Ita/7/2017 Of Shri. Sumir J. Hinduja v. The Deputy Commissioner Of Income Tax

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE J2ND DAY OF AUGUST 2027 PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR.JUSTICE HEMANT CHANDANGOUDAR. 1LT.A. NO.7 OF 2017 BEITWEEN SHRI. SUMIR J. HINDUJA|NO.7 & 12, INDUSTRIAL SUBURB2ND STAGE, YESHWANTHPUR|BENGALURU-560027. (BY SRI. ASHOK A. KULAKARNI, ADV.,) — APPELLANT| AND THE DEPUTY COMMISSIONER|OF INCOME TAX.CIRCLE-11(3), BENGALURU. (BY SRI. E.I. SANMATHI, ADV., FOR|SRI. K.V. ARAVIND, ADV.,). ... RESPONDENT| THIS IB.T.A. IS FILED UNDER SECTION 260-A OFI.T.ACT, 1961 ARISING OUT OF ORDER DATED 12.08.2016PASSED|IN|LTANO.13/74/BANG/2012ANDCROSSOBJECTION NO.49/BANG/2013 AND ASSESSMENT ORDERDATED 24.12.2010, FOR THE ASSESSMENT YEAR 2006-07,PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW|STATED ABOVE. II]. ALLOW THE APPEAL BY SETTING ASIDE THE ORDEROF THE ITAT IN ITA NO.1374/BANG/2012 & CROSSOBJECTION NO.49/BANG/2013 DATED 12.08.2016 ANDASSESSMENT ORDER DATED 274.172.7010 AND SUITABLMODIFY IT AS SOUGHT IN THE APPEAL. III. PASS SUCH OTHER SUITABLE ORDER AS THIS|HON BLE COURT DEEMS FIT TO GRANT IN THE FACTS ANDIN THE CIRCUMSTANCES OF THE CASE IN THE INTEREST OFJUSTICE AND EQUITY. THIS I.T.A. COMING ON FOR FINAL HEARING, THIS|DAY,ALOK ARADHE J.,DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260-A of the Income TaxAct, 1961 (hereinafter referred to as ‘the Act’, for short) has|been filed by tne assessee. The subject matter of the appealpertains to the Assessment Year 2006-07. The appeal wasadmitted by a Bench of this Court on the _ followinsubstantial questions of law: 1) Whether the Assessing Officer to justifyaction u/s 147 can travel beyond nis recording u/s148(2) and the material therein?| 2) Whether on the facts and in thecircumstances of the case the Appellate Tribunalwas right in law in upholding that the action of theAssessing Officer in assuming Jurisdiction u/s 147 of the Income Tax Act, 1961 Is valid on the basisof the recoding of his u/s 148(2)? (3) Whether on the facts and in thecircumstances of the case the Appellate Tribunalwas correct in upholding the reassessmentproceedings on the basis of reasons not containedIn|therecordedFea@SO?rfor.reopeningof.assessment? (4) Whether on the facts and in _ thcircumstances of the case and having regard tothe material on record the Appellate Tribunal wasjustified in holding that the requirements forinvoking provisions of Section 147 are satisfied? (5) Whether on the facts and in thecircumstances of the case, there was any reliableand cogent material in the recording u/s 148(2) ofthe Assessing Officer to initiate reassessmentproceedings? (6) Wnetner on tne facts and circumstancesof the case tne funds provided to the associateconcerns by GIP Ltd as per tne terms of the SSSAthe understanding anda agreements thereundercan be treated as deemed aividend u/s 2(22)(e)of the [Income Tax Act in the hands of theappellant, without appreciating the fact that suchadvances were given for business purposes|including capital induction of GI(P) Ltd. (7) Without prejudice even if the books ofaccounts and material on record showed thetmoneys were lent to the “Directors” a group assuch and not to the appellant one of the 5Directors as sucn, can such lending be deemeddividend in the hands of the appellant. (8) Wnen no benefit wnatsoever as sucn Is derived by tne loanee airector through the allegedlending benefiting the fending company can see2(22)(e) be invoked. (9) Whether on the facts and in_ thecircumstances of the case the finding of tneTribunal that there its absence of any stipulation inthe records of the case indicating the manner inwhich the loan given and treated as dividendsnould be utilized in a particular manner is aperverse finding of fact and tnerefore tne entireorder Is vitiated. (10) Whether on the facts of tne caseSec.2(22)(e) was rightly applied in respect of any.part of the sum of Rs.5,00,00,000/- taxed asdeemed dividend. (8) Wnen no benefit wnatsoever as sucn Is derived by tne loanee airector through the allegedlending benefiting the fending company can see2(22)(e) be invoked. (9) Whether on the facts and in_ thecircumstances of the case the finding of tneTribunal that there its absence of any stipulation inthe records of the case indicating the manner inwhich the loan given and treated as dividendsnould be utilized in a particular manner is aperverse finding of fact and tnerefore tne entireorder Is vitiated. (10) Whether on the facts of tne caseSec.2(22)(e) was rightly applied in respect of any.part of the sum of Rs.5,00,00,000/- taxed asdeemed dividend. 2. Facts leading to filing of this appeal briefly statedare that the assessee is an individual deriving income under the heads namely ‘salary and otner sources. Tne assesseefiled the return of Income for the Assessment Year 2006-07 and declared a sum of Rs.18,10,150/- as taxable income.Admittedly, there was no scrutiny assessment in respect ofthe aforesaid return of income filed by the assessee. TheAssessing Officer received an information that assessee hadreceived loan from a Company namely Gokuldas Images Pvt.Ltd. in whicn assessee was holding 27.3% of equity snares. |The Assessing Officer also received an information that theaforesaid company was having profits and surplus to the|extent of Rs.84,35,22,/53/- as on 31.03.2006. Tne|Assessing Officer thereupon issued a notice on 12.03.2010under Section 148 of the Act requiring the assessee to file|return of income for the Assessment Year 2006-07, as reasonto believe that income escaped assessment. ‘3.Tne.aSS@ , requested the Assessing Officer to treat thereturn of income as originally filed on 31.10.2006 as return inresponse to notice under Section 148 of the Act. TheAssessing Officer furnished the reasons recorded underSection 148(2) of the Act to the assessee. The assessee fileda detailed objection to the proceeding. Thereafter, an order of re-assessment was passed under Section 148 of the Act on24.12.2010. The assessee filed an appeal before theCommissioner of Income Tax (Appeals), who by an orderdated16.07.7012|upheldtne|Validityoforder|re-assessment and directed deletion of addition made underSection 2(22)(e) of the Act. The revenue filed an appeal|against the aforesaid order, whereas the assessee filed across-opjection.Tne|Tribunal,Dyanoraerdated.12.08.2016, allowed the appeal preferred by the revenue anddismissed the cross-objection filed by the assessee. In theaforesaid factual background, this appeal has been filed. of | 3 Learned counsel for the assessee submitted that.validity of notice under Section 148 of the Act has to be|determined with reference to the reasons recorded by theAssessing Officer for formation of belief. It is furthersubmitted that the finding recorded by the Tribunal thatassessee has received loan from the company namely GIPL isbased on surmises and conjectures. It ought to have beenappreciated by the Tribunal that the names of Directors arenot mentioned in the ledger account. It is also contended of | 3 Learned counsel for the assessee submitted that.validity of notice under Section 148 of the Act has to be|determined with reference to the reasons recorded by theAssessing Officer for formation of belief. It is furthersubmitted that the finding recorded by the Tribunal thatassessee has received loan from the company namely GIPL isbased on surmises and conjectures. It ought to have beenappreciated by the Tribunal that the names of Directors arenot mentioned in the ledger account. It is also contended that the appellant is one of the Directors of the companynamely M/s. Gokaldas Images Pvt. Ltd. wnicn had enteredinto an agreement on 21.11.2005 for infusion of capital totne tune of Rs.44 crores by the new investors and the newinvestors insisted that the company namely GIPL snouliddisassociate itself in all possible ways wnhicn would free fromits obligation and possible liabilities. It is also pointed outthat no money was made availabie to the assessee and in|pursuance of agreements dated 02.11.2005 and 24.12.2005,a Cheque for a sum of Rs.5 crores was issued in the name ofPersonality Ltd., an affiliate group concern and the loan wastaken in pursuance of share purchase of the agreement andwas purely for the business of the company. It is also urgedthat the Tribunal has over looked clause 5 and 6 of theagreement and the material available on record. In supportof aforesaid submission, reliance Nas been placed on theGecIisSions I‘INDIVEST PTE LTD, Vs. ADDL. DIT &OTHERS 350 ITR 120 (BOM) 129, 130, CIT Vs.KELVINATOR OF INDIA LTD. 320 ITR 561 (SC) 564AND '"BAGMANE CONSTRUCTION (P) LTD. Vs. CIT’ 277CTR 338 (KAR) and Circular No.19 of 2017 dated 12.06.2017 tssued by Central Board of Direct Taxes(CBDT). 4. On the otner hand, learned counsel for the revenue|submitted that Assessing Officer has rightly formed the belief|tnat income escaped assessment in the hands of thneassessee which was reflected in the reasons recorded by himwhich show that assessee had received loans of Rs.6.85crores from GIPL in whicn assessee was_ substantiallyinterested as he was holding 25.3% of the share capital andthe same company was having surplus to the extent of 81.8crores as on 31.03.2006. It is also argued that conditions ofinvocation of Section 2(22)(e) of the Act are fulfilled in thiscase. It is also submitted that any payment made by a|company to a shareholder or concern in which he has asubstantial interest, is also covered under Section 2(22)(e) oftne Act. It is also urged tnat there is no material on recordthat the amount of loan was to be utilized only for thepurpose of business of the company and the amount wasadvanced as gratuitous loan to the snare nolders. It is alsourged that the aforesaid finding is a finding of fact. In| Support of aforesaid submission, reliance has been placed onthe decisions In."RAYMOND WOOLLEN MILLS LTD. Vs.|ITO' (1999) 236 ITR 34 (SC), ‘ACIT Vs. RAJESHJHAVERI STOCK BROKERS P., LTD.’ 291 ITR 500 AND‘ITO Vs. SELECTED DALURBAND COAL CO. (P) LTD.(1996)|132|CTR(SC)162and'BAGMANECONSTRUCTION (P) LTD. Vs. CIT’ (2015) 277 CTR 338(KAR). 5. We nave considered the SUDMISSIONS made on pbotnsides and nave perused the record. When a loan Is advancedby a company to a registered share holder and otherconditions mentioned in Section 2(22)(e) of the Act havingbeen satisfied, the amount of loan has to be treated as/deemed dividend within the meaning of Section 2(22)(e) of|the Act. The Commissioner of Income Tax (Appeals), in itsorder dated 16.07.2012, Neild as under: "4.6.The said financial transaction narratedabove does not constitute loan or advance for thepurpose of section 2(22)(e) of the Act. The saidtransaction, even though considered as a loan inthe books of account, cannot be considered forthe purpose of section 2(22)(e) as there was no- 5. We nave considered the SUDMISSIONS made on pbotnsides and nave perused the record. When a loan Is advancedby a company to a registered share holder and otherconditions mentioned in Section 2(22)(e) of the Act havingbeen satisfied, the amount of loan has to be treated as/deemed dividend within the meaning of Section 2(22)(e) of|the Act. The Commissioner of Income Tax (Appeals), in itsorder dated 16.07.2012, Neild as under: "4.6.The said financial transaction narratedabove does not constitute loan or advance for thepurpose of section 2(22)(e) of the Act. The saidtransaction, even though considered as a loan inthe books of account, cannot be considered forthe purpose of section 2(22)(e) as there was no- individual or personal benefit to the shareholder|taking tne loan or advance. Tne AO in his orderexplaineq the transaction in the assessmentorder very elaborately but there is no materialavailable on record to prove tne point tnat thesaid loan to the Directors nad resulted in anypersonal benefit to the appeliant, either directlyor indirectly. In fact, the said transactions weremeant for the business purpose, strengtheningthe company on a better financial footing andfreeing it from existing possible obligationsflowing from its past dealings. To this objective, |the above transactions were entered into by the.appellant with M/s GIPL. In the instant case, theloans were given by M/s GIPL to tne Directorsnot for the personal benefit of loanee i.e.appellant but for the benefit of the lender i.e.M/s. GPIL to improve tne financial strength. Thearguments of the appellant are acceptable in this.regard. In this context, the appellant relied onthe following decisions in nis submission.| 6. Tne Tribunal nas neld as under: "19.1 The CIT(A) deleted the adaition of deemeddividend simply accepting the submissions made by the assessee. The CIT(A) had not gone into.the substance of tne transactions as explained by tne assessee himself. The vital fact which|escaped tne attention of the CIT(A) is that the. money of the company in which the assessee Is substantially interested, had gone to the concern in wnicn the assessee substantially interested i.e. PI. It is unaisputed fact that the assessee, |along witn his family members, is 100%—Shareno/derInM/s.Personality|Ltd.,Any|payment made by a company to a snarenolder|or concern in which he has substantial interest,is also covered by clause (e) of sub-sec.(22) ofsection 2. The existence of pre-conditions for|invoking the provisions of sec.2(22)(e) to tax as.deemed dividend in the hands of shereholder a2arnot in dispute. Therefore, we are not going intotne issues. The only aspect to be examined.herein is payment made by GIP Ltd., to M/s.|Personality Ltd., is taxable in the hands of.shareholder. The payments made to PL are.transferred as ‘loan to directors in the Dooks OfGIP Ltd’. The purpose of making payment to.M/s. Personality Ltd., was stated to be (i) Rs.5_crores was paid for discharging of its bank loan.obligation so as to free GIP Ltd., from this|guarantee obligation (ii) An amount of Rs.5.5|crores was paid initially as consideration for|buying the trade brand of M/s. Personality Ltd.,but subsequently transferred to HIP Ltd. in|whicn the assessee is substantially interested| and.theseamountsWere|subsequentlytransferred to the directors. The provisions ofsection 2(22)(e) are clearly attracted even ifpayment is made to a concern in- whicnsnarenoider is naving substantial interest or any.payment made by such company on behalf of|Sharenolder or for [Individual benefit of Suchsnarenoider. Even accepting for argument sake, |the submission of the assessee that the loan to shareholder is only by way of book entry does|not involve any payment, still provisions of.sec.2(22)(e) are attracted when payment Is.made by a company to any concern in wnicn theshnarenoider has substantial interest havingregard to the plain provisions of sec.2(22)(e) of|the Act. and.theseamountsWere|subsequentlytransferred to the directors. The provisions ofsection 2(22)(e) are clearly attracted even ifpayment is made to a concern in- whicnsnarenoider is naving substantial interest or any.payment made by such company on behalf of|Sharenolder or for [Individual benefit of Suchsnarenoider. Even accepting for argument sake, |the submission of the assessee that the loan to shareholder is only by way of book entry does|not involve any payment, still provisions of.sec.2(22)(e) are attracted when payment Is.made by a company to any concern in wnicn theshnarenoider has substantial interest havingregard to the plain provisions of sec.2(22)(e) of|the Act. 21. From a mere perusal of the above clauses itIs clear that the director f.e. the assessee I/Sentitled to interest-free loan of Rs.1O crores|from GIP Ltd., and the same is repayable over aperiod of 10 years without any interest. There tsno stipulation as to the manner in wnicn the said.loan of Rs.10 crores should be utilized by the|daSSessee-company.Further,there1S|NhoStipulation in the said agreement that the loan.amount should be utilized only for the purpose| of discharging the loan obligations of M/s.|Personality Ltd. There is no evidence on recordto show that this loan was to be utilized only for|purpose of business of the company or in any.other manner. Therefore, these facts go toprove tnat these amounts were advanced as.gratuitous loan to the snareholders. The.provisions of section 2(22)(e) are squarelyapplicable. — 7. However, the Tribunal while recording the aforesaidfinding and while reversing the finding recorded by theCommissioner of Income Tax (Appeals), has not taken intoaccount the ledger report, certificates issued by a standardchartered bank, books entries as well as the provisions of theagreements dated 22.11.2005 and 24.12.2005. Since theissue with regard to applicability of Section 2(22)(e) of theAct requires factual adjudication, the order dated 12.08.2016passed by the Tribunal is quasned and the matter is remittedto the Tribunal for decision afresh after taking into account ��������������������������������������������������������������������������������������������������)����������������� ���������������� ���������� ��������� ������������ ����������� -.�