DR. SHIV KANT MISHRA v. DEPUTY COMMISSIONER OF INCOME TAX
[Citation -2008-LL-0523]

Citation 2008-LL-0523
Appellant Name DR. SHIV KANT MISHRA
Respondent Name DEPUTY COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 23/05/2008
Assessment Year 2000-01, 2001-02
Judgment View Judgment
Keyword Tags memorandum of understanding • reduction of tax liability • declaration of dividend • business consideration • compulsory acquisition • hindu undivided family • interest-free advance • business transaction • residential purpose • individual capacity • business expediency • accumulated profit • agreement for sale • search and seizure • issuance of notice • colourable device • reason to believe • managing director • avoidance of tax • lending of money • purchase of land • deemed dividend • payment of tax • special bench • voting power
Bot Summary: In response to query raised by the Assessing Officer it was replied to the Assessing Officer that advance was given by the company to the assessee for purchasing land for constructing a Nursing Home as the present premises of the company is rented one. The assessee is holding more than 10 per cent share in the company and company is not the one in which public is substantially interested. Regarding reopening the assessment, we find following reasons recorded by the Assessing Officer: 30-3-2005 During the scrutiny assessment proceedings of assessment year 2002-03 in the case of M/s. Shivani Hospitals Pvt. Ltd., a company in which the assessee is a director and shareholder, holding more than 10 per cent shares, it was noted that the company has given 'advances' in the nature of loans over the years. As regards addition of Rs. 2,23,574 before us, the learned A.R. for the assessee submitted that money was paid by the company to the assessee for purchase of land on which company intended to construct a Nursing Home which at present was in the rented house. There cannot be any legal action by the company on the assessee for not executing the MOU and transferring the land to the company. The assessee's company is a controlled company. The MOU signed between the company and the assessee is clearly a colourable device whereby accumulated profits are transferred to the assessee as loan for indefinite period and in case company decides not to acquire portion of the property purchased by the assessee then assessee would pay interest at the rate of 10 per cent.


Per D.C. Agrawal, Accountant Member: These are two appeals filed by assessee raising common grounds for assessment years 2000-01 and 2001-02. For assessment year 2000-01, t h e assessee has raised following grounds:1. Because authorities below have erred on facts and in law in issuing notice under section 148 and framing reassessment in pursuance thereof, which assessment is without jurisdiction, bad in law and be quashed. 2. Because authorities below have erred on facts and in law in making addition of Rs. 2,23,574 by invoking provisions of section 2(22)(e) of Income-tax Act, 1961. 3. Because on proper consideration of facts and circumstances of case, re-assessment framed by Assessing Officer is contrary to provisions of law and be quashed.' 2. For assessment year 2001-02, figure of deemed dividend is Rs. 3,09,361. 3. For assessment year 2000-01, facts of case are that return declaring total income of Rs. 5,64,330 was filed on 24-10-2000. assessee is practising doctor and he is also director in M/s. Shivani Hospital (P.) Ltd., wherein his wife, who is also doctor, is another director. assessment in this case was completed under section 143(1) on 15-1-2001. Later, it was gathered by Assessing Officer that assessee has received advance from company M/s. Shivani Hospital (P.) Ltd. Therefore, it was considered that case is covered by provisions of section 2(22)(e) of Act. Accordingly, reasons were recorded and notice under section 148 was issued on 30-3-2005 and served upon assessee. In response thereto, it was replied that return originally filed on 24-10-2002 may be treated as one filed in response to notice under section 148. 4. Assessing Officer noted while completing assessment under section 143(3) in case of M/s. Shivani Hospital (P.) Ltd. for assessment year 2002-03 that assessee had received payments totalling to Rs. 21,12,500 from company. It was recorded in accounts of company under head 'Advances recoverable in cash or in kind or value to be received.' It was explained to Assessing Officer that MOU between company, M/s. Shivani Hospital (P.) Ltd. and assessee was entered into which related to purchase of land for construction of Nursing Home. said land was to be purchased by Dr. S.K. Mishra i.e., assessee and he was in turn to transfer by lease portion of same in favour of company. MOU was signed by Dr. Neelam Mishra on behalf of company and by assessee on his own behalf. It was dated 24-3-1999. relevant portion of MOU as referred to by Assessing Officer in his order is as under: (A)Dr. Mishra will negotiate for land measuring 1480 sq. mts. worth approx. Rs. 70,00,000 out of which company was desirous of taking on lease 50 per cent of land. (B)For purchasing same company had empowered Dr. Mishra to take interest-free advance of up to Rs. 35,00,000 as and when required by him. (C)On purchase of same in his name, Dr Mishra was required to transfer on lease of 25 years, 50 per cent of land to company for construction of Nursing Home. Significantly no time-limit was set for executing this lease deed after purchase of land. (D)If for any reason company decided not to take land then in that case amount of advance taken by Dr. Mishra was liable to be refunded within 6 months from date of receipt of such intention of company. (E)On whole MOU places onus of actions related to purchase, Drawing of advance and transfer on lease upon Dr. Mishra and only action open for company is in situation where decision not to take land is taken by it. 5.In accordance with MOU, land was purchased by Dr. S.K. Mishra in his own name. He held possession thereof also. No portion of same had been leased to company by him so far. company has also not asked him to get lease executed as agreed upon at time of signing MOU even though advance was given for that purpose. Assessing Officer noted that advance has not been returned till date i.e., till passing of assessment order on 7-3-2006. advance remained interest-free with Dr. S.K. Mishra. No action has been taken either by company or by Dr. Mishra either in getting lease deed executed in favour of company or returning advance. On other hand, Dr. Mishra constructed his residence on said plot of land and is enjoying benefit of whole plot. In response to query raised by Assessing Officer it was replied to Assessing Officer that advance was given by company to assessee for purchasing land for constructing Nursing Home as present premises of company is rented one. advance is in nature of loan and therefore, outside purview of section 2(22)(e) of Act. Assessing Officer, however, did not accept explanation. He held that to extent there is accumulated profit of Rs. 2,23,574 in company, advance so given to assessee is deemed dividend within meaning of section 2(22)(e) of Act. assessee is holding more than 10 per cent share in company and company is not one in which public is substantially interested. He, accordingly, made addition of Rs. 2,23,574. 6. Before ld. CIT(A), reopening of assessment was challenged but it was upheld by him on ground that original assessment was completed under section 143(1) and therefore, provisions of section 148 are clearly applicable. Regarding treating sum of Rs. 2,23,574 as deemed dividend, ld. CIT(A) held that company had accumulated profit as on 31-3-1999 and advances were made to one of directors for purchase of land in his name since none of conditions laid down in MOU has been fulfilled advance made by company would fall within purview of section 2(22)(e) of Act. ld. CIT(A) also referred to decision of Hon'ble Madras High Court in case of CIT v. K. Srinivasan [1963] 50 ITR 788 and in case of Baidya Nath Plastic Industries (P.) Ltd. v. K.L. Anand, ITO [1998] 230 ITR 522 (Delhi) for explaining concept of advance, loan and deposit. 7. Regarding reopening assessment, we find following reasons recorded by Assessing Officer: 30-3-2005 During scrutiny assessment proceedings of assessment year 2002-03 in case of M/s. Shivani Hospitals Pvt. Ltd., company in which assessee is director and shareholder, holding more than 10 per cent shares, it was noted that company has given 'advances' in nature of loans over years. After examination of same it was held that these loans were in nature of 'deemed dividend' as given in section 2(22)(e) of Income-tax Act, 1961. For assessment year 1999-2000 total such payment to assessee was Rs. 13,32 ........ whereas accumulated profit of company for this year is Rs. 2,23,574.28. Accordingly I have reason to believe that income amounting to Rs. 2,23,574.28 has escaped assessment issue notice under section 148 of Income-tax Act, 1961.' 8.The objection of ld. AR is that there is no omission or failure on part of assessee shown by Assessing Officer while recording reasons as assessment has been reopened after four years of assessment. 9.On other hand, ld. DR submitted that original assessment was framed under section 143(1) and further assessee has failed to disclose deemed dividend as net income and therefore, Assessing Officer was justified in reopening assessment. 10. After considering rival submissions, we uphold reopening assessment because once original assessment was made under section 143(1) then Assessing Officer is not required to identify and record failure or omission on part of assessee to disclose fully and truly all material facts necessary for assessment. Assessing Officer has charged in reasons recorded that deemed dividend to extent of Rs. 2,23,574 has escaped assessment which is sufficient for purposes of issuance of notice under section 148(1). This ground of assessee is dismissed. 11. As regards addition of Rs. 2,23,574 before us, learned A.R. for assessee submitted that money was paid by company to assessee for purchase of land on which company intended to construct Nursing Home which at present was in rented house. Accordingly, advance was given to assessee, Dr. S.K. Mishra, who purchased land for sum of Rs. 70,01,000 on 14-11-1998 from one Shri P.N. Kaul. house is already constructed thereupon on land measuring 1770 sq. yard. payments were made according to schedule as per agreement made with Shri P.N. Kaul. However, copy of sale deed is in possession of Department as consequence of search and seizure operation. In absence of original sale deed, it would not be possible to transfer half portion of land to company. In fact, there is no ulterior motive of assessee not to pay taxes. deal has been honest both in case of assessee and Shri P.N. Kaul and company and assessee. land to be transferred to company is lying vacant. house is only on half of portion. total contribution by company is Rs. 32 lakhs approximately. MOU executed with company is fully implemented. ld. AR then referred to decision of Hon'ble Tribunal in case of Sri Satchidanand S. Pandit v. ITO [2008] 19 SOT 213 (Mum.) and Dy. CIT v. Lakra Bros. [2007] 162 TAXMAN 170 (Chd.)(Mag.) for proposition that if advances are made during ordinary course of business for business expediency then it could not be said that advances were given for benefit of company. In present case also, ld. AR submitted that advance was given to assessee by company as business consideration because company was intending to purchase land for constructing Nursing Home. In view of these authorities, advances given to assessee could not be treated as deemed dividend. ld.AR also submitted that it is genuine transaction and it is not entered to give any benefit to director. MOU so signed is not doubted. Similarly, records of company are also not doubted. land is being given to company at same price on which it is purchased. 12. On other hand, ld. DR submitted that it is colourable device in sense that MOU between company and assessee is only paper work. It does not show as to when assessee will hand over land to company or in event of land being not given to company then what action- company is going to take to recover money from assessee. In fact, company and assessee are practically same. There are only two persons in company, assessee himself and his wife. Therefore, there cannot be any legal action by company on assessee for not executing MOU and transferring land to company. Thus, no value against advance given has been received by company so far from assessee. He referred to decision of Hon'ble Supreme Court in case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 and also Special Bench [Mumbai] decision in case of Mid East Portfolio Management Ltd. v. Dy. CIT [2003] 87 ITD 537, for proposition that if there is colourable device then Assessing Officer is within his right to enter into reality and ignore transaction so entered into through colourable device. ld. DR submitted that one should look at totality of transaction as whole to take view whether it makes commercial sense and not to give any importance to each step which may be otherwise legally valid. 13. In rejoinder, learned A.R. for assessee submitted that there is no colourable device and in fact there is no ulterior motive to evade tax. Department has not proved that assessee had intention to evade taxes by entering into such transaction. He submitted that it is business transaction and therefore, would fall beyond scope of section 2(22)(e) of Act.14. We have considered rival submissions and perused material on record. facts which are undisputed are that assessee, along with his wife who is also doctor, are directors in company M/s. Shivani Hospital (P.) Ltd. There is no other person as shareholder. All decisions are, therefore, taken by them together. It is also undisputed fact that assessee has received advance from company and ostensibly this advance was for purchase of land. land was to b e purchased in name of assessee and it was left at discretion of assessee as to when he would transfer land to company against advance given to him. In this regard, we reproduce relevant portion of MOU as under: This Memorandum of Understanding has been made at Kanpur on this day o f 24-3-1999 between Dr. Shiva Kant Misra, S/o Shri Ram Balak Mishra, resident of 120/503 Shivaji Nagar, Kanpur, hereinafter called First Party And Shivani Hospital Private Limited, Company incorporated under Companies Act, 1956 having its Registered Office at 120/503 Shivaji Nagar, Kanpur through its Director, Dr. Neelam Mishra, hereinafter called Second Party. Which expression shall unless context......(not legible) so deemed include its successors ....... (not legible). Whereas second party is desirous of construction of Nursing Home in some prime location on main road requiring piece of land approximately 700 sq. ft. and that First party is already in negotiation of piece of land measuring 1480.48 sq. mtr. bearing House No. 117/72 Sarvodaya Nagar, Kanpur belonging to Shri P.N. Kaul. Whereas first party has negotiated said plot for consideration of Rs. 70,00,000 but for want of resources to purchase entire plot, has agreed to share land with Second party on terms and conditions contained herein below. Now this agreement witnesseth as under 1. That Dr. Shiva Kant Misra, First party, will negotiate for entire plot of 1480.48 sq. mtr. with Shri P.N. Kaul and will get sale deed executed in his favour. 2. That 50 per cent of area i.e., 740.24 sq. mtr. of front portion will be left open for Shivani Hospital Private Limited. Second party for construction of nursing home by Second party in future and balance 50 per cent area will be utilized by First party for residential purpose only. 3. That First party after getting said plot purchased in his name will execute lease deed for period not less than 25 years in favour of Second party for construction of nursing home with right to mortgage said portion of land for raising finances for construction of nursing home from financial institutions/banks. 4. That cost of stamp duty for lease deed shall be borne by Second party. 5. That terms and conditions of lease will be decided between both parties mutually as and when required. 6. That First party will be entitled to take advance from Second party up to maximum of 50 per cent of land value i.e., Rs. 35,00,000 as and when required by Fisrt Party and advance will be interest-free. 7. That if Second party decides not to take land on lease then First party shall be liable to refund advance taken by him within six months from date of receipt of said intention of Second party in writing failing which First party will be liable to pay interest @ 15 per cent per annum from expiry of date of six months. In witness whereof parties of this Agreement have put their respective signatures upon this on day, month and year as already mentioned herein above, without undue influence, coercion, bar and pressure etc.' 15. reading of this MoU dated 24-3-1999 indicates that (i) discretion is left with first party i.e., assessee to execute lease deed. But when such lease deed in favour of company would be executed is not specified; (ii) it is also not laid down as up to what period company will wait for assessee for executing lease deed, (iii) valuation of land is not made vis- -vis amount of advance given so as to know whether advance given was equivalent to value of land company was going to get. There is no provision for any extension of lease. There is also no provision as to when company will decide when it will take land on lease from assessee and as to when interest will start running on advance given by company. Thus, above MOU which is not registered with authorities gives unlimited time to assessee to execute lease deed. It seems to be eternity. argument of learned A.R. for assessee that sale deed of land is in possession of Department does not make any difference because copy of deed can always be obtained from Department and even original sale deed can also be obtained by satisfying authorities. No documentary evidence has been furnished so as to show that assesses or company had made efforts to procure sale deed from Department. It is also not shown that it is because of sale deed that lease deed with company could not be executed. There is no material on record to suggest that company has taken any step to either recover half portion of land which it claims it will get against advance or to recover advance as such. 16. In our considered view, MOU so drafted by assessee and company is apparently just paper work to enable it to advance money to assessee to purchase land in his name. There is no law which would debar company to purchase land in its own name or in joint name of company and assessee. fact that entire discretion has been left to assessee through that MOU to transfer land or to lease land to company without any time-limit just indicates that it was clear intention of two parties to transfer money from company to assessee to enable assessee to purchase land and construct house thereon in his name. 17. So far as argument of ld. AR that it should be treated as business consideration and therefore, two authorities of Tribunal and High Court as referred to by him would be applicable have no force because there is no business deal. Neither company nor assessee is dealing in land. It is only investment and therefore, two decisions referred to by ld. AR cannot be applied on facts of case. Further, transaction between assessee and company through MOU is apparently not genuine because it lacks basic ingredients of genuine and real Commercial transaction. MOU is not registered. There is no stipulation as to when assessee will return money or when he will execute lease deed. There is also no stipulation as to when company would start constructing Nursing Home. There is no material to show that any step has been taken for arranging finance or for submitting papers to appropriate authorities for constructing Nursing Home thereon. Merely because sale deed between Shri P.N. Kaul and assessee is in possession of Department, it cannot be considered to be impediment in initiating construction of Nursing Home or initiating process of defining terms of lease deed or registering lease deed. There is no material to show semblance of genuine transaction for purchase of land for purposes constructing Nursing Home on plot. As matter of fact, plot already has residential house thereon which is used now by assessee for his residence residential house thereon which is used now by assessee for his residence and plot vacant is enjoyed by him being adjacent to or part of constructed house. 18. Now, we refer to certain authorities including those cited by parties with regard to deemed dividend under section 2(22)(e) of Act and colourable device. 19. Hon'ble Calcutta High Court in case of Mukundray K. Shah v. CIT [2005] 277 ITR 128 explained as to under what circumstances advance or loan could be treated as deemed dividend. It described that there are four ingredients to be satisfied i.e., (a) company must qualify, i.e., company should be one in which public are not substantially interested (b) payment must qualify, i.e., payment should be by way of loan or advance (c) persons to whom payment is made must also qualify, i.e., such persons should be shareholders having not less than 10 per cent of voting power (as at that time); and (d) payment is to be made out of accumulated profits of company. All these four ingredients in relation to qualification of company, shareholder, concern and payment by way of loan or advance out of accumulated profits are required to be established. Even though case was decided in favour of assessee but it was reversed by Hon'ble Supreme Court in CIT v. Mukundray K. Shah [2007] 290 ITR 433 holding that in controlled group declaration of dividend is entirely within discretion and may adopt device of advancing profits by way of loan to its shareholders so as to avoid payment of tax on accumulated profits. This was considered to be main reason for enacting section 2(22)(e) of Act. In this regard, we refer to observation of Hon'ble Supreme Court in that case as under: ' companies having accumulated profits and companies in which substantial voting power lies in hands of person other than public (controlled companies) are required to distribute accumulated profits as dividends to shareholders. In such companies, controlling group can do what it likes with management of company, its affairs and its profits. It is for this group to decide whether profits should be distributed as dividends or not. declaration of dividend is entirely within discretion of this group. Therefore, Legislature realised that though funds were available with company in form of profits, controlling group refused to distribute accumulated profits as dividends to shareholders but adopted device of advancing said profits by way of loan to one of its shareholders so as to avoid payment of tax on accumulated profits. This was main reason for enacting section 2(22)(e) of Act.' 20. ITAT Mumbai in case of Jhamu U. Sughand v. Dy. CIT [2006] 99 ITD 1, held that main object of provisions of section 2(22)(e) of Act is to treat loan granted by closely held company to any of its shareholders in same manner as it treats dividend distributed by it to them. One exception to provisions is that term 'dividend' does not include any advance or loan made by company to shareholder in course of its business and lending of money as substantial part of business of company. 21. In case of CIT v. P.K. Abubucker [2003] 259 ITR 507 (Mad.) facts w e r e that assessee Shri P.K. Abubucker was Managing Director of company and had substantial interest therein. He also owned property individually. company was using that property as godown. It was destroyed in fire. It was required to be reconstructed. It was agreed by company with assessee that after reconstruction six flats would be taken on lease by company. For purposes of construction of new building, company advanced sum of Rs. 10 lakhs to assessee which was to be subsequently adjusted towards rent of premises. It was held that in eyes of law assessee had received dividend from company during relevant period and advance was assessable as deemed dividend. 22. In case of M.D. Jindal v. CIT [1987] 164 ITR 28 (Cal.), it was held that section 2(22)(e) of Act creates legal fiction. Even though legal fictions are created only for definite purpose and they are limited to purpose for which they are created and cannot be extended beyond their legitimate filed, but legal fiction has to be carried to its logical conclusion within framework of purpose for which it is created. It was also held that even though company is legal personality entirely distinct from its members and company is capable of enjoying rights and being subjected to duties independent of its members, but in certain exceptional cases court is entitled to lift veil of corporate entity and to pay regard to economic realities behind legal facade. In this case, assessee was Managing Director of company. only other director of company was his wife. company was wholly controlled by assessee and his wife. It was carrying on business in iron material. assessee( individual) started construction of multistoried building containing several flats. company entered into agreement with assessee and his wife in their individual capacity to purchase six flats from assessee. For purposes of construction of flats company gave advance, certain raw material (iron rods) amounting to Rs. 1,80,446 and also advance in cash of Rs. 3,50,000. In this regard, Hon'ble Calcutta High Court held that advance of raw material is covered as deemed dividend under section 2(22)(e) as under: ' Held , that, in this case, assessee and his wife controlled company. It was with view to circumventing provisions of section 2(22)(e) that by agreement with company, company was made debtor to assessee and his wife, to extent of Rs. 3,95,000. Tribunal was justified in going behind agreement for sale of flats as well as sale agreement which was subsequently entered into in May, 1968. Section 2(22)(e) makes it clear that any payment by any company of any sum representing part of assets by way of advance would come within mischief of section. In this case, there was advance made by company to assessee by transfer of goods. T h e Tribunal had found that by such transfer, benefit had accrued to assessee. value of iron rods received by assessee could, therefore, be treated as dividends under section 2(22)(e).' 23. In Indo Tech Electric Co. v. Dy. CIT [2006] 99 ITD 325 (Chennai), it was held that Assessing Officer has duty to find out real intention of parties to agreement which prima facie appears different than what is shown on its face. In this regard, we refer to relevant portion of head notes from that decision as under: ' It is duty of Assessing Officer to tax right person for right amount and to discover true state of affairs. agreement to be read in accordance with its construction when there is no doubt regarding intention, but that authorities have right to go behind documents to find out real intention of parties has always been recognised. This rule presupposes that in given case, real intention of parties to agreement is different from what it appears on its face. authorities must normally proceed on basis of professed intention, but if there is doubt, then its power to find out real intention of parties, ignoring apparent, has to be, and has always been conceded. It is difficult to imagine whether this is possible, except in cases of make believe arrangement, or device adopted to evade tax. In such event, authorities will be removing cover to expose real intention of parties intelligently cloaked and if that intention is discovered, which is meant to evade tax, it cannot be acted upon because all steps taken as component part of arrangements are legally correct or valid. This is not rewriting of agreement for parties or importing something outside agreement. taxation authorities must consider that apparent is real until it is shown that there are reasons to believe that apparent is not real and authorities are entitled to look into surrounding circumstances to find out reality.' 24. In Mid East Portfolio Management Ltd.'s case (supra), reference was made to decision of Hon'ble Supreme Court in case of McDowell & Co. Ltd. (supra) and it was observed that genuineness of arrangement has to be viewed not in relation to every step taken to achieve result but in relation to final result. In this regard, we refer to relevant portion of head notes from above decision as under: ' observations relating to questions of tax evasion or avoidance made by Supreme Court in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 have to be followed as guiding principles while deciding whether there was tax evasion or not on facts and circumstances of given case. approach in such cases must be, to take entire transaction or arrangement as whole and see if it makes any economic or commercial sense without attaching weight to steps that go to make up scheme, each of which may be legally valid. genuineness of arrangement has to be viewed not in relation to every genuineness of arrangement has to be viewed not in relation to every step taken to achieve result but in relation to final result. McDowell [1985] 154 ITR 148 (SC), therefore, did not depart from what has already been laid down by Supreme Court earlier except that law regarding tax evasion was restated in much ker expressions such as 'dubious device', 'subterfuge', 'colourable transactions', etc. proper way to understand observations in McDowell [1985] 154 ITR 148 (SC) regarding tax evasion, read as whole and i n perspective, is to hold that all commercial arrangements and documents or transactions have to be given effect to, even though they result in reduction of tax liability, provided that they are genuine, bona fide and not colourable transactions. ** ** ** Supreme Court in case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 has held that even if transaction is genuine and even if it is actually acted upon, if transaction is entered into with intention of tax avoidance, then transaction would constitute colourable device.' 25. Hon'ble Gujarat High Court in case of Banyan & Berry v. CIT [1996] 222 ITR 831 held that Hon'ble Supreme Court in case of McDowell & Co. Ltd. (supra) said that every action or inaction on part of tax payer which results in reduction of tax liability is to be viewed with suspicion but where arrangement is so made only for purpose of not paying taxes then it would fall in category of colourable device. In this regard, we refer to relevant portion of head notes from decision of Hon'ble Gujarat High Court as under: ' In McDowell and Co. Ltd. v. CTO [1985] 154ITR 148 (SC), it was apparent that on factual aspect court was considering case where in going business liability to pay duty which was legally of assessee and which on such payment was to become part of cost of commodity sold by it and to become part of its selling price to buyers, was as result of arrangement between seller and buyer split into two, namely, duty so far paid separately directly to tax authorities and balance so paid to seller; arrangement was existing solely for purpose of not paying tax and it was not transaction in reality of receiving lower price than one on which it was marketing. court nowhere said that every action or inaction on part of taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as device for avoidance of tax irrespective of legitimacy or genuineness of act. principle enunciated in above case has not affected freedom of citizen to act in manner according to his requirements, his wishes in manner of doing any trade, activity or planning his affairs with circumspection, within framework of law, unless same falls in category of colourable device.' 26. Hon'ble Delhi High Court in case of Bhagat Construction Co. (P.) Ltd. v. CIT [2001] 250 ITR 291, held that colourable device is colourable transaction which is seemingly valid, but feigned or counterfeit transaction entered into for some ulterior purpose. conclusion about nature of transaction whether it was colourable or otherwise has to be supported by material or evidence. 27. Hon'ble Supreme Court in case of Union of India v. Playword Electronics (P.) Ltd. [1990] 184 ITR 308 (Hon'ble Supreme Court of India) held that tax planning may be legitimate provided it is within framework of law. Colourable devices cannot be part of tax planning. 28. In this regard, we refer to section 2(22)(e) of Act as under: ' Section 2(22)(e). 'dividend' includes.-** ** ** (e) any payment by company, not being company in which public are substantially interested, of any sum (whether as representing part of assets of company or otherwise) made after 31st day of May, 1987, by way of advance or loan to shareholder, being person who is beneficial owner of shares (not being shares entitled to fixed rate of dividend whether with or without right to participate in profits) holding not less than ten per cent of voting power, or to any concern in which such shareholder is member or partner and in which he has substantial interest (hereafter in this clause referred to as said concern) or any payment by any such company on behalf, or for individual benefit, of any such shareholder, to extent to which company in either case possesses accumulated profits; but 'dividend' does not include- ** ** ** (ii) any advance or loan made to shareholder or said concern by company in ordinary course of its business, where lending of money is substantial part of business of company; ** ** ** Explanation 2. expression 'accumulated profits', in sub-clauses (a), (b), (d) and (e), shall include all profits of company up to date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of company up to date of liquidation, but shall not, where liquidation is consequent on compulsory acquisition of its undertaking by Government or corporation owned or controlled by Govern- ment under any law for time being in force, include any profits of company prior to three successive previous years immediately preceding previous year in which such acquisition took place; Explanation 3.-For purposes of this clause,- (a) 'concern' means Hindu undivided family, or firm or association of persons or body of individuals or company; (b) person shall be deemed to have substantial interest in concern, other than company, if he is, at any time during previous year, beneficially entitled to not less than twenty per cent of income of such concern;' 29. In light of above judicial authorities and provisions of section 2(22)(e) when we examine facts of present case, issue has to be decided against assessee. assessee's company is controlled company. There are only two directors, assessee and his wife. Both are substantially interested in company. money is paid to assessee by way of advance. It is neither business of assessee company to carry on construction activities or dealing in real estate nor that of assessee. Therefore, case of assessee does not fall in exception provided in section 2(22)(e) of Act. All four ingredients as referred in decision of Hon'ble Supreme Court in case of Mukundray K. Shah (supra) are satisfied. Further it is undisputed that assessee company has accumulated profits which it could have distributed as dividend but no such distribution had actually taken place. MOU signed between company and assessee is clearly colourable device whereby accumulated profits are transferred to assessee as loan for indefinite period and in case company decides not to acquire portion of property purchased by assessee then assessee would pay interest at rate of 10 per cent. As to when this stipulation will start operating is without any time-limit and thus practically entire advance goes to assessee without there being any legal remedy available to company for recovery of advance. 30. As result, we hold that MOU was signed by assessee with company is only device to transfer money to assessee for providing benefit to him for purchase of land and house constructed there upon for his benefit. We, therefore, confirm orders of authorities below and dismiss appeal filed by assessee. 31. As result, appeals filed by assessee for assessment years 2000-01 and 2001-02 are dismissed. *** DR. SHIV KANT MISHRA v. DEPUTY COMMISSIONER OF INCOME TAX
Report Error