By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi
Chartered Accountants
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Section 2(22)(e) — Advance which carries with an obligation of repayment is covered u/s.2(22) (e). Trade advance/advance given for effecting commercial transaction did not fall under the ambit of section 2(22)(e). Amount advanced by company to its directors under board resolution, for specific business purpose would not fall under the mischief of section 2(22)(e) of the Act.
Facts:
The assessee was managing director in DHL Ltd. The company was engaged in the business of development of property. The company advanced funds to purchase plot of lands in the name of the assessee on understanding that land is to be given to DHL for development. The AO on scrutiny of books of DHL Ltd., discovered that there is advance of Rs.3.59 crore and rental advance of Rs.19.89 lakh issued to the assessee. The AO applied provisions of deemed dividend u/s.2(22)(e) on these advances. In order to support its contention the AO also relied on the capital gain shown by the assessee in his books.
Appeal was filed by the assessee to the CIT(A). The assessee contended that advance of Rs.3.59 crore was taken to acquire land which was to be developed by DHL. The main intention behind bifurcating ownership of land and development rights was to reduce the cost of stamp duty so that they remain competitive in this fierce market. The CIT(A) deleted the above addition except sum of Rs.39.62 lakh accepting the fact that transaction was motivated by business consideration and commercial expediency.
The CIT(A) also deleted the addition of lease advance of Rs.19.89 lakh accepting holding it to be advance given for lease of building to be used as office by DHL Ltd.
Aggrieved by the order of the CIT(A), the AO filed appeal before the ITAT.
Held:
Trade advance and monies given for business expediency could not be taxed as dividend. In order to bring any advance within the four corners of section 2(22)(e), advance should carry an obligation of repayment.
Advance given by the company to managing director to purchase the land in its name and then transfer the development rights to the company was a business arrangement made with a view to avoid payment of stamp duty twice, first on land and then on proposed construction of flats.
The assessee was well within the law to adopt such practice which would reduce the cost incidence to the ultimate customer. The AO’s contention that bifurcation was done with an intention to circumvent provisions of the Tamil Nadu Stamp Act could not be accepted being for an unlawful purpose.
Also, the project executed by DHL Ltd. does not appear in the capital gain computation of lands as disclosed by the assessee. So there was no direct nexus as alleged by the AO.
