Profit Sharing as per MoU cannot be treated as “Deemed Dividend”: ITAT [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) in a recent ruling,has held that the profit as per MoU could not be treated as “deemed dividend.”

Sanjana RealconPvt. Ltd., the assessee-company is incorporated with the main objective to carry on business as a real estate developer. During the scrutiny of the return filed by the assessee Assessing Officer (AO) found that the assessee had received loans from a company, namely, Landspace Construction Pvt. Ltd. (Landscape) wherein the assessee holds 20substantial interest.

And many other transactions were found including outstanding payable to lender namely Landspace which  was classified as received from Landspace in the nature of loan and advances from related parties. In a consequence of the MOU entered in respect of a business transaction in the ordinary course where both assessee and the Landspace are engaged in real estate business. AO made addition.

Anand Choudhary,on behalf of the assessee,contended that the AO had failed to consider the direct and circumstantial evidence filed in corroboration of explanation furnished. He further contended that where the payment received by the shareholder, i.e., assessee from the other company was in the ordinary course of business transaction entered between two parties, such business transactions would not be a ground for addition.

Kajal Singh, on behalf of the revenue submitted that, the stand taken by the assessee does not match with the audited financial statement of the Assessee, where transactions had been recognized and reported as ‘inter- corporate loans had not been taken cognizance of in its natural perspective. It was contended that the purported MOU between group entities seeking to demonstrate a transfer 50% right in the so-called property in Sun Court was sham and was not proved to have been acted upon in the subsequent years. 

The Bench of Chandra Mohan Garg, (Judicial Member) and Pradip Kumar Kedia (Accountant Member),allowed the appeal observing that , “claim of the assessee that the amount received was in consideration of transfer of rights in the property allotted and thus cannot be regarded as a loan transaction of ordinary nature. To support the nature of money received from Landspace, the assessee claims that such MOU has been acted upon. Where the rights in the property were sold and profits have been shared as business receipt by Land space, the other considerations fade into insignificance. The CIT(A), in our view, has examined the issue threadbare and has rightly concluded that the amount obtained from Landspace is in the nature of business transaction outside the purview of Section 2(22)(e).”

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