perusal of the aforesaid provision,it is evident that it is only where a loan is advanced by a.company to the registered shareholder and in case other|conditions as set out in Section 2(22)(e) of the Act aresatisfied, the amount of loan would be liable to be.treated as deemed dividend within the meaning of Section 2(22)(e) of the Act. The purpose of insertion ofsub clause (e) of sub Section 22 of Section 2 of the Actwas to Dring witnin the tax net accumulated profitswhich are distributed by closely held companies to its.Shareholders in the form of loans to avoid payment of.dividend distribution tax under Section 115-O of the Act.Loan or advance given to shareholders or to a concern.would not normally qualify as dividend and only in case,|where sucn loan or advance is given to a snarenolder as_a consequence of any further consideration which is.beneficial to the company received from such aShareholder, in such a case, such advance or loancannot be said to pe deemed dividend witnin tne! meaning of the provision. The word ‘loan’ means|anything lent specially money on interest whereas,deposit means a sum of money paid to secure an articleat service etc. Therefore deposit is not covered by thedecision of Section 2(22)(e) of the Act. In the instantcase, the assessee received certain sum from thecompany which was subsequently adjusted with the|security deposit. The company did not give loan to the|assessee to construct a building but kept a deposit asany other commercial transaction. The sum so paid has.been adjusted towards security deposit which is evident|from the books of the company and therefore, theaforesaid deposit is outside the purview of Section.2(22)(e) of the Act. A sum of Rs.19,37,355/- amounts.to trade advances which was recovered from rentals|during the usual course of business. The trade advances|arising during usual course of business and not for'individual benefit of the assessee and the same amounts.to advance payment of the rents adjusted monthly with. the ledgers of the assessee. The Commissioner of Income Tax (Appeals) has also held that under thecommercial transactions, the assessee had given prime|property and after construction to the company and theCOM padNWaSbenefitedas|thebuilding|afterconstruction was let out to the company at much lower.ratethan.themarket.priceandtherefore,|thetransaction in question is commercial transaction and isoutside the purview of Section 2(22)(e) of the Act.However, the aforesaid aspect of the matter has notbeen appreciated by the tribunal Therefore, the finding|recorded by the tribunal cannot but be termed asperverse. In view of preceding analysis, the substantialquestion of law is answered in the negative and in.favour of the assessee and against the revenue. In the|result, the impugned order of the tribunal dated30.08.2012 insofar as it contains the finding against theappellant is hereby quashed. | �������������������������������������� ����������������������� )*+""�