Ita/92/2015 Of The Commissioner Of Income Tax v. Sri N.s. Narendra

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 29TH DAY OF JUNE 20271 PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR.JUSTICE HEMANT CHANDANGOUDAR. ILT.A. NO.92 OF 2O15 BEITWEEN 1.THE COMMISSIONER OF INCOME TAX| C.R. BUILDING, QUEENS ROAD| BANGALORE. 2D.THE DEPUTY COMMISSIONER OF INCOME TAX) CIRCLE-11(3), RASHTROTHANA BHAVANA NRUPATHUNGA ROAD| BANGALORE-560001. _.. APPELLANTS (BY SRI. K.V. ARAVIND, ADV.) AND SRI. N.S. NARENDRA|NO.10 & 11, FIREPRO HOUSESERVICE ROAD, INDIRANAGAR|BANGLORE-560008PAN: ABTPSSOOILR (BY SRI. S. ANNAMALAI, ADV., FOR SRI. M. LAVA, ADV.,) .., RESPONDENT| THIS I.T.A. IS. FILED UNDER SECTION 260-A OFI.T.ACT, 1961 ARISING OUT OF ORDER DATED 21.11.2014PASSED IN ITA NO.557/BANG/2013, FOR THE ASSESSMENTYEAR 2009-10, PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAWSTATED ABOVE. Il. ALLOW THE APPEAL AND SET ASIDE THE ORDERS|PASSED BY THE INCOME TAX APPELLATE TRIBUNAL,BANGALORE IN ITA NO.557/BANG/2013 DATED 21.11.2014CONFIRMINGTHE|ORDER.OF|THE|APPELLATECOMMISSIONER AND CONFIRM THE ORDER PASSED BY THE|DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(3),BANGALORE. THIS IL.T.A. COMING ON FOR HEARING, THIS DAY,ALOK ARADHE J.,DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260-A of the Income TaxAct, 1961 (nereinafter referred to as the Act, for snort) nas| been filed by the revenue. The subject matter of the appealpertains to the Assessment Year 2009-10. The appeal wasadmitted by a Bench of this Court on the _ followinsubstantial questions of law: a)Whether the Tribunal was correct in|deleting the entire addition made when theassessee is an employee of the company and Isnot carrying on any business of his own andtherefore, there cannot be any chance of any credit balance due on account of the businessdealings between the assessee and the company? Db) Whether the Tribunal is correct’ ideleting the additions made by the assessing.officer without appreciating the fact that theassessee has purchased a flat in Embassy Crown,Aga Abbas Ali Road, Bangalore, from the nousingloan and advances given by the company, whichcannot be treated as business purpose for thecompany? © 2. Facts leading to filing of this appeal briefly stated arethat assessee is the managing director of M/s. FireproSystems Pvt. Ltd. (hereinafter referred to as ‘the Company’for short). The assessee filed the returns for the AssessmentYear 2009-10 in which he declared the Income. asRs.1,/77,27,090/-. The assessee had provided nis personalproperties as collateral to Banks and financial institutions ofthe Company to borrow loans for furtherance of business ofthe Company. Jne assessee also provided his personalGuarantee. The Company borrowed loans worth Rs.200crores which were utilized for its capital requirements. TheCompany paid certainamounts to theassessee (forpurcnasing an apartment in Bengaluru wnhicn was disclosed under recoverable advances in the accounts of the Company.The aforesaid amounts were paid to the assessee in|recognition of his contribution to the business of the|Company. The return of income of the assessee was|selected for scrutiny. The Assessing Officer sent a noticedated 21.12.2011 to the assessee and sougnt the detailswhich were furnished by the assessee on 23.12.2011. TheAssessing Officer thereafter passed an order on 27.12.2011making an addition of Rs.5,39,95,832/- under Section2(22)(e) of the Act and held that the amounts received bytne assessee from the Company are liable to be taxed under|Section 2(22)(e) of the Act as deemed dividend. under recoverable advances in the accounts of the Company.The aforesaid amounts were paid to the assessee in|recognition of his contribution to the business of the|Company. The return of income of the assessee was|selected for scrutiny. The Assessing Officer sent a noticedated 21.12.2011 to the assessee and sougnt the detailswhich were furnished by the assessee on 23.12.2011. TheAssessing Officer thereafter passed an order on 27.12.2011making an addition of Rs.5,39,95,832/- under Section2(22)(e) of the Act and held that the amounts received bytne assessee from the Company are liable to be taxed under|Section 2(22)(e) of the Act as deemed dividend. 3. The assessee thereupon filed an appeal before theCommissioner of Income Tax (Appeals), who by an orderdated 28.01.2013, allowed the appeal preferred by the|assessee and held that payments received by the assesseefrom the Company cannot be termed as deemed dividends asthe payments were not for the benefit of the assessee and infact the Company was benefited by availing loans forfurtherance of its business. The revenue thereupon filed an appeal before Income Tax Appellate Tribunal. The Tribunalby an order dated 21.11.2014|inter alianeld that payments.received by the assessee from the Company cannot betreated aS loan or advance for the purposes of Section(2)(22)(e) of the Act as the same was not for the benefit oftne assessee. The Tribunal, by an order dated 21.11.2014,|dismissed the appeal. In the aforesaid factual background,|this appeal has been filed. 4. Learned counsel for the revenue while inviting theattention of this Court to Section 2(22)(e) of the Act,|submitted that payment made to the assessee was in thenature of dividend and therefore, the Assessing Officer hasrightly held that ingredients of Section 2(22)(e) of the Actare attracted to the fact situation of the case. It Is further|submitted that no material was produced before theCommissioner of Income Tax (Appeals) and before the|Tribunal, by the assessee and therefore, the Commissioner ofIncome Tax (Appeals) as well as the Tribunal grossly erred inholding that payments received by the assessee from theCompany cannot be treated as loan or as advance under Section 2(22)(e) of the Act. It is further submitted that copyof the resolutions were also not placed on record andtherefore, the finding recorded by the Commissioner ofIncome Tax (Appeals) as well as the Tribunal is without anybasis. Alternatively, it is urged that the matter be remitted|to the Assessing Officer for examination of the issue afresn. 5. On the other hand, learned counsel for the assessee|submitted that since the assessee has provided the collateralto the Banks / financial institutions, the Company was able toborrow the loan and to conduct its business and earn profits.It is also submitted that Company derived substantialbenefits due to provision of personal assets of the assessee.It is also urged that since advance was given by theCompany to tne assessee in return to an advantage|conferred upon the Company by the assessee, therefore, theloan / advance to the assessee does not fall within thepurview of Section 2(22)(e) of the Act. It is also submittedthat the assessee had produced the documents before theCommissionerOf Income|Tax(Appeals)and.theCommissioner of Income Tax (Appeals) had sought for the remand report from the Assessing Officer and on the basis ofmaterial available on record, the Commissioner of IncomeTax (Appeals) and the Tribunal have recorded the concurrentfindings of fact which do not suffer any infirmity warrantinginterference of this Court. In support of aforesaid|Submissions, reliance has been placed on decisions in‘"PRADIP KUMAR MALHOTRA Vs. CIT’ (2011) 64 DTR378 (CAL) JAMUNA VERNEKAR Vs. DCIT IN ITANO.43/2013 DATED 10.2.2021 OF KARNATAKA HighCourt, BAGMANE CONTRUCTIONS PRIVATE LIMITEDVs. CIT’ (2015) 277 CTR 338 (KAR.), (‘CIT Vs.CREATIVE DYEING AND PRINTING P. LTD. (2009) 218ITR 476 (DEL.) AND 'CIT Vs. AMBASSADOR TRAVELS P.LTD. (2009) 318 ITR 376 (DEL.). remand report from the Assessing Officer and on the basis ofmaterial available on record, the Commissioner of IncomeTax (Appeals) and the Tribunal have recorded the concurrentfindings of fact which do not suffer any infirmity warrantinginterference of this Court. In support of aforesaid|Submissions, reliance has been placed on decisions in‘"PRADIP KUMAR MALHOTRA Vs. CIT’ (2011) 64 DTR378 (CAL) JAMUNA VERNEKAR Vs. DCIT IN ITANO.43/2013 DATED 10.2.2021 OF KARNATAKA HighCourt, BAGMANE CONTRUCTIONS PRIVATE LIMITEDVs. CIT’ (2015) 277 CTR 338 (KAR.), (‘CIT Vs.CREATIVE DYEING AND PRINTING P. LTD. (2009) 218ITR 476 (DEL.) AND 'CIT Vs. AMBASSADOR TRAVELS P.LTD. (2009) 318 ITR 376 (DEL.). 6. We have considered the submissions made on both.sides and nave perused tne record. The issue wnhicn arisesfor determination in this appeal is whether the amount ofRs.1,89,95,382/- received by the assessee as advance fromthe Company is a deemed dividend within the meaning of Section 2(22)(e) of the Act. Section 2(22)(e) of the Actreads as under: "Section 7 (22) “dividend includes - (e) any payment by a company, not being a companyin which the public are substantially interested, ofany sum (whether as representing a part of theassets of the company or otherwise) made after the31st day of May, 1987, by way of advance or loan toa shareholder, being a person who its the beneficialowner of shares (not being shares entitled to a fixedrate of dividend whether with or without a right toparticipate in profits) holding not less than ten percent of the voting power, or to any concern in whichsucn snarenolder is a member or a partner and in|which he has a substantial interest (hereafter in thisclause referred to as the said concern) or any|payment by any such company on behalf, or for theindividual benefit, of any such shareholder, to theextent to which the company in either case possessesaccumulated profits ; but ‘dividend does not include—_ (1) a aistripution made in accordance witn sub-clause(c) or sub-clause (d) in respect of any share issuedfor full cash consideration, where the holder of the share is not entitled in the event of liquidation toparticipate in the surplus assets ; (la) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as sucndistribution ts attributable to the capitalised profits ofthe company representing bonus shares allotted toits equity shareholders after the 31st day of March,1964, and before the 1st day of April, 1965 ; (il) any advance or loan made to a snareno/lder ortne said concern by a company in tne ordinary courseof its business, where the lending of money Is asubstantial part of the business of the company; (iii) any dividend paid by a company which is set offby the company against tne wnole or any part of anysum previously paid by it and treated as a dividendwitnin the meaning of sub-clause (e), to the extentto which it is so set off; (iv) any payment made by a company on purchase ofIts own shares from a shareno/lder in accordance withtne provisions of section 77A of the Companies Act,1956 (1 of 1956); (v) any aistribution of snares pursuant to a demergerby the resulting company to the snareholders of the (il) any advance or loan made to a snareno/lder ortne said concern by a company in tne ordinary courseof its business, where the lending of money Is asubstantial part of the business of the company; (iii) any dividend paid by a company which is set offby the company against tne wnole or any part of anysum previously paid by it and treated as a dividendwitnin the meaning of sub-clause (e), to the extentto which it is so set off; (iv) any payment made by a company on purchase ofIts own shares from a shareno/lder in accordance withtne provisions of section 77A of the Companies Act,1956 (1 of 1956); (v) any aistribution of snares pursuant to a demergerby the resulting company to the snareholders of the qemerged company (wnetner or not there is areduction of capital in the demerged company).Explanation 1.—The|expression“accumulated.profits’, wnerever it occurs in this clause, snail notinclude capital gains arising before tne 1st day ofApril, 1946, or after the 31st day of March, 19468,and before the 1st day of April, 1956.Explanation 2.—The expression “accumulated profits”in sub-clauses (a), (Db), (d) and (e), shall include allprofits of the company up to the date of distributionor payment referred to in those sub-clauses, and insub-clause (c) shall include all profits of the companyup to the date of liquidation, but shall not, where theliquidationIS|consequentOf)thecompulsory.acquisition of its undertaking by the Government or acorporation owned or controlled by the Governmentunder any law for the time being in force, include anyprofits of the company prior to three successiveprevious years immediately preceding the previousyear in wnicn such acquisition took place. Explanation 2A.—In the case of an amalgamatedcompany,theaccumulatedprofits,whethercapitalised or not, or loss, as the case may De, snallbe increased by the accumulated profits, whnetnercapitalised or not, of the amalgamating company ontne date of amaigamation. Explanation 3.—For the purposes of this clause, — (a) “concern” means a Hindu undivided family, or afirm or an association of persons or a body ofindividuals or a company; | (Db) a person snail be deemed to nave a substantialinterest in a concern, other than a company, if he Is,at any time during the previous year, beneficiallyentitled to not less than twenty per cent of theincome of such concern.” 7. A Division Bench of Calcutta High Court, whiledealing with Clause (e) of Section 2(22) of the Act, held tnatthe phrase ‘by way of advance of loan’ appearing in sub-cl.(3) must be construed to mean those advances or loanswhich a shareholder enjoys for simply on account of being aperson who its the beneficial owner of shares (not beingShares entitled to a fixed rate of dividend whether with orwithout a right to participate in profits) holding not less thanten per cent of the voting power; but if such loan or advanceis given to such shareholder as a consequence of any furtherconsideration whicn is beneficial to the company receivedfrom such a shareholder, in such case, such advance or loan cannot be said to a deemed dividend without the meaning ofthe Act. Thus, for gratuitous loan or advance given by ajcompany to those classes of shareholders would come withinthe purview of s. 2(22) but not to the cases where the loanor advance is given in return to an advantage conferred uponthe company by sucn snarenhoider. A similar view has beentaken Ine"JIAMUNA VERNEKAR Vs. DCIT', ‘CIT Vs.CREATIVEDYEINGAND|PRINTING| >LTD,‘and‘BAGMANE CONTRUCTIONS PRIVATE LIMITED Vs. CIT,SUPIaB cannot be said to a deemed dividend without the meaning ofthe Act. Thus, for gratuitous loan or advance given by ajcompany to those classes of shareholders would come withinthe purview of s. 2(22) but not to the cases where the loanor advance is given in return to an advantage conferred uponthe company by sucn snarenhoider. A similar view has beentaken Ine"JIAMUNA VERNEKAR Vs. DCIT', ‘CIT Vs.CREATIVEDYEINGAND|PRINTING| >LTD,‘and‘BAGMANE CONTRUCTIONS PRIVATE LIMITED Vs. CIT,SUPIaB 8. In the instant case, the Commissioner of Income Tax.(Appeals) has held that the loan was not advanced to theassessee py the Company merely because he was a|shareholder with substantial interest, but the Companyallowed the assessee to avail the advance / loan as it wantedto obtain the loan from the Bank for business purpose. Thus,the Company derived the benefit of getting a loan / advance.Therefore, the Commissioner of Income Tax (Appeals) heldthat advance of loans granted by tne Company to theassessee cannot be treated as deemed dividend under Section 2(22)(e) of the Act. The Tribunal vide its order dated22.11.2014, held that assessee was managing director of theCompany and holding more than 10% of the voting power.The assessee is the owner of an apartment wnich was offeredas a collateral security in the form of mortgage to theBank,in lieu thereof, the Company availed of credit facilityfrom the Banks to the extent of Rs.266.45 crores. Thus, theCompany derived the benefit from the assessee and|tnerefore, granted tne loan / advance to the assessee. TheTribunal, by placing reliance on the division bench decision ofCaicutta High Court in|PRADIP KUMAR MALHOTRAfSUPId,has held that the advance of loan granted by the Company tothe assessee cannot be treated as deemed dividend Section|2(22)(e) of the Act. The aforesaid finding is based onmeticulous appreciation of evidence on record. | 9. The assessee had produced the documents beforethe Commissioner of Income Tax (Appeals) and _ thCommissioner of Income Tax (Appeals) had asked for theremanadreport.fromthe.AssessingOfficer.TneCommissioner of Income Tax (Appeals), after consideration of the remand report, recorded a finding in this regard, whichhas been affirmed by the Tribunal. Thus, it cannot be said|that the assessee had not adduced any material either beforethe Commissioner of Income Tax (Appeals) or before theTripunal. 10. For the aforementioned reasons, the substantial|question of law is answered against the revenue and infavour of the assessee. In the result, we do not find anymerit in the appeal. The same fails and is hereby dismissed. | Sd/-.JUDGE Sd/-—JUDGE