Gomti Exim Pvt. Ltd., New Delhi vs Assessee

Appellant by : Sh. Ved Jain, Adv., Smt. Rano Jain, CA Respondent by : Smt. Parminder Kaur, Sr. Dr. Date of hearing : 15/04/2015 Date of pronouncement : 12 /06/2015

ORDER

Per N.K.Saini, A. M. :

1. This is an appeal by the Assessee against the order dated

30/09/2010 of CIT(A)- XV, New Delhi.

2. Following grounds have been raised in this appeal :-

"1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law and on facts.

2 ITA No. 5383/ Del/2010 2(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the addition of Rs. 10,00,000/- made by AO on account of share application money.

(ii) That the above said addition has been confirmed despite the assessee bringing all material and evidences on record to prove the identity of the share holder. (3) That the addition on account of share capital has been confirmed ignoring the fact that appellant company was incorporated during the year and there was no source of income which could be alleged to have been introduced by way of share capital.

4(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the addition of Rs. 5,79,203/- on account of advance received against the land invoking the provision of section 2(22)(e) of the Act.

(ii) That the above said addition has been confirmed ignoring arbitrarily the evidence brought on record that the transaction was entered into in due course of the business of the assessee and as such does not come under the purview of section 2(22)(e) of the Act.

(iii) That the appellant company not being a shareholder, no addition can be made in the hands of the appellant on account of dividend.

5. That the appellant craves leave to add, amend or alter any of the grounds of appeal."

3. Ground no. 1 and 5 are general in nature so do not require any

comments on our part.

4. Vide ground no. 2 (i), (ii) and (iii) the grievance of the assessee

relates to the confirmation of addition of Rs. 10,00,000/- made by the

AO on account of share application money.

3 ITA No. 5383/ Del/2010

5. The facts of the case in brief are that the assessee filed e-return of

Income on 28.11.2006 declaring nil income which was processed u/s

143(1) of the Income Tax Act, 1961(hereinafter referred to as the Act)

and thereafter the case was selected for scrutiny. During the course of

assessment proceedings, the AO noticed that the assessee had raised

share capital including share premium amounting to Rs. 10,00,000/-

from Shri Vinod Kumar and Rs. 6,50,000/- from Shri Jasbir Singh. The

AO asked the assessee to furnish the confirmation and the sources of

investment made by the above mentioned two share holders. He also

asked to produce the aforesaid persons to verify the veracity of the

transactions. In response the assessee produced both the persons on

5.12.2008. The AO observed that Shri Jasbir Singh was able to

substantiate his sources of investment from sale proceeds of

agricultural land but Shri Vinod Kumar could not do so. The AO further

observed that the statement of Shri Vinod Kumar was also recorded in

which he explained that he made the investment out of his past

savings from agricultural activities and out of refund of cash loan given

to Shri Jasbir Singh alias Pappu. Shri Vinod Kumar in his statement

also stated that he owned approximately 40 bighas of land, however,

papers were not available with him since those were mortgaged in 4 ITA No. 5383/ Del/2010

connection with a tractor loan. The AO observed that Shri Vinod

Kumar could not explain the exigency under which he had to apply for

bank loan specially when a sum of Rs. 10,00,000/- in cash was

available with him. He further observed that copy of the Khasra

Khatoni of agricultural land at Village Nathupur the names mentioned

were Shri Sardare, Shri Tare and Shri Umed Singh as owner of

agricultural land and the name of Shri Vinod Kumar was not amongst

the co-owners of the land. The AO pointed out that the assessee

produced an agreement on the blank paper which revealed that Shri

Jasbir Singh of Village Nathupur had refunded and an old cash loan to

Shri Vinod Kumar, however, he did not find merit in the submission of

the assessee and added Rs. 10,00,000/- to its income by considering

the same as unexplained credits u/s 68 of the Act. Reliance was

placed on the following case laws :-

" --Union of India vs. Raghubir Singh 178 ITR 548 (S.C)

--Gujarat State Co-operative Bank Ltd. vs. CIT (2001) 250 ITR 229(Guj.)

--CIT vs Steller Investment Ltd., [2001] 251 ITR 263 (SC)."

6. Being aggrieved the assessee carried the matter to the Ld.

C.I.T.(A) and submitted that the assessee produced following 5 ITA No. 5383/ Del/2010

evidences before the AO to prove the identity and creditworthiness of

Shri Vinod Kumar :-

"(i) Copy of Share Application received from Mr. Vinod Kumar

(ii) Copy of Shares Certificate of shares Allotted to him

(iii) Copy of confirmation received from him

(iv) Copy of Annual Return and Form 2 filed before the Registrar of Companies

(v) Various documents related to assets owned by him, Identity Card."

It was further submitted that the assessee produced the person who

confirmed the amount of contribution to the assessee. It was also

stated that the assessee produced various papers related to land and

other assets owned by Shri Vinod Kumar which could establish his

creditworthiness and to prove the genuineness of the transaction it

was necessary to prove the identity and creditworthiness of the

creditor. It was submitted that the AO specifically mentioned in his

order that Shri Vinod Kumar appeared before him and produced

details of assets owned by him. Therefore, assessee discharged the

onus cast upon him. It was prayed that the addition of Rs.

10,00,000/- made by the AO may be deleted. Reliance was placed on

the following case laws :-

"1. CIT vs. M/s Lovely Exports Pvt. Ltd. 216 CTR 195

2. CIT vs. Steller Investment Ltd. 251 ITR 263 (SC)

3. CIT vs. Sophia Finance Ltd. 205 ITR 98 (Del)

4. CIT vs. Achal Investment Ltd. 268 ITR 211 (Del)

5. CIT vs. M/s Divine Leasing & Finance Ltd. (299 ITR 268)

6. CIT vs. Sumati Dayal 214 ITR 801 (SC) 6 ITA No. 5383/ Del/2010

7. CIT vs. Value Capital Services Pvt. Ltd. 307 ITR 334 (Del)"

7. The Ld. CIT(A) after considering the submissions of the

assessee observed that Shri Vinod Kumar was not assessed to tax

and did not have a PAN. He further observed that Shri Vinod Kumar

could not produce any evidence with regard to the source of income

for his creditworthiness and that the mode of payment regarding his

claim of agricultural income was not furnished before the AO. The ld.

C.I.T.(A) also observed that the assessee could not submit either the

copy of Khasra, Khatauni or any receipt of agricultural produce and

that the genuineness of the transaction was in doubt since the

payment was not made through banking channel but was made in

cash. The Ld. CIT(A) also mentioned that the case laws relied by the

assessee were not applicable to the present case. Accordingly the

addition made by the AO on account of share capital of Rs. 10 lac

received from Sh. Vinod Kumar was sustained.

Now, the assessee is in appeal.

8. The Ld. Counsel for the assessee reiterated the submissions

made before the authorities below and further submitted that the

assessee furnished various documents including PAN Card, Share

Certificate, Receipt, Khasra Khatauni etc. before the AO, for the 7 ITA No. 5383/ Del/2010

aforesaid contention our attention was drawn towards page no. 51

onward of the assessee's paper book. It was further submitted that

the assessee produced Shri Vinod Kumar before the AO who

recorded his statement wherein the source of investment was

explained out of saving from agricultural activities. It was also

submitted that Shri Vinod Kumar is son of Shri Umed Singh whose

name was appearing in Khasra Khatauni copy which is placed at

page no. 43 to 49 of the assessee's paper book and the name of the

father Shri Umed Singh was there in the khatauni as a co-owner.

Reference was made to page no. 43 of the assessee's paper book. It

was submitted that the addition sustained by the AO was not justified.

9. In his rival submissions, the ld. DR strongly supported the roder of

the authorities below and further submitted that the assessee could

not produce the creditworthiness of Shri Vinod Kumar and the

genuineness of transaction was in doubt. Therefore, the ld. CIT(A)

was fully justified in confirming the addition made by the AO u/s 68 of

the Act. Reliance was placed in the following case laws :-

-- C.I.T. vs. NOVA PROMOTERS AND FINLEASE (P) LTD.342 ITR 169 (Del.)

-- C.I.T. vs. FAIR FINVEST LTD. 357 ITR 146 (Del.)

-- C.I.T. vs. GANGESHWARI METAL P. LTD. 361 ITR 10 (Del.)

--C.I.T. vs. LOVELY EXPORTS P. LTD. [2009] 319 ITR (St.) 5 (SC) 8 ITA No. 5383/ Del/2010

10. We have considered the submissions of both the parties and

carefully gone through the material available on the record. In the

present case, it is an admitted fact that the asessee received a sum of

Rs. 10,00,000/- as share application money from Shri Vinod Kumar.

The assessee furnished copy of PAN Card, Annual return, Share

application form, copy of share certificate, copy of Khasra Khatauni

before the AO vide letter dated 11.12.2008 copies of the above

documents are placed at page nos. 17 to 49 of the assessee's paper

book. In the present case, the main objection of the AO was that in

khasra khatauni, the name of the assessee was not appearing as the

owner of land. In this regard the explanation of assessee was that the

name of his father Shri Umed Singh was appearing in khasra khatauni

which is placed page no. 43 of the assessee's paper book which

clearly established the ownership of land. It is also noticed that the

assessee furnished copies of "J" froms in the name of Shri Vinod

Kumar which clearly established that he sold the agricultural produce

to M/s. Rameshwer Dayal Prem Chand Aadhti, Sonepat Mandi, copies

of the same are placed at page no. 37 to 43 of the assessee's paper

book. In the present case, it is noticed that the assessee received a

sum of Rs. 5,00,000/- from Shri Jasbir Singh to whom the said amount 9 ITA No. 5383/ Del/2010

was given as an advance to purchase the land which is evident from

page no. 44 of the assessee's paper book which clearly shows that the

advance money given to Shri Jasbir Singh was taken back by Shri

Vinod Kumar on 25.12.2005. Both the parties affixed their signature

on the above said document which is witnessed by Shri Ajay Kumar

son of Shri Jagdish and Shri Jagdish Son of Shri Raj Kumar.

11. From the above facts, it is clear that Shri Vinod Kumar was a

man of means, his creditworthiness was proved and the identity was

not in doubt since the assessee produced Shri Vinod Kumar before the

AO who recorded his statement wherein the investment in the shares

was admitted, copy of the share certificate, is placed at page no. 36

of the assessee's paper book which revealed that 10,000 shares

having destructive nos. 16,501 to 26,500 were allotted to Shri Vinod

Kumar vide certificate no. 22, therefore, the genuineness of

transaction can also not be doubted. From the above facts, it is clear

that the asseseee proved the identity and creditworthiness of Shri

Vinod Kumar as well as the genuineness of transactions amounting to

Rs. 10,00,000/-, therefore, the addition made by the AO and sustained

by the ld. CIT(A) was not justified, accordingly the same is deleted. 10 ITA No. 5383/ Del/2010

12. The next issue vide ground no. 4 (i),(ii), & (iii) relates to the

confirmation of addition of Rs. 5,79,203/- made by the AO by invoking

the provisions of Section 2(22)(e) of the Act. The facts related to this

issue in brief are that the AO, during the course of assessment

proceedings noticed that the assessee had taken an advance of Rs.

10,00,000/- from M/s. Precision Stock and Credit Pvt. Ltd. in which

Shri Jasbir Singh held 22,000 out of 1,03,500 shares i.e. a beneficial

holding of 21% shares with voting right. He further, observed that Shri

Jasbir Singh had holding of 24.52% in assessee's company and that

the balance sheet of M/s Precision Stock and Credit Pvt. Ltd. revealed

that it had an accumulated profit of Rs. 579203/- in the beginning of

year, thus, satisfying the conditions of applicability of Section 2(22)(e)

of the Act. The AO asked the assessee to explain as to why the

amount of advance received to the extent of accumulated profits of

M/s Precision Stock and Credit Pvt. Ltd. may not be taxed as deemed

dividend as per the provisions of Section 2(22)(e) of the Act. The

Assessee submitted that the advance was received against the land

which was in the nature of normal business transaction, M/s Precision

Stock and Credit Pvt. Ltd. had no accumulated profits and the

advance was given only out of share premium available with that 11 ITA No. 5383/ Del/2010

company which could not be termed as part of accumulated profit as

such the provisions of section 2(22)(e) of the Act were not applicable.

The AO, however, was not satisfied from the submission of the

assessee by observing that the balance sheet of M/s Precision Stock

and Credit Pvt. Ltd. revealed that accumulated profits of Rs. 5,79,203/-

was included in reserve and surplus as per Schedule II. He also

mentioned that a share premium of Rs. 66,15,000/- was added during

the year beside the profit for the year of Rs. 99,213/- which gave the

total reserve and surplus of Rs. 72,93,433/-. The AO accordingly made

the addition of Rs. 5,79,203/- by invoking the provisions of Section

2(22)(e) of the Act. Reliance was placed in the judgment of the

Hon'ble Bombay High Court in the case of Wall Chand & Co. Ltd. vs.

CIT (1975), 100 ITR 598.

13. Being aggrieved the assessee carried the matter to the Ld.

CIT(A) and submitted that the assessee company was incorporated

during the year under consideration with the objective of dealing in real

estate business and a sum of Rs. 10,00,000/- was received from one

of its client M/s Precision Stock & Credit Pvt. Ltd. It was further

submitted that the provisions of Section 2(22) (e) of the Act make it

clear that in case some money has been advanced by any company 12 ITA No. 5383/ Del/2010

for some business transaction, the same cannot be considered for the

purpose of Section 2(22)(e) of the Act. It was further, submitted that

the money advanced by M/s Precision Stock & Credit was on account

of business transaction and also the said party did not has

accumulated profits to the extent of amount advanced by it to the

assessee. It was emphasized that the balance sheet of M/s Precision

Stock & Credit Pvt. Ltd. revealed that the said company had given the

amount of Rs. 10,00,000/- to the assessee on account of advance

towards purchase of some property. In support of the above

contention, copy of the agreement was produced before the AO. It was

submitted that the said amount was refunded back to the assessee in

the next year and the balance sheet in the books of the said party had

been reduced to nil, therefore, the transaction was clearly out of the

purview of provisions of Section 2(22)(e) of the Act.

14. The Ld. CIT(A) after considering the submissions of the assessee

observed that Shri Jasbir Singh who had holding of 24 to 25% in the

assessee company was also having a beneficial holding with voting

right of 21% in M/s Precision Stock & Credit Pvt. Ltd. which had an

accumulated profit of Rs. 5,79,203/-. The Ld. CIT was of the view that

the provisions of Section 2(22)(e) of the Act would be applicable in the 13 ITA No. 5383/ Del/2010

present case, since Sh. Jasbir Singh was holding more than 20% to

the shares in both the assessee and M/s Precision Stock and Credit

Pvt. Ltd. He also mentioned that the assessee could not prove on the

basis of evidence that the transaction was in the nature of the

business transaction. He, therefore, confirmed the addition made by

the AO. Now, the assessee is in appeal.

15. Ld. Counsel for the assessee submitted that since the assessee

company was not a share holder of M/s Precision Stock and Credit

Pvt. Ltd. and just because of a common share holder the addition u/s

2(22)(e) of the Act cannot be made. Reliance was placed on the

following case laws :-

1. Commissioner of Income Tax vs. Ambassador Travels P. Ltd. [2009] 318 ITR 376(Delhi)

2. Commissioner of Income Tax vs. Shri Raj Kumar [2009]318 ITR 462(Delhi)

3. Commissioner of Income Tax vs. Creative Dyeing & Printing Pvt. Ltd. [2009]318 ITR 476 (Delhi)

It was further submitted that the assessee had received advance

against land from M/s Precision Stock and Credit Pvt. Ltd. which is in

the nature of business transaction. A reference was made to page no.

51 of the assessee's paper book which is a copy of the agreement. It

was submitted that the transaction during the normal course of

business does not come within the ambit of section 2(22)(e) of the Act.

The reliance was placed on the following case laws :- 14 ITA No. 5383/ Del/2010

1.Commissioner of Income Tax vs. Universal Medicare Private Ltd. [2010] 324 ITR 263 (Bom)

2.Commissioner of Income Tax vs. Ankitech Pvt. Ltd. & Others [2012] 340 ITR 14 (Del.)

3.Commissioner of Income Tax vs. MCC Marketing (p.) Ltd. [2012] 343 ITR 350 (Del.)

4. Assistant Commissioner of Income Tax vs. Bhaumik Colour (P) Ltd. [2009] 313 ITR 146

5. CIT vs. AR Magnetics Pvt. Ltd. (2014), 220 Taxman 209 (Delhi)(HC)

6. C.I.T. vs. Navyug Promoters (P) Ltd. (2011) 203 Taxman 618(Del.)

16. In his rival submissions, the Ld. DR strongly supported the

orders of the authorities below and further submitted that since Shri

Jasbir Singh was a common share holders having more than 20%

share holding in the assessee company and M/s Precision Stock and

Credit Pvt. Ltd. which was having an accumulated profits. Therefore,

the provisions of Section 2(22)(e) were rightly invoked by the AO and

the Ld. CIT(A) was justified in confirming the addition made by the AO.

17. We have considered the submissions of both the parties and

carefully gone through the material available on the record. In the

present case, it is noticed that the assessee entered into an

agreement with M/s Precision Stocks and Credit Pvt. Ltd. on 28.3.2006

for the sale of agricultural land and received Rs. 10,00,000/- vide

cheque no. 406306 of Cooperative Bank Ltd, the same is evident

from page no. 51 to 53 of the assessee's paper book which is the copy

of aforesaid agreement. The assessee also issued receipt for the

above said amount copy of which is placed at page no. 54 of the 15 ITA No. 5383/ Del/2010

assessee's paper book. From the above facts, it is clear that the

assessee who was engaged in the real estate business received an

advance against the sale of land, therefore it was in the nature of

business transaction. On a similar issue the Hon'ble Jurisdictional

High Court in the case of CIT vs. Ankitech Pvt. Ltd. and Others [2012]

340 ITR 14(Supra) has held as under :-

"25. Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to "dividend". Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to "shareholder". When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non-members. The second category specified under section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of "deeming shareholder", then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspective.

16 ITA No. 5383/ Del/2010 26. In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the Revenue to argue that if this position is taken, then the income "is not taxed at the hands of the recipient". Such an argument based on the scheme of the act as projected by the learned counsel for the Revenue on the basis of sections 4,5,8,14 and 56 of the Act would be of no avail. Simple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance.

27. Precisely, for this very reason, the courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under section 2(22)(e) of the Act."

18. In the present case also, the assessee company is not the

shareholder in M/s Precision Stock & Credit Pvt. Ltd. and received the

amount from the said company in the course of ordinary business

activities. Therefore, in view of ratio laid down by the Hon'ble

Jurisdictional High Court in the aforesaid referred to case, the

provisions of section 2(22)(e) of the Act were not applicable. We,

therefore, by considering the totality of the facts deem it appropriate to

delete the impugned addition made by the AO and sustained by the

Ld. CIT.

19. In the result, appeal of the assessee is allowed. 17 ITA No. 5383/ Del/2010

(Order pronounced in open court on 12 June, 2015.)

Sd/- Sd/-

(G.C.Gupta) (N.K.Saini) Vice President Accountant Member

Dated 12 June, 2015 Binita Copy forwarded to 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. CIT (ITAT), New Delhi. AR, ITAT

N. Delhi