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| DATE: | December 19, 2012 (Date of publication) |
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| Click here to download the judgement (shantikumar_majithia_deemed_dividend_occupancy_rights.pdf) |
S. 2(22)(a)/2(24)(iv): Occupancy rights to shareholder taxable as “deemed dividend” but not as “benefit or perquisite”
The assessee was the substantial shareholder of a closely held company which owned a building. The Articles of the company provided that each shareholder would have occupancy rights to a flat on the condition that an interest-free refundable deposit be paid. The occupancy rights were transferable. The AO held that the grant of occupancy rights by the company amounted to a “distribution of assets” and that the same was assessable as “deemed dividend” in the hands of the assessee u/s 2(22)(a) to the extent of the accumulated profits. On appeal, the CIT(A) held that as the occupancy rights were given against payment of a refundable deposit, there was no “distribution of assets” and so no deemed dividend. Instead, he held that the occupancy rights conferred a “benefit/perquisite” on the assessee which was assessable u/s 2(24)(iv). On cross appeals before the Tribunal, HELD:
(i) U/s 2(22)(a), any distribution by a company of accumulated profits, whether capitalized or not, constitutes “dividend” if such distribution entails the release by the company to its shareholders of all or any part of the assets. As the assessee received the occupancy rights to the flat in perpetuity and could transfer them, it effectively meant that he had full ownership over the flat. Accordingly, the value of the flats was assessable as deemed dividend u/s 2(22)(a);
(ii) However, as the said occupancy rights were given in lieu of holding shares and an interest-free refundable deposit towards proportionate land cost and development cost and were transferable, there is no “benefit or perquisite” which is assessable u/s 2(24)(iv).
Pending a detailed study, there is prima facie a point of grave doubt that the view the ITAT has taken gives rise to. Certainly, it calls for an intensive debate and incisive discussion. That is, even granting it to be a case of ‘distribution of assets’, why and how it is tantamount to ‘distrbution of accumulated profits’ as envisaged- within its legal or accounting sense ! Can the expression ‘whether capitalised or not’ be regarded to conclusively clinch the point of doubt for or against the Revenue ?
To continue
Out of sheer impulsive curiosity, i tried to closely read through the ITAT order. Also made an attempt to refresh own nearly 4 decades old memory on the several propositions of law which happened to come up and taken to courts. At the end, I am personally left with a strong feeling that the arguments advanced by both sides, and the discussion and the view (s) the iTAT has taken on the points of issue are certainly worth the pains to be given an in-depth study. All the more reason for doing so, not only by the taxpayers but also by the Revenue, simply because, by reason of the high stakes involved, it is quite likely that both the parties being aggrieved the dispute might be taken up further.
Be that as it may, in any case, purely from the viewpoint of academic interest, those of the learned professionals so inclined would do well to, in order to form their independent ideas and views, insightfully study the plethora of case law and expert commentary in Kanga, Palkhivala, and Vyas’s book on Income Tax, Vol. I, Ninth Edition- on inter alia section 2 (22), pages 118 to 132.
My first impression is that , given the matrix of facts as set out in the ITAT Order, there are many areas left to be covered for , inter alia, a proper appreciation of the true scope of the deeming provisions of section 2 (22); so also of the other related or connected provisions of the law dealing with, besides dividend or deemed dividend, with ‘capital gains’ and ‘other sources’ .
While on the topic, there appears to be the need also to keep in view and unfailingly take into consideration the legal implications, peculiar in kind, of the special state enactment governing the property known as ‘flats’ . Incidentally, one is obliged to recall the seemingly related discussion and expert views set out in a write-up in the booklet (Year 2001)published by the Bangalore Branch of SIRC of the ICAI, titled – TITLE, TRANSFER, TAXATION AND DOCUMENTATION OF TRANSACTIONS IN IMMOVABLEPROPERTIES (5.8 SCHEME OF ACQUIITION OF RIGHTS AND IND INTERESTS IN FLATS…., on pgs. 25 to 31).
Now, over to the enlightened readers having an unquenchable thirst for ‘knowledge’ on this special topic of taxation.
Add-on (pending a further detailed studY):
The referred article in the ICAI Booklet, authored by an eminent professional, as read and understood by one, is noted to have suggested a specially designed scheme , for buyers of flats/apartments, which, if followed, would result in certain advantages, -besides others, savings in stampduty and income-tax. Prima facie, one has genuine difficulty in reconciling some of the suugestions made, with the applicable provisions of the stastre enactments governing construction and conveyance of the property in such properties.
In the itat case, the scheme of things actually adopted / effected does not seem to tally, on a one-to-one basis, with the above referred special scheme recommended by the expert. Instead, the questioned transaction (s) have come to be viewed differently, hence giving rise to certain fresh issues , obviously not envisaged or foreseen at that point in time.
wrt / supplenting previous comments>
In an earler reported case- Yogesh Sunderlal Shah v ACIT, (2012) 25 taxman.com 300, the Mumbai Bench of itat has handed down its decision on a very interesting proposition.
That is to the following effect:
Acquisition of ‘tenancy rights’ in Flat(s) of a building owned by a co-operative society is not tantamount to ‘purchase’, in order to qualify for tax exemption under section 54.
It is noteworthy that the assessee’s following arguments have not been accepted but rejected by the itat:
Q
Assessee’s arguments
• He had perpetual tenancy rights in the flats and, therefore, he was deemed owner of the flats under section 27(iiib) and also for the purposes of section 269UA(f).
• It had paid stamp duty at the rate of 5 per cent, which also showed that it was a case of transfer of flats.
• Under the tenancy agreement, he had right to bequeath the flats, sub-let/lease them and was also entitled to raise loan against the flats. He had also right to make alteration in the flats.
• In terms of Circular No. 8/2/169-IT(A)-1, dated 25-3-1969 he was owner of flats for all practical purposes.
• Therefore, he had to be considered as owner of the flats entitled to exemption under section 54.”
UQ
The reasoning given / grounds of the decision are, in one’s considered view, quite sound and profoundly logical. Those should, therefore, provide enough guidance for an independent study of the instant case,- Shantikumar D Majithia vs. DCIT. Also, to re-examine /review the merits or otherwise of the viewpoints of the expert CA in his article published in the ICAI Booklet referred in the previous comment.
Comments Posted elsewhere on this website (i.e. @ itatonline.org » Hill Properties Ltd vs. Union Bank (Supreme Court)) being of equal relevance, are reproduced below:
Regrettably, personal entreaties to those directly concerned or otherwise, who really care to share own thoughts and ideas, -extended to law pundits as well , – inviting, but altruistically for the common good, useful or helpful contribution, by way of add-on / rejoinder, if any, on the implications of the SC Ruling , it is noted, have failed to evoke any response.
Meanwhile, however, in pursuit of the intended objective, further thoughts are to be found briefly set out in a short write-up @
http://taxguru.in/corporate-law/sc-judgment-hill-properties-case-form-prevailed-substance.html
May be noted, that goes to supplement the comments earlier posted @
http://itatonline.org/archives/index.php/shantikumar-d-majithia-vs-dcit-itat-mumbai-s-222a-occupancy-rights-to-shareholder-taxable-as-deemed-dividend/
Hi Admn. / Editor
Suggest that, In the common interests of the concerned readers/visitors of this website, such feed backs, which are prima facie and indisputably intended for the common good, if and when posted, be disclosed instantly, without “awaiting moderation”.
Furnishing the external websites links, it requires to be appreciated, is simply to draw their attention the related info. available elsewhere; thereby saving self from having to go those extra miles and reproduce those info. at the cost of repetition and avoidable hassle.