Amount given as Security for Purchase of Flat cannot be treated as ‘Deemed Dividend’: ITAT [Read Order]

In the case of DCIT vs. Smt. Sriram Satyavathi, Visakhapatnam bench of Income Tax Appellate Tribunal (ITA) recently held that amount given as security for purchase of flat cannot be treated as ‘deemed dividend’ for the purpose of Section 2(22)(e) of the Income Tax Act, 1961.

Assessee in the present case is an individual duly filed his return of income for the relevant assessment year.  During the course of assessment proceedings the Assessing Officer (AO) has conducted a search under Section 132 of the Income Tax Act 1961.

It was found during the course of search that a promissory note executed in favour of the assessee which representing Vijetha Foundation and Constructions Pvt. Ltd.for a sum of Rs.35 lakhs. However the assessee was called for explanation as to why the loan given to M/s. Vijetha Constructions should not be brought to tax under section 2(22)(e) of the Act in the hands of the assessee. In response the assessee explained that M/s. First Tek Pvt. Ltd. had advanced a sum of ` 35 lakhs to M/s. Vijetha Foundation and Constructions Pvt. Ltd. for purchase of property and as a precautionary measure, a pro note was executed in favour of the assessee by M/s. Vijetha Constructions and no monetary transaction was exchanged between the assessee and M/s. Vijetha Constructions in respect of ` 35 lakhs.

But the AO refused to accept assessee’s submission and he was of the opinion that the said sum required to be brought to tax as deemed dividend under section 2(22)(e) of the Act, and accordingly completed assessment by making an addition of Rs.35 lakhs in the hands of the assessee.

On appeal, CIT(A) deleted the addition made by the AO by holding that the aforementioned transactions were purely sale and purchase transactions but not the finance transactions or any loan to hold the payment as a deemed dividend under section 2(22)(e) of the Act.

Aggrieved by the order passed by the authority revenue was on appeal before the tribunal.

After analyzing the facts and circumstances deeply, the tribunal bench comprising of Judicial Member V.Durga Rao and Accountant Member D.S.Sunder Singh observed that amount given as security for purchase of flat cannot be treated as ‘deemed dividend’.

The division bench further observed that the assessee has not derived any benefit out of payment made to M/s. Vijetha Constructions by M/s. First Tek Pvt. Ltd, hence the amount cannot be treated as deemed dividend. The bench also analyzed that the above mentioned transactions were purely sale and purchase transactions but not the finance transactions or any loan to hold the payment as a deemed dividend under section 2(22)(e) of the Act.