Madras H.C : Whether the Tribunal was right in law and had valid materials in holding that the advance (rental) received by the assessee from the company in which he is a shareholder cannot be termed as a deemed dividend for the purpose of s. 2(22)(e) ?

High Court Of Madras

CIT vs. P.K. Abubucker

Sections 2(22)(e)

Asst. Year 1983-84

R. Jayasimha Babu & K. Raviraja Pandian, JJ.

Tax Case No. 282 of 1996

4th September, 2002

Counsel Appeared

T.C.A. Ramanujam, for the Revenue : V. Ramachandran, for M/s. Anitha Sumanth, for the Assessee

JUDGMENT

R. JAYASIMHA babu, J. :

The question referred to us at the instance of the Revenue is : “Whether the Tribunal was right in law and had valid materials in holding that the advance (rental) received by the assessee from the company in which he is a shareholder cannot be termed as a deemed dividend for the purpose of s. 2(22)(e) ?”

2. The assessee is an individual and he is the managing director of Tip Top Plastic Industries (P) Ltd. The assessee has substantial interest in that company. The assessee as an individual owns a property at No. 31, Stringers St., Madras. The company of which he is the managing director was using that premises as a godown prior to 1981 in which year the building was heavily damaged in a fire accident and, thereafter, the building had to be reconstructed. The assessee on 11th Dec., 1981, leased out the ground floor of the building which he had reconstructed by then up to the ground floor to the company on a monthly rental of Rs. 1,500. In that agreement it was also provided that on completion of the other floors, those floors would also be leased out to the company. That document contained a further provision that for the purpose of meeting the cost of construction of the other three floors, the company should advance a sum of Rs. 10 lakhs to the assessee which would be adjusted towards rent for the premises. After the completion of the construction of the other floors a further lease deed was entered into on 3rd May, 1984, by which the second, third and fourth floors of the building were rented out to the company on a monthly rental of Rs. 10,400.

3. While making the assessment for the asst. yr. 1983-84, the AO held that the assessee had obtained a loan of Rs. 6,88,584 from the company, and that, that amount should be treated as dividend within the meaning of s. 2(22)(e) of the IT Act. On appeal the CIT granted some relief to the assessee based upon his determination of the accumulated profits of the company. On further appeal by the assessee, the Tribunal held that the amount received by the assessee was nothing but advance rent in a transaction between the landlord and the tenant and, therefore, could not be deemed as advance for the purpose of s. 2(22)(e).

4. The Supreme Court in the case of Miss P. Sarada vs. CIT (1998) 144 CTR (SC) 209 : (1998) 229 ITR 444 (SC) considered s. 2(22)(e) of the Act and held that “The loan or advance taken from the company may have been ultimately repaid or adjusted, but that will not alter the fact that the assessee, in the eye of law, had received dividend from the company during the relevant accounting period.”

5. The fact that advance paid to the assessee was to be set off against the future rents would, therefore, not alter the fact that the assessee in the eye of law had received dividend from the company during the relevant accounting period.

6. Learned counsel for the assessee submitted that the term “advance” implies payment of a sum which was not due at the time it was paid and that in this case payment of the sum of Rs. 10 lakhs was in terms of an agreement and that it could not be said that that money was not due when paid. It was also submitted by him that there was no finding by the Tribunal that that money was required to be adjusted or repaid.

7. We have already referred to the facts which have been extracted from the statement of the case. It is clear therefrom that the company had agreed to pay an advance of Rs. 10 lakhs when it had taken the first floor on lease for the purpose of meeting the cost of construction of the other three floors and that the lease deed provided explicitly that the advance so paid was to be adjusted against the rent payable for the other three floors. The amount of rent payable for those floors was also set out in the further lease. The advance, therefore, was required to be set off against the rents payable in future years and thus adjusted. The amount of Rs. 10 lakhs paid was clearly an advance, though it was an advance which was to be set off against the rents payable in future.

The question referred to us is, therefore, required to be and is answered in favour of the Revenue and against the assessee.

[Citation : 259 ITR 507]

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