Ita/73/2010 Of The Commissioner Of Income Tax v. Shri Basant Poddar

IN THE HIGH COURT OF KARNATAKA AT BENGALURU ON THE 10 DAY OF DECEMBER, 2018. BEFORE THE HON BLE MR. JUSTICE RAVI MALIMATH AND THE HON'BLE MR.JUSTICE K.NATARAJAN | INCOME TAX APPEAL NO.73 OF 2010 BEI|WEEN 1.THE COMMISSIONER OF INCOME-TAX |CENTRAL CIRCLE, |CENTRAL CIRCLE, | C.R.BUILDING,QUEENS ROAD,BENGALURU | 2.THE DEPUTY COMMISSIONER OF INCOME-TAX,CENTRAL CIRCLE —- 1(1),C.R.BUILDING,QUEENS ROAD,BENGALURU. _.. APPELLANTS (BY SRI K.V.ARAVIND, ADVOCATE) AND SHRI. BASANT PODDARNO.487, 10 CROSS,RMV EXTENSION,SADASHIVNAGAR,BENGALURU - 560 O80 .. RESPONDENT (BY SRI A.SHANKAR, SENIOR COUNSELFOR SRI M.LAVA, ADVOCATE) | THIS|INCOMETAXAPPEAL|ISFILEDUNDER|SECTION 260A OF THE INCOME TAX ACT, 1961 ARISING|OUT OF ORDER DATED 11.09.2009 PASSED IN ITA.NO.521/BNG/2009, FOR THE ASSESSMENT YEAR 2004-2005, PRAYING TO; FORMULATE THE SUBSTANTIAL|QUESTIONS OF LAW STATED THEREIN; ALLOW THE|APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT.BENGALURUINLTA]NO.521/BNG/2009,DATED11.09.2009,ANDCONFIRMTHE|ORDER.OF|THE|APPELLATE COMMISSIONER CONFIRMING THE ORDER.PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX,CENTRAL CIRCLE-1(1), BENGALURU, IN THE INTEREST OF)JUSTICE AND EQUITY. AK AK THIS INCOME TAX APPEAL COMING ON FOR)HEARING THIS DAY, RAVI MALIMATH J., DELIVERED THEFOLLOWING: JUDGMENT The assessee filed the return of income for the'assessment year 2004-2005 on 28.10.2004, declaring the:total income of Rs.3,85,250/-. The same was processedunder Section-143(1) of the Income tax Act (for short.‘Act’). The assessee is also the Managing Director ofM/s.Mineral Enterprises Limited (for short ‘MEL’). The}assessee was holding 74.84% shares and his wife, viz.,Mrs.Vandana Poddar was holding 15.08% shares, along| with other family members. The company was beingmanaged and administered by.the assessee-BasantPoddar. 2.A searcn action under Section-132 of tne Act!was initiated against the assessee on 22.07.2005. During|the course of the search proceedings, several DOOKS Ofaccounts and incriminating documents were found whichwere seized. Consequent to the searcn, a Notice under)Section-153A of the Act was issued on 07.02.2006. In!response, tne assessee filed a return of income on.20.02.2006, declaring the said income at Rs.3,85,250/-, as|per the originally returned income. Subsequently, a Notice|dated 15.03.2007, under Section-143(2) of the Act, wasissued to the assessee. Thereafter, Notices under Section-142(1) of the Act along with questionnaires were issued to the assessee on various occasions. ‘3.While going through the seized books ofaccounts and documents, it was found that the assessee| had paid a sum of Rs.11 Crores as on 24.05.2004 to hiswife Smt.Vadana Poddar| apparently, on a- personalcommitment to her. The same was indicated as ‘gift fromSri.Basant Poddar to nis wife, in a sum of Rs.25 Crores,|whicn constituted Rs.11 Crores already paid, Rs.6 Crores.to be paid before 10.06.2004 and Rs.8 Crores to be paid.between July-August 2004, along witn certain othercommitments. The same was signed by the assessee as.well|as|nis|wife,WNhIcnWaSwitnessed DYSri.S.Badrinarayan. | 4 iANoticedated20.06.2007,Section-142(1) of the Act, along witn a questionnaire was.issued to the assessee. Tne same were replied by nim. The)material on record indicated that MEL had paid a sum of)Rs.11.05 Crores to M/s.Solid Real Estate Private Limited|(for short *‘SREL’) on various dates. Thereafter, SREL inturn paid a sum of Rs.10.80 Crores to Smt.VandanaPoddar. The Assessing Officer considered the reply to.various questions put to the assessee. under 5.Tne Directors of SREL in reply to tnequestionnaire stated that MEL had made a deposit ofaround Rs.10 Crores with the company, on whicn SREL)was paying interest at 5%. That this amount in turn was)given to Vandana Poddar at 5.25% interest. That other|than this, they were not aware of the transactions. 4 iANoticedated20.06.2007,Section-142(1) of the Act, along witn a questionnaire was.issued to the assessee. Tne same were replied by nim. The)material on record indicated that MEL had paid a sum of)Rs.11.05 Crores to M/s.Solid Real Estate Private Limited|(for short *‘SREL’) on various dates. Thereafter, SREL inturn paid a sum of Rs.10.80 Crores to Smt.VandanaPoddar. The Assessing Officer considered the reply to.various questions put to the assessee. under 5.Tne Directors of SREL in reply to tnequestionnaire stated that MEL had made a deposit ofaround Rs.10 Crores with the company, on whicn SREL)was paying interest at 5%. That this amount in turn was)given to Vandana Poddar at 5.25% interest. That other|than this, they were not aware of the transactions. 6.In view of the reply given by the assessee andSREL, conclusions were drawn by the Assessing Officer,holding that SREL has no transaction other than those)mentioned in the books of accounts and that the Directors|of SREL were not aware as to what are the other§transactions. That tne assessee nad paid Rs.11.05 Crores|to Vandana Poddar thnrougn SREL. Tnat the assessee beingthe beneficial owner of the shares of M/s.MEL to an extent|of 75%, nad made tne payment due to a personal.commitment to his wife. The same could be deduced from|the settlement pian, which was seized from the assessee. 7. The plea of the assessee that it was a commercialtransaction between M/s. MEL and M/s.SREL was negated. That even the contentions of the assessee that the!payment of interest is reflected in the books of accounts|M/s.MEL, as well as in the books of M/s.SREL were not!accepted on the ground that tney are mere ‘Journal.Entries’ and therefore there was no real transactions or.payment of interest. That the motive behind using)M/s.SREL was that it could act as a conduct to make)payment to Smt.Vandana Poddar, only to evade tax on the)dividend, since the assessee was holding more tnan 10%)of the shares of M/s.MEL. That any amount taken out of)‘Reserves And Surplus’ on his behalf would amount to;Dividend under Section2(22)(e) of the Act. Consequently,such dividend is taxable. Therefore, the entire sum of)Rs.29,/8,154/-, declared as payment made on behalf ofVandana Poddar was considered as dividend within the!meaning of Section.2(22)(e) of the Act. Therefore, theentire sum of Rs.11.05 Crores advanced by M/s.MEL to. M/s.SREL was held as payment made on behalf and for thepersonal benefit of Smt.Vandana Poddar and accordingly|the said payment was considered as dividend witnin the)meaning of Section-2(22)(e) of the Act. 8.Questioning the order of the Assessing Officer,the assessee preferred an appeal before the Commissioner|of Income Tax (Appeals). The Commissioner of Income Tax.(Appeals) was of the view that the Assessing Officer was)not justified in treating the entire amount of 11.05 Croresas ‘deemed dividend’ in the hands of the assessee. That|since M/s.SREL had advanced only a sum of Rs.10.80cores to Vasanth Poddar, the same has to be treated as|‘deemed dividend’. Therefore, it upheld the addition ofRs.10.80 Cores, as ‘deemed dividend’ at the hands of theassessee by granting partial relief of Rs.25 lakhs on thatground. — QO.Aggrieved by the same, the assessee preferredanappealbeforetheTribunal.|The.Tribunal|on 8.Questioning the order of the Assessing Officer,the assessee preferred an appeal before the Commissioner|of Income Tax (Appeals). The Commissioner of Income Tax.(Appeals) was of the view that the Assessing Officer was)not justified in treating the entire amount of 11.05 Croresas ‘deemed dividend’ in the hands of the assessee. That|since M/s.SREL had advanced only a sum of Rs.10.80cores to Vasanth Poddar, the same has to be treated as|‘deemed dividend’. Therefore, it upheld the addition ofRs.10.80 Cores, as ‘deemed dividend’ at the hands of theassessee by granting partial relief of Rs.25 lakhs on thatground. — QO.Aggrieved by the same, the assessee preferredanappealbeforetheTribunal.|The.Tribunal|on reconsidering the facts of the case, was of the view thattne assessee nad no direct or Indirect contro! over'M/s.SREL. That SREL is a ‘Separate Corporate Entity”and is separately assessed to Income tax. I[nat the.company M/s.MEL during the course of its ordinary activitynas given ‘Inter-Corporate Deposit of Rs.11.05 Crores to)M/s.SREL.That.M/s.MEL|nas|recelVedinterest|Of|Rs.10,71,926/- from SREL during the assessment yearending 31.03.2004. That this amount has been assessedto Income Tax by the same Assessing Officer in theassessment made at the hands of M/s.MEL withoutrecording any adverse observations. That the interest)received from SREL for the assessment year 2005-2006.has also been assessed to tax in the hands of M/s.MEL, as—interest received from M/s.SREL. In the assessment ofM/s.SREL, interest received from Smt.Vandana Poddar andthe interest paid to M/s.MEL has been accepted by the)Revenueautnorities as|SnNOWN.Tne|assessmentOf|Smt.Vandana Poddar has also been completed by the very| Assessing Officer whereinithe loan liability snown by)M/s.SREL has been accepted by the Assessing Officer. Thatadmittedly the assessee nas no snarenoilding in M/s.SRELnor is he on the Board of Directors of M/s.SREL. Therefore,when the Assessing Officer accepted the amount given byM/s.MEL to M/s.SREL as ‘Inter Corporate Deposit’ andsimilarly accepted the loan received by Smt.Vadana Poddaras loan received from M/s.SREL and also the interest paid.and received in the case of M/s.MEL, M/s.SREL andVandana Poddar, it could not nave come to the conclusionthat the amount paid to M/s.MEL is for the sole benefit ofthe assessee. Furthermore, the Assessing Officer has noteven examined Smt.Vandana Poddar for the transactioneffected between her and M/s.SREL. That the transactions|are through proper banking channels. 10.|Tne Tribunal came to tne conclusion tnat|Section-2(22)(e) of the Act is inapplicable to the case of.the assessee. That the transactions between M/s.MEL,|M/s.SREL and Vandana Poddar are business transactions.| That M/s.MEL has not given any payment for the benefit oron behalf of the assessee to bring the amount assessableunderSection-2(22)(e)of|the.Act.Therefore,tneAssessing Officer was directed to delete the addition at the.hands of the assessee. Questioning the same, the presentappeal is filed by Revenue. 11.By the order dated 29.09.2010, the appeal wasadmitted to consider the following substantial questions of|law: ieWhether the Tribunal was correct [nsetting-aside the findings of the AO which was_confirmed by the CIT(A) that agreementbetween the assessee and Smt. Vandane|Podaar dated 24.05.2004 (seized documentsA/BP/1) to pay her Rs.11 Crores and thepayment of Rs.11.05 Crores by MEL at theinstance of the assessee who was the MS and|the shareholder to M/s.Solid Real Estate|Private Limited and in turn to Smt. Vandane|Poddar would amount to deemed dividend as|per Section2(22)(e) of the Act, and the. judgments of the Apex Court in 229 ITR 444,PIO ITTR 893? ?_|Whether the Tribunal was correct [Innoiding tnat the amount paid by MEL toM/s.Solid Real Estate Private Limited and.thereafter to Smt.Vandana Poddar was 2scommercialtransaction, despitethe5%|interest snown was only on paper anda notactual and the entire series of transactions wesentered into is the sole object of avoiding tax?| judgments of the Apex Court in 229 ITR 444,PIO ITTR 893? ?_|Whether the Tribunal was correct [Innoiding tnat the amount paid by MEL toM/s.Solid Real Estate Private Limited and.thereafter to Smt.Vandana Poddar was 2scommercialtransaction, despitethe5%|interest snown was only on paper anda notactual and the entire series of transactions wesentered into is the sole object of avoiding tax?| 3.|Whether the Tribunal was correct [in nottaking into consideration tne relevant materialconsidered by the AO and CIT(A) which clearlyShows that the entire income wes dividend|income liable to tax, wnich had been avoidedby entering into these series of transactions?”| 12.|Snri.K.V.Aravind, learned counsel appearingfor the Revenue contends that the order of the Tribunal iserroneous and liable to be interfered with. That the'material on record would indicate that’ incriminatingdocuments were seized from the assessee. That the!documents would clearly indicate that an amount of Rs.11. Crores nas been paid to Vandana Poddar by her nusbancd.Tnat tnis is as a result of a settlement or otnerwise arrivedat between the assessee and his wife. Therefore, there.cannot be any interpretation so far as the seized)documents are concerned. The said document is signed not)Only by the assessee, Dut also Dy his wife Smt.Vandana_Poddar,along.witnsignatureOf|tnewitness.Sri.S.Badrinarayan. Tnat the findings recorded by the)Tribunal that the said transaction is not in anyway related|to tne transaction between M/s.MEL, M/s.SREL andVandana Poddar is incorrect. Tnat the notings snould be)considered as they are. | 13.He further contends that the findings of theTribunal that Section-2(22)(e) of the Act is not applicable, is also incorrect. The findings would indicate that theentries snown by the assessee are journal entries.|Tnerefore, accepting the case of the assessee is incorrect.That the third requirement in Section-2(22)(e) of the Actwith regard to the payment made by tne company on. behalf and for the individual benefit of any of itsShareholders to the extent to wnichn the company in eithercase possesses accumulated profits would stand applicableto the case on nand. Tnerefore, Section-2(22)(e) of the Act|requires to be applied to the case on nand.. 14.On the other hand, Sri.A.Shankar, learned|Senior Counsel appearing for the respondents’ counseldisputes the same. He contends that the Tribunal was)justified in arriving at the conclusion. That the entirematerial nas Deen reconsidered and hence no interference|is called for. The contention of the Revenue that the!transactions in question are only journal entries and did)not reflect the true transactions between the parties arenot correct. Tne books of accounts Nave been produced.before the authorities. Even though there has been areferenceCO‘JournalEntries,theSameISalso|Subsequently reflected in tne actual payment made.through banking channels. Therefore, the contention that they are mere Journal Entries without any banking)transaction Is incorrect. 15.Secondly,tnejearned.SeniorCounse|lsubmitted that Section-2(22)(e) of the ActiS applicable to the facts of the case is also incorrect. That the payments.made are the deposits made by one company to anotner. That there is no Individual interest of the assessee herein.Tnat M/s.SREL has also paid interest to M/s.MEL for the)amounts borrowed by it, inasmucn as, it has received)interest for the amounts paid to Smt.Vandana Poddar. All|these transactions are reflected in the books of accounts|and are also reflected in the bank entries. Therefore, the|Tribunal was justified in passing the order so far as therecovery of the incriminating material is concerned. That.tnere is no nexus between the payments made and thesuspected payment herein and the material seized. 16. It is the further contention that the material|seized would only indicate that the transaction in question. 16. It is the further contention that the material|seized would only indicate that the transaction in question. is a settlement plan arrived at petween the husband and)wife. That even if the said settlement is not accepted, the)Same nas no nexus with tne tnstant transaction iInquestion, and has to be considered as a separate)transaction and not relatable to the issue on hand. Tnat.the transaction being inter-related between the assessee,|M/s.MEL and Vandana Poddar are assessed by the same.Assessing Officer. Tnat since it is related to one and the.Same transaction and the same having been accepted in.the case of M/s.MEL and Smt.Vandana Poddar, the.question of raising the said issue only so far as the)assessee iS concerned is unacceptable. 1/.Heard learned counsels. 18.The seized material which was also extracted|in the assessment order would indicate tnat the settlement.plan arrived at has been signed by the assessee and his.wife M/s.Vandana Poddar, which was witnessed by oneSri.Badrinarayana. The same would read as, it is a. settiement plan petween the assessee-Basant Poddar and)nis wife Smt.Vandana Poddar. Tnat a sum of Rs.11 Crores|was already paid, Rs.6 Crores was to be paid before10.06.2004 and Rs.8 Crores was to be paid between July-August’ 2004, along with certain other commitments, whichin all constituted a total sum of Rs.25 crores. Tnree otner|items nave also been mentioned therein, whicn we are not|concerned nerein. It is also indicated tnat it is a financial|settiement and tnere is no furtner claim from Smt.VandanaPodaar. Tne Revenue contends tnat it nas a direct nexus|with the amount involved hnerein. Tnat the amount hnabeen paid to M/s.MEL and M/s.SREL and in turn to)Smt.Vandana Poddar. That M/s.SREL has been treated as a.conduce for the transfer of this money. 19.Tne Tribunal on considering the contentions,was of the view that relying on the said noting would beinappropriate. Tnat tne seized documents refers to the)transaction between M/s.MEL, M/s.SREL and Smt.Vandana|Poddar. The transaction involved herein is the amounts of. Inter Corporate Deposit made between M/s.MEL, M/s.SREL|and thereafter from M/s.SREL to Smt.Vandana Podadar. Tnesame are satisfied by various entries made so far asM/s.MEL and M/s.SREL are concerned. The deposit made|by M/s.MEL to M/s.SREL is also reflected in the books of.accounts. The deposit received by M/s.SREL from M/s.MEL|and further payment to Smt.Vandana Poddar are alsoreflected in the books of accounts of M/s.SREL. Tnat tax.nas also been paid on the interest received from M/s.MEL|and M/s.SREL as well as for the interest received from M/s.SREL to Smt. Vandana Poddar. Tnese are all matters ot fact which can be deduced from the books of accounts|produced by both the companies, as well as the relevant.material produced so far as the relevant bank transactionsare concerneca. 20.The contention of the Revenue is that they areOnly Journal Entries, may not be a true reflection of the)books of accounts of both the companies. The bank entriesnave also been produced before the Authorities. However,| 20.The contention of the Revenue is that they areOnly Journal Entries, may not be a true reflection of the)books of accounts of both the companies. The bank entriesnave also been produced before the Authorities. However,| the Revenue by placing reliance on some of the documents.would contend that they are only Journal Entries’. One)such document is that of M/s.MEL with reference to'M/s.SREL. A copy of the paper book produced before the|Tribunal is placed before us. The said material would also—indicate that there is a ‘journal entry’ with regard to)Rs.8,52,181/-, with regard to the interest received from.M/s.SREL. The same would also further indicate that)interest nas also been received. Tnat tnere is a total|receipt of Rs.35,44,763/-, through American Express BankLimitedandthereforetheaccountsstands.closed. Therefore, the Tribunal was justified in holding that all theentries did not constitute mere ‘Journal Entries’. Tnat tne|same are backed by the relevant bank entries. Therefore,it held that firstly there is no nexus so far as the seized|documents are concerned. Secondly, tne transactions|between M/s.MEL and M/s.SREL and Smt.Vandana Poddarare business transactions which are reflected in the books|of accounts of the three of them. Therefore, the Tribunal| was justified in coming to such a conclusion. We do notfind any ground to interfere in the order of the Tribunal.|The same is an appropriate finding recorded on the factsand circumstances of the case. — D1.So far as the contention of the Revenue with|regard to Section-2(22)(e) of the Act is concerned, the)Tribunal on considering the same held that invoking the)provisions of Section-2(22)(e) of the Act to the case on)Nand is inappropriate. On coming to sucn a conclusion, the|Tribunal relied on the judgment of tne High Court of)Kolkatta, reported in 124 ITR 405, in the case ofSHRI.NANDLAL KANORIA VS. CIT, wherein at para-8 of its|order it was neld tnat transactions in the ordinary course|of business are outside the purview of Section 2(22)e of)the Act. In the facts of the present case, the transaction.between M/s.MEL and M/s.SREL being admittedly asbusiness transaction, as is evident from the evidence on|record, Section-2(22)(e) of the Act is not applicable. 2).Reliance is also placed on order of the Hon’‘bleKolkatta Hign Court in the case of SRI NANDLAL KANORIA|v. THE COMMISSIONER OF INCOME TAX reported in 122)ITR 405. Therefore, on considering the facts involved and)the material produced by the assessee, tne Tribunal held|tnat the same constitutes a business transaction and/therefore, the provisions of Section-2(22)(e) of the Actwould not be applicable. We do not find any reason to)take a different view of the matter. Tne material on recordwould indicate that all transactions are routed tnrougn|Dank channels. Hence, it cannot be construed as mere)journal entries and therefore, it is a business transaction.between the assessee and M/s.SREL. 23. Furthermore, the TridDunal was also of the view.that the Assessing Officer was the same with reference tothe assessee, Sri Basant Poddar, M/s.MEL and Smt.Vandana Poddar. When he accepted the case so far as this.transaction is concerned, with regard to MEL as well.Vandana Poddar, the question of raising such a doubt only. SO|far.as|the.aSSeSSECCISconcernedWouUIdpeinappropriate. Therefore, wnen the transactions areinterrelated and when the Assessing Officer has acceptedtne case, so far as M/s. MEL as well as Smt. Vandana/Poddar is concerned, the question of doubting thetransaction so far as assessee is concerned is inappropriate|and stands opposed to the transaction made towards SREL|and Smt. Vandana Poddear.. 23. Furthermore, the TridDunal was also of the view.that the Assessing Officer was the same with reference tothe assessee, Sri Basant Poddar, M/s.MEL and Smt.Vandana Poddar. When he accepted the case so far as this.transaction is concerned, with regard to MEL as well.Vandana Poddar, the question of raising such a doubt only. SO|far.as|the.aSSeSSECCISconcernedWouUIdpeinappropriate. Therefore, wnen the transactions areinterrelated and when the Assessing Officer has acceptedtne case, so far as M/s. MEL as well as Smt. Vandana/Poddar is concerned, the question of doubting thetransaction so far as assessee is concerned is inappropriate|and stands opposed to the transaction made towards SREL|and Smt. Vandana Poddear.. D4.For the aforesaid reasons, we are of the viewtnat the Tribunal was justified in setting aside tne findings|of the Assessing Officer, as well as the Commissioner ofIncome Tax (Appeals) by holding that the agreement,petween tne assessee and Smt. Vandana Poddar does not.result in a deemed dividend as per Section-2(22)(e) of the|Act. Hence, the first substantial question of law is heldagainst the Revenue and in favour of the assessee. So far as second substantial question of law isconcerned, we are of the view that the Tribunal was| justified in holding that the amount paid by M/s.MEL toM/s.SREL and thereafter to Smt. Vandana Poddar was acommercial transaction and tne said transaction cannot besaid to have been entered with the sole object of avoiding.tax. Hence, the second substantial question of law is heldagainst the Revenue and in favour of the assessee. On|answeringthe.firstand.tneSECONCGsubstantial questions of law, the third substantial question.of law would not arise for consideration, since the same.becomes academic. The judgment referred to in framingthe substantial questions of law, therefore, would not arisefor consideration in determining the said question under. the facts and circumstances of the present case. Consequently, the appeal is disposed off. | Sd/- JUDGE JJ / KVK. Sd/-JUDGE