Vasantbhai Haribhai Gajera, Surat vs Department Of Income Tax

Deputy Commissioner of Shri Vasantbhai Haribhai Income-tax, Circle-8, Gajera, W ard No. 15-D, Room No. 414, Aayakar Vs Vrushal Nagar, Katargam Bhavan, Majura Gate, Road, Surat Surat PAN: ABTPG2033P (Appellant) (Respondent)

Revenue by: Shri Vimlendu Verma, CIT-D.R. Assessee by: Shri R.N. Vepari, A.R.

Date of heari ng : 15-06-2015 Date of pronouncement : 24-06-2015

आदेश /ORDER

PER : RAJPAL YADAV, JUDICIAL MEMBER:-

The present appeal is directed at the instance of revenue against the order of ld. Commissioner of Income Tax (Appeals) dated 17th March, 2011 passed for Assessment Year 2008-09.

I.T.A No. 1730/Ahd/2011 A.Y. 2008-09 Page No 2 DCIT vs. Vasantbhai Haribhai Gajera

2. The solitary substantial ground of appeal raised by the revenue is that ld. Commissioner of Income Tax (Appeals) has erred in deleting the addition of Rs. 18,45,25,001/- which was added by the Assessing Officer with the aid of section 2(21)(e) of the Income Tax Act as deemed dividend.

3. The brief facts of the case are that assessee is an individual. He has filed his return of income electronically on 31st March, 2009 declaring a total income of Rs. 3,42,49,460/-. The case of the assessee was selected for scrutiny assessment and a notice u/s. 143(2) was issued and served upon the assessee.

4. On scrutiny of the accounts, it revealed to the Assessing Officer that asessee is a director in Laxmi Diamond Pvt. Ltd. He is also a partner in various firms which are engaged in re-assortment work of diamonds. According to the Assessing Officer, there is a credit balance of the company, M/s Laxmi Diamond Pvt Ltd in the accounts of the assessee which is to be considered as deemed dividend u/s. 2(22)(e) of the Income Tax Act. The Ld. Assessing Officer has propounded the meaning and construction of section 2(22)(e) in para no. 3.4 to 3.4.3 for appreciating the controversy in more scientific way. It is necessary to take note of section 2(22)(e) as well as the meaning appreciated by the Assessing Officer. It reads as under:-

"(22) "dividend" includes-

(a)

(b)

(c)

(d)

(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as I.T.A No. 1730/Ahd/2011 A.Y. 2008-09 Page No 3 DCIT vs. Vasantbhai Haribhai Gajera

representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent, of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest thereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profile; but "dividend" does not include-

(i) a distribution made in accordance with sub-clause (c) or sub-

clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets; (ia) a distribution made in accordance, with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965;

(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;

(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;

(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77 A of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).

Explanation 1.- The expression "accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956.

Explanation 2.- The expression "accumulated profits" in sub-clauses

(a), (b), (d), and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and I.T.A No. 1730/Ahd/2011 A.Y. 2008-09 Page No 4 DCIT vs. Vasantbhai Haribhai Gajera

in sub-clause(c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place. Explanation 3. - For the purposes of this clause, -

(a) "concern" means a Hindu undivided family , or a firm or an association of persons or a body of individuals or a company;

(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent, of the income of such concern;

5. The language of section 2(22) (e) is very clear and unambiguous. The Legislature has identified the three categories in which payments made by the company shall be treated as dividend:

(1) Any payment by a company to a shareholder being a person who is the beneficial owner of shares not being shares entitled to a fixed rate of dividend whether with or without a right to participate in the profits holding not less than 10 per cent of the voting power;

(2) Any payment by a company to any concern in which the aforesaid shareholder is a member or a partner and in which he has substantial interest; Through Explanation 3, substantial interest was also defined in its clause (b) according to which, a person shall be deemed to have substantial interest in a concern other than a company if he is at any time during the previous year beneficially entitled to not less than 20 per cent of the income of such concern, (3) Any payment by any such company on behalf of or for the individual benefit of any such holders.

I.T.A No. 1730/Ahd/2011 A.Y. 2008-09 Page No 5 DCIT vs. Vasantbhai Haribhai Gajera

But the payment made by a company can be treated to be deemed divided only to the extent of accumulated profits possessed by the company. Through Explanation 1 and Explanation 2, accumulated profits have been defined in unequivocal terms and according to these Explanations, accumulated profits shall not include capital gain arising before April 1, 1946, or after March 31, 1948, and before April 1, 1956. The accumulated profits in sub-clauses (a), (b), (d) and (e) of section 2(22) shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses and in sub-clause (e) it shall include all profits of the company up to the date of liquidation.

14.3] Therefore following conditions must be satisfied before invoking section 2(22) (e) in any case

1. The company in question must be one in which the public are not substantially interested.

2. The borrower must be a shareholder at the date when the loan was advanced i.e. being a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in the profits holding not less than 10 per cent of the voting power.

3. The third condition is that the loan is advanced to such shareholder by such a company during the year.

4. The company possessed accumulated profit at the date of the loan.

5. The loan must not have been advanced by the company in the ordinary course of its business. In oilier words, this provision would not apply to cases where the lending of money is a substantial part of the business of the company and such advance or loan made by the company in the ordinary course of its business.

I.T.A No. 1730/Ahd/2011 A.Y. 2008-09 Page No 6 DCIT vs. Vasantbhai Haribhai Gajera

6. The advance must not be trade advance as held by judicial authorities including by the Hon'ble jurisdictional High court of judicature at Delhi in the cases of CIT v. Ambassador Travels Pvt. Limited [2009] 318 ITR 476 (Delhi), CIT v Creative Dying and Printing Pvt. Limited [2009] 318 ITR 476(Delhi) and CIT v Raj Kumar [2009] 318 ITR 462 (Delhi)."

6. According to the assessee, he has an opening balance of Rs. 46,73,85,000/-. He further deposited a sum of Rs. 8,17,70,200/-. The company has made a payment of Rs. 47,41,70,000/- to the assessee during the year. Thus, at the end of the year, assessee has to receive a sum of Rs. 7,49,85,200/-. According to the assessee, there is debit balance in the accounts of the company rather it is the assessee who has to receive from the company. In other words, the company has no credit balance in the accounts of the assessee. Therefore, section 2(22)(e) is not applicable. The Assessing Officer has appreciated the contentions of the assessee but observed that there is distinction between loan receipt from a director and amount received as a share-holder deposit. The money received from the director, it is to be treated as exempt in deposit even when the person from whom money has been received ceases to be a director of the company. But the case is not same in case of a share- holder. However, a share-holder from whom company has received any money ceases to be member of the company, the exemption ceases and thus the amount received from him will be considered as a deposit within the meaning of section 58A of the company. Thus, according to the Assessing Officer, the money was received by M/s Laxmi Diamond from the director which is to be kept in a separate account and the loan given to I.T.A No. 1730/Ahd/2011 A.Y. 2008-09 Page No 7 DCIT vs. Vasantbhai Haribhai Gajera

the assessee was given in the capacity of a share-holder which is to be assumed a deemed dividend. The other conditions of section 2(22)(e) were not disputed. Accordingly, ld. Assessing Officer has worked the deemed dividend at Rs. 18,45,25,001/- which is equivalent to alleged loan amount in the account of share-holder.

7. The learned counsel for the assessee at the very outset submitted that issue in dispute is squarely covered in favour of the assessee by the decision of the Hon'ble High Court rendered in Tax Appeal No. 84 of 2014 which was rendered in the case of assessee's father, Shri Haribhai Gajera. He placed on record the copy of Hon'ble High court's decision rendered on 7th April, 2015. Ld. DR on the other hand was unable to controvert the contention of the learned counsel for the assessee.

8. The question framed by the Hon'ble High Court reads as under:

"Whether on the facts and in the circumstance of the case in law, the Hon'ble ITAT is right in deleting the addition made on account of deemed dividend u/s 2(22)(e) of the Income-tax Act, by holding that after merging all accounts, the final position is zero in the balance sheet in the name of the assessee in the books of accounts of the company as on 31.03.2008, whereas all the accounts of the assessee were of different nature?"

9. The Hon'ble High Court has answered this question in favour of the assessee. The finding recorded by the Hon'ble High Court reads as under:-

"Having heard the learned counsel for the parties and having perused the documents on record, it clearly emerges that though the said Company did advance loan to the assessee in different I.T.A No. 1730/Ahd/2011 A.Y. 2008-09 Page No 8 DCIT vs. Vasantbhai Haribhai Gajera

accounts, it is also an established fact that in two separate accounts, the assessee was the creditor of the company to the tune of Rs. 14,26,15,000/-. At the end of the year, this exactly is the amount which is in net the assessee withdrew from the company, may be in different accounts. The peak credit in different accounts never exceed Rs. 13.16 crore. Under the circumstances, the CIT (Appeals) as well as the Tribunal, both took an overall view of the accounts of the assessee and the said company to hold that section 2(22)(e) of the Act would not apply. As is well-know, section 2(22)(e) of the Act would not apply. As is well-know, section 2(22)(e) of the Act pertains to dividend, which would include several payments made by the Company. In particular clause (e) of the said sub-section (22) pertains to payment by a company to which a legal friction would arise and such payment shall be deemed to be dividend distributed by such company to the person. It is well-known that a legal friction can arise only at the circumstance in which the legislature envisages giving rise to the same. In the present case, when the very fundamental condition of a payment made by the Company is on fact found not established, in our opinion, both the CIT(Appeals) and the Tribunal correctly refused to apply the said section.

7. The judgments cited by the learned counsel for the Revenue, however, based on factual premise, which are different, would not change our opinion."

10. In the present case also, if we take a consolidated figure of all the accounts then it is the assessee, whose credit balance is there in the company. The Assessing Officer has treated the account in the name of director separately and did not consider the credit balance along with the account in the capacity of share holder. Thus, there is no disparity on facts. The identical issue was considered in the case of assessee's farther. Therefore, respectfully following the decision of Hon'ble jurisdictional High Court, we do not see any reason to interfere in the finding of ld. Commissioner of Income Tax (Appeals).

I.T.A No. 1730/Ahd/2011 A.Y. 2008-09 Page No 9 DCIT vs. Vasantbhai Haribhai Gajera

11. In the result, the appeal of the revenue is dismissed.

Order pronounced in the open court on 24-06-2015

Sd/- Sd/-

(G.D. AGRAWAL) (RAJPAL YADAV) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 24/06/2015 ak आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file.

By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद