DCIT, Bangalore V. Shri. Jagadish N Hinduja, Bangalore

ITA 1373/BANG/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9461 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 17-06-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 18-10-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: ASHOK A KULKARNI
• Keywords: Share purchase agreement; Valuation report; Deemed dividend; Reason to believe
• Section: 143(3); 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SUNIL KUMAR YADAV , JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA NO S . 1373/ BANG/20 12 (ASSESSMENT YEAR: 2006 - 07) AND ITA NO S . 137 4 / BANG/20 12 (ASSESSMENT YEAR: 2006 - 07) DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 11(3), BANGALORE. VS. APPELLANT 1. SHRI JAGADISH N.HINDUJA, 2. SHRI SUMIR J.HINDUJA NO.7 & 12, INDUSTRIAL SUBURB, TUMKUR ROAD, BANGALORE. RESPONDENT AND CROSS OB JN.NO.48/BANG/2013 (IN ITA NO S . 1373/ BANG/20 12) (ASSESSMENT YEAR: 2006 - 07) AND CROSS OBJN.NO.49/BANG/2013 (IN ITA NO S . 137 4 / BANG/20 12) (ASSESSMENT YEAR: 2006 - 07) 1. SHRI JAGADISH N.HINDUJA, 2. SHRI SUMIR J.HINDUJA NO.7 & 12, INDUSTRIAL SUB URB, TUMKUR ROAD, BANGALORE. VS. CROSS OBJECTOR DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 11(3), BANGALORE. RESPONDENT ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 2 OF 34 R EVENUE BY : SHRI SANJAY KUMAR, CIT(DR) ASSESSEES BY : SHRI ASHOK A.KULKARNI, ADVOCATE DATE O F HEARING : 17/06/2016 DATE OF PRONOUNCEMENT : 12 /08/2016 O R D E R PER I NTURI RAMA RAO, AM : THESE ARE THE APPEALS FILED BY THE REVENUE DIRECTED AGAINST THE ORDER OF THE CIT(A) - I, BANGALORE, DATED 16/07/2012 FOR THE ASSESSMENT YEAR 2006 - 07 AND THE CROSS OBJECTIONS BY THE ASSESSEE S . SINCE COMMON ISSUE IS INVOLVED IN BOTH THE CASES, WE PROCEED TO DISPOSE OF THE SAME BY THIS CONSOLIDATED ORDER. 2. BRIEFLY FACTS OF THE CASE ARE THAT T HE ASSESSEES ARE INDIVIDUALS DERIVING INCOME UNDER THE HEAD SALARY AND OTHER SOURCES . FOR THE SAKE OF CONVENIENCE, FACTS RELEVANT TO APPEAL NO.1373/BANG/2012 ARE STATED HEREIN . RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006 - 07 WAS FILED ON 31/07/2006. ADMITTEDLY, THERE WERE NO SCRUTINY ASSESSMENT PROCEEDINGS AGAINST SAID RETURN OF INCOME. SUBSEQUENTLY, THE ASSESSING OFFICER [AO] RECEIVED INFORMATION THAT THE ASSESSEE HAD RECEIVED LOAN FROM THE COMPANY CALLED GOKULDAS IMAGES PVT. LTD. [ GIP LTD. ] IN WHICH HE WAS SUBSTANTIALLY INTERESTED AND HOLDING 27.3% OF THE EQUITY SHARES OF THE SAID COMPANY. THE AO ALSO GOT INFORMATION THAT THE SAID COMPANY WAS HAVING PROFITS AND SURPLUS TO THE EXTENT OF RS.84,35,22,753/ - AS ON 31/03/2006. THEREFORE, THE AO ISSUED ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 3 OF 34 NOTICE DATED 12/03/2010 U/S 148 OF THE INCOME - TAX ACT , 1961 [HEREINAFTER REFERRED TO AS 'THE ACT' FOR SHORT] CALLING UPON THE ASSESSEE TO FILE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006 - 07 AS HE HAD REASON TO BELIEVE THAT INCOME ESCAPED ASSESSMENT. PURSUANT TO THIS NOTICE, ASSESSEE REPLIED THAT RETURN OF INCOME FILED UNDER SEC.139 MAY BE TREATED AS A RETURN IN RESPONSE TO NOTICE U/S 148 AND THEN REQUESTED FOR FURNISHING REASONS OF ISSUANCE OF NOTICE U/S 148. THE AO HAD FURNISHED THE REASONS RECORDED WHICH ARE AS UNDER: 3. THE ASSESSEE FILED HIS WRITTEN OBJECTIONS VIDE HIS LETTER DATED 11/8/2010 , WHICH ARE AS UNDER : ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 4 OF 34 ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 5 OF 34 ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 6 OF 34 ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 7 OF 34 ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 8 OF 34 ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 9 OF 34 ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 10 OF 34 ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 11 OF 34 ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 12 OF 34 4. THE OBJECTIONS OF THE ASSESSEE WERE DISPOSED OF BY THE AO ON 14/09/20 10 . SUBSEQUENTLY, AFTER ISSUING NOTICE U/S 143(2), THE AO COMPLETED THE ASSESSMENT TREATING THE LOAN RECEIVED OF RS.6 ,85,000/ - FROM GIP LTD., AS DEEMED DIVIDEND AND COMPLETED THE ASSESSMENT U/S 143(3) R.W.S. 147 OF THE ACT VIDE ORDER DATED 24/12/2010. 5. BEING AGGRIEVED, AN APPEAL WAS PREFERRED BEFORE THE CI T(A), WHO VIDE IMPUGNED ORDER, WHILE UPHOLDING THE ACTION OF THE AO IN INITIATING PROCEEDINGS U/S 147, HELD THAT THE PROVISIONS OF SEC.2(22)(E) WERE NOT APPLICABLE IN THE INSTANT CASE AS THERE WAS NO BENEFIT WHICH ACCRUED TO THE ASSESSEE AS A RESULT OF RE CEIPT OF THIS LOAN. HE, ACCORDINGLY, CONCLUDED THAT THE RECEIPT OF LOAN BY THE ASSESSEE WAS ONLY FOR THE PURPOSE OF BUSINESS OF GIP LTD., THE RELEVANT PARAGRAPH OF THE CIT(A) S ORDER IS AS UNDER: ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 13 OF 34 ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 14 OF 34 ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 15 OF 34 ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 16 OF 34 ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 17 OF 34 6. BEING AGGRIEVED, THE REVENUE IS IN AP PEAL BEFORE US IN THE PRESENT APPEAL. THE REVENUE RAISED THE FOLLOWING GROUNDS OF APPEAL: 7 . THE ASSESSEES, BEING AGGRIEVED BY THE DECISION OF THE CIT(A) UPHOLDING THE ACTION OF INITIATION OF RE - ASSESSMENT PROCEEDINGS U/S 147, FILED CROSS OBJECTION S CHALLENGING THE VALIDITY ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 18 OF 34 OF ASSUMPTION OF JURISDICTION U/S 147 OF THE ACT. THE CROSS OBJECTIONS RAISED BY THE ASSESSEES ARE AS UNDER: 1. THE ORDER OF THE CIT (APPEALS) IN SOME RESPECTS IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. THE LEARNED COMMISSIONER WAS IN ERROR IN HOLDING THAT THE ASSUMPTION OF JURISDICTION U/S 147 AND THE ISSUE OF NOTICE U/S 148 WERE IN ACCORDANCE WITH LAW. 3. IT SHOULD HAVE BEEN APPRECIATED THAT THE ASSESSING OFFICER IS TO RESTRICT HIMSELF TOTALLY TO THE RECORDED REASONS AND REASONS ALO NE FOR TESTING THE VALIDITY OF ACTION U/S 147 AND HE CANNOT TO TRAVEL BEYOND IT TO ANY EXTENT AND FOR JUSTIFYING ACTION U/ S 147 HE CANNOT FALL BACK UPON EVEN MATERIAL THAT MAY BE AVAILABLE ON RECORD BUT NOT FINDING EXPRESSION IN THE RECORDING. 4. IT SHOULD HAVE BEEN APPRECIATED THAT THERE WAS NO REFERENCE IN THE RECORDING TO THE LETTER AND EXTRACTS ALLEGEDLY OBTAINED FROM THE ACIT, CIRCLE - 11(4) IN THE RECORDED REASONS AND THE CONTENTS THEREOF CANNOT BE RELIED UPON TO SUPPORT THE ASSUMPTION OF JURISDICTION U/S 147. 5. IT SHOULD HAVE BEEN FURTHER APPRECIATED THAT THE LETTER DATED 26 TH JUNE 2009 OF THE ACIT, CIRCLE 11(4), BANGALORE, ONLY FORWARDED THE COPY OF THE LEDGER ACCOUNTS OF LOANS TO DIRECTORS IN THE BOOKS M/S. HINDUJA INVESTMENTS PRIVATE LIMITED AND SUCH LEDGER EXTRA AND EVEN SUCH EXTRACT IN THE BOOKS OF M/S. GOKULDAS IMAGES PRIVATE LIMITED DID NOT SHOW THAT ANY MONEY WAS LENT TO THE ASSESSEE AS SUCH. 6. THE APPELLANT CRAVES FOR LEAVE TO AMEND, ADD TO OR DELETE THE GROUNDS OF APPEAL. 8 . THE CROSS OB JECTIONS FILED BY THE ASSESSEES GO TO THE VERY ROOT OF THE MATTER AS THEY CHALLENGE THE ASSUMPTION OF JURISDICTION U/S 147 OF THE ACT. THEREFORE, AT THE FIRST INSTANCE, WE SHALL DEAL WITH THE PRELIMINARY GROUND CHALLENGING THE VERY JURISDICTION U/S 147 OF THE ACT. ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 19 OF 34 9 . TO ADJUDICATE THE ISSUE OF REOPENING, WE MUST DEAL WITH THE FACTS SURROUNDING INITIATION OF RE - ASSESSMENT PROCEEDING U/S 147 OF THE ACT. THE ASSESSEE FILED RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006 - 07 ON 31/7/2006. ADMITTEDLY, THER E WERE NO SCRUTINY ASSESSMENT PROCEEDINGS AGAINST SAID RETURN OF INCOME. SUBSEQUENTLY, THE AO RECEIVED INFORMATION FROM THE AO OF M/S.HINDUJA INVESTMENTS PVT. LTD. [HIP LTD.] VIZ., ASST. COMMISSIONER OF INCOME - TAX, CIRCLE 11(4), BANGALORE, VIDE LETTER DAT ED 26/6/2009 THAT THE ASSESSEE HAD RECEIVED LOAN FROM THE COMPANY VIZ., GIP LTD., THE SAID LETTER ALSO CONTAINED INFORMATION THAT THE ASSESSEE WAS HOLDING 50% OF SHARE CAPITAL IN ONE COMPANY HIP LTD. , AND HOLDING 27.25 AS SHARE CAPITAL IN GIP LTD. THE AO OF HIP LTD., ALSO INFORMED THAT DIRECTORS OF GIP LTD., HAD RECEIVED LOANS AMOUNTING TO RS.10.5 CRORES FROM GIP LTD., WHICH IS A DEEMED DIVIDEND WITHIN THE MEANING OF THE PROVISIONS OF SEC.2(22)(E) OF THE ACT. LEDGER ACCOUNT COPY UNDER TITLE LOANS TO DI RECTOR AS APPEARING IN THE BOOKS OF GIP LTD., WAS ALSO ANNEXED TO THE SAID INFORMATION. BASED ON THIS INFORMATION THE AO HAD INITIATED RE - ASSESSMENT PROCEEDINGS BY ISSUING NOTICE U/S 148 DATED 12/03/2010 AFTER RECORDING THE REASONS, AS EXTRACTED SUPRA. THE ASSESSEE CONTENDED BEFORE THE AO THAT ASSUMPTION OF JURISDICTION U/S 148 IS NOT VALID. THE AO CANNOT TRAVEL BEYOND REASONS RECORDED FOR ISSUANCE OF NOTICE U/S 148 AND FURTHER CONTENDED THAT THE REASONS RECORDED DO NOT INDICATE WHETHER THE ORIGINAL RET URN OF INCOME WAS PROCESSED U/S 143(1) OR 143(3) ETC. ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 20 OF 34 ACCORDING TO THE ASSESSEE, THERE WAS NO MATERIAL IN POSSESSION OF THE AO TO HOLD THAT THERE IS A DEEMED DIVIDEND OF RS.6.58 CRORES IN THE HANDS OF THE ASSESSEE. THE SAID OBJECTIONS HAVE BEEN OVERRULED BY THE AO. 10 . ON APPEAL BEFORE THE CIT(A), THE CIT(A) ALSO CONFIRMED THE ASSUMPTION OF JURISDICTION U/S 148. HOWEVER, RELIEF WAS GRANTED ON MERITS OF THE ADDITION. HENCE, THE ASSESSEE IS IN CROSS OBJECTION BEFORE US CHALLENGING THE ASSUMPTION OF J URISDICTION U/S 148. 1 1 . EVEN BEFORE US, THE ASSESSEE CONTENDED THAT (I) THE REASONS RECORDED DO NOT INDICATE THAT THE AMOUNT RECEIVED AS LOAN FROM GIP LTD. IS TAXABLE AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE; (II) THE REASONS RECORDED DO NOT LEAD ANY PRUDENT PERSON TO BELIEVE THAT INCOME ESCAPED ASSESSMENT TO TAX; (III) THE AO CANNOT TRAVEL BEYOND REASONS RECORDED FOR THE PURPOSE OF ASSUMPTION OF JURISDICTION. THE REASONS RECORDED CAN EITHER BE SUPPLEMENTED OR SUBSTITUTED . IN THIS REGARD, H E RELIED ON SEVERAL DECISIONS. 1 2 . ON THE OTHER HAND, LD.CIT(DR) VEHEMENTLY SUBMITTED THAT FROM THE REASONS RECORDED, ONE CAN CLEARLY FORM A BELIEF THAT INCOME ESCAPED ASSESSMENT. THE INFORMATION RECEIVED BY ANOTHER AO CONSTITUTES FRESH INFORMATION. THIS INFORMATION HAS ENABLED THE AO TO FORM A BELIEF THAT INCOME ESCAPED ASSESSMENT ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 21 OF 34 IN THE HANDS OF THE ASSESSEE. THEREFORE, HE PRAYED THAT RE - ASSESSMENT PROCEEDINGS MAY BE UPHELD. 13 . WE HEARD RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. THE ONLY ISSUE IN THE CROSS OBJECTION IS ABOUT VALIDITY OF ASSUMPTION OF JURISDICTION U/S 148. THERE IS NO QUARREL ABOUT PROPOSITION CANVASSED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT VALIDITY OF RE - ASSESSMENT PROCEEDING SHOULD BE JUDGED ON THE TOUCHSTON E OF THE REASONS RECORDED. IN THE INSTANT CASE, THE REASONS RECORDED BY THE AO ARE AS UNDER: ABOVE REASONS ARE RECORDED BY THE AO BASED ON INFORMATION RECEIVED BY HIM FROM THE ASST. COMMISSIONER OF INCOME - TAX, CIRCLE 11(4), BANGALORE, VIDE HIS LET TER DATED 26/6/2009, WHO IS THE AO OF HIP LTD., CONCERN IN WHICH THE ASSESSEE WAS SUBSTANTIALLY INTERESTED. FROM THE SAID LETTER, IT IS VERY CLEAR THAT THE ASSESSEE HAD RECEIVED LOANS FROM THE COMPANY CALLED GIP LTD., IN WHICH HE IS SUBSTANTIALLY INTERES TED AS HE IS HOLDING SHARES OF 27.3% IN THE SAID COMPANY. UNDISPUTEDLY, THIS TRANSACTION ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 22 OF 34 WAS NOT REFLECTED IN THE ORIGINAL RETURN OF INCOME FILED BY THE ASSESSEE. THERE WAS NO SCRUTINY ASSESSMENT AGAINST SAID ORIGINAL RETURN OF INCOME. THEREFORE, THE AO HAD NO OCCASION TO EXAMINE THIS TRANSACTION NOR TO FORM AN OPINION ABOUT TAXABILITY OF RECEIPT OF THE SAID LOAN IN THE HANDS OF THE ASSESSEE AS DEEMED DIVIDEND. THEREFORE, THE AO HAD FORMED BELIEF THAT INCOME ESCAPED ASSESSMENT IN THE HANDS OF THE ASSESS EE. THE SAID BELIEF IS REFLECTED IN THE REASONS RECORDED WHICH CLEARLY SAYS THAT THE ASSESSEE HAD RECEIVED LOANS OF RS.6.85 CRORES FROM GIP LTD., IN WHICH HE WAS SUBSTANTIALLY INTERESTED AS HE WAS HOLDING 27.3% OF SHARE CAPITAL AND THE SAID COMPANY WAS AL SO HAVING RESERVE AND SURPLUS TO THE EXTENT OF RS.81.8 CRORES AS ON 31/3/2006. THIS INFORMATION WOULD CERTAINLY ENABLE ANY PRUDENT PERSON WHO IS DULY INSTRUCTED UNDER LAW TO FORM A BELIEF THAT INCOME ESCAPED ASSESSMENT. THE REASONS RECORDED CLEARLY MENTI ON THAT THE INGREDIENTS FOR INVOKING THE PROVISIONS OF SECTION 2(22)(E) ARE SATISFIED I.E. RECEIPT OF LOAN FROM A COMPANY IN WHICH HE IS SUBSTANTIALLY INTERESTED AND THE COMPANY HAVING ACCUMULATED PROFITS AND RESERVES. IT IS ALSO FACT TO BE NOTED THAT THE ASSESSEE HAD NOT DISPUTED ABOUT EXISTENCE OF THESE FACTS AND THERE IS NO QUARREL ABOUT THIS. IT IS TRITE LAW THAT AT THE TIME OF ISSUING NOTICE U/S 148, THE FACT OF ESCAPEMENT OF NEED NOT BE CONCLUSIVELY PROVED AS HELD BY THE HON BLE SUPREME COURT IN THE CASE OF RAYMOND WOOLLEN MILLS LTD. VS. ITO (1999) 236 ITR 34 (SC) ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 23 OF 34 REITERATED IN ACIT VS. RAJESH JHAVERI STOCK BROKERS P.LTD. (291 ITR 500) . THE RELEVANT PARAGRAPH IS EXTRACTED BELOW: 16. SEC. 147 AUTHORIZ ES AND PERMITS THE AO TO ASSESS OR REASSESS INCO ME CHARGEABLE TO TAX IF HE HAS REASON TO BELIEVE THAT INCOME FOR ANY ASSESSMENT YEAR HAS ESCAPED ASSESSMENT. THE WORD 'REASON' IN THE PHRASE 'REASON TO BELIEVE' WOULD MEAN CAUSE OR JUSTIFICATION. IF THE AO HAS CAUSE OR JUSTIFICATION TO KNOW OR SUPPOSE THAT INCOME HAD ESCAPED ASSESSMENT, IT CAN BE SAID TO HAVE REASON TO BELIEVE THAT AN INCOME HAD ESCAPED ASSESSMENT. THE EXPRESSION CANNOT BE READ TO MEAN THAT THE AO SHOULD HAVE FINALLY ASCERTAINED THE FACT BY LEGAL EVIDENCE OR CONCLUSION. THE FUNCTION OF THE AO IS TO ADMINISTER THE STATUTE WITH SOLICITUDE FOR THE PUBLIC EXCHEQUER WITH AN INBUILT IDEA OF FAIRNESS TO TAXPAYERS. AS OBSERVED BY THE DELHI HIGH COURT IN CENTRAL PROVINCES MANGANESE ORE CO. LTD. VS. ITO (1991) 98 CTR (SC) 161 : (1991) 191 ITR 662 (SC) , FOR INITIATION OF ACTION UNDER S. 147(A) (AS THE PROVISION STOOD AT THE RELEVANT TIME) FULFILMENT OF THE TWO REQUISITE CONDITIONS IN THAT REGARD IS ESSENTIAL. AT THAT STAGE, THE FINAL OUTCOME OF THE PROCEEDING IS NOT RELEVANT. IN OTHER WORDS, AT THE INIT IATION STAGE, WHAT IS REQUIRED IS 'REASON TO BELIEVE', BUT NOT THE ESTABLISHED FACT OF ESCAPEMENT OF INCOME. AT THE STAGE OF ISSUE OF NOTICE, THE ONLY QUESTION IS WHETHER THERE WAS RELEVANT MATERIAL ON WHICH A REASONABLE PERSON COULD HAVE FORMED A REQUISIT E BELIEF. WHETHER THE MATERIALS WOULD CONCLUSIVELY PROVE THE ESCAPEMENT IS NOT THE CONCERN AT THAT STAGE. THIS IS SO BECAUSE THE FORMATION OF BELIEF BY THE AO IS WITHIN THE REALM OF SUBJECTIVE SATISFACTION [SEE ITO VS. SELECTED DALURBAND COAL CO. (P) LTD. (1996) 132 CTR (SC) 162 : (1996) 217 ITR 597 (SC); RAYMOND WOOLLEN MILLS LTD. VS. ITO (1999) 152 CTR (SC) 418 : (1999) 236 ITR 34 (SC)]. THEREFORE, HAVING REGARD TO THE RATIO LAID DOWN BY THE HON BLE SUPREME COURT IN THE ABOVE TWO CASES, WE HOLD THAT ASS UMPTION OF JURISDICTION U/S 148 BY THE AO IS VALID IN LAW. 1 4 . IN THE RESULT, THE CROSS - OBJECTIONS ARE DISMISSED. ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 24 OF 34 15 . HAVING UPHELD THE RE - ASSESSMENT PROCEEDINGS, NOW WE PROCEED TO DEAL WITH THE APPEALS BY THE REVENUE IN ITA NOS.1373 & 1374/BANG/20 12. THE REVENUE HAS FILED THE PRESENT APPEALS CHALLENGING THE FINDING OF THE CIT(A) DELETING THE ADDITION AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEES. 16 . THE REVENUE RAISED THE FOLLOWING GROUNDS: 1 7 . THE LD.CIT(DR) CONTENDED THAT THE CIT (A) WAS NOT JUSTIFIED IN DELETING THE ADDITION AS ALL THE CONDITIONS ESSENTIAL FOR INVOKING THE PROVISIONS OF SEC.2(22)(E) ARE EXISTING IN THE PRESENT CASE. A DEEMED PROVISION SHOULD BE CONSTRUED STRICTLY. ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 25 OF 34 18 . ON THE OTHER HAND, LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SAME SUBMISSIONS AS WERE MADE BEFORE THE CIT(A) . HE DR EW OUR ATTENTION TO WRITTEN SUBMISSIONS FILED BEFORE THE CIT(A). 1 9 . WE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ONLY ISSUE IN THE APPEAL IS WHETHER THE AMOUNT OF RS.10.5 CRORES RECEIVED BY THE ASSESSEES FROM GIP LTD., IS TAXABLE IN THE HANDS OF THE ASSESSEES. THERE IS NO DISPUTE ABOUT EXISTENCE OF CONDITIONS I.E. THE ASSESSEE WAS HOLDING SHARES OF MORE THAN 10% IN THE COMPANY CALLED GIP LTD., AND TH E SAID COMPANY IS HAVING RESERVES AND SURPLUS OF RS.81.8 CRORES AND RECEIPT OF MONEY BY THE ASSESSEE FROM THE SAID COMPANY. THE EXPLANATION OFFERED BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES IS THAT THE SAID LOAN WAS RECEIVED ONLY FOR THE PURPOSE OF BUS INESS OF THE COMPANY AND THEREFORE, CANNOT BE TREATED AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE. HE FURTHER SUBMITTED THAT MONEY WAS RECEIVED BY THE DIRECTORS ONLY PURSUANT TO COVENANT CONTAINED IN SHARE SUBSCRIPTION AND SHARE HOLDERS AGREEMENT DATE D 22/11/2005 ENTERED INTO BETWEEN GIP LTD., AND OTHER THREE INVESTORS. COPY OF THE SAID AGREEMENT WAS ALSO PRODUCED BEFORE US. IT IS SUBMITTED THAT THE SAID AGREEMENT CONTAINED A CLAUSE WHEREBY THE COMPANY GPI LTD. HAD AGREED TO DISASSOCIATE ITSELF FROM T HE AFFAIRS OF ITS AFFILIATED COMPANIES BEFORE THE INVESTORS BRING THEIR MONEY TO THE COMPANY. AND TO ACHIEVE THIS PURPOSE, CLAUSE 3 OF THE SAID AGREEMENT CONTAINED A COVENANT THAT A SUM ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 26 OF 34 OF RS.10 CRORES WAS TO BE PROVIDED TO THE PROMOTERS IN THE FORM OF IN TEREST - FREE LOAN FOR ACHIEVING THE ABOVE SAID OBJECTIVES. THUS, IT IS THE CONTENTION OF THE ASSESSEE THAT THE LOAN WAS OBTAINED BY THE ASSESSEE ONLY OUT OF BUSINESS EXIGENC IES OF GIP LTD. AND IT IS FURTHER CONTENDED THAT THE AGREEMENTS MADE IT OBLIGATORY ON THE PART OF THE ASSESSEE TO UTILIZE THE LOAN PROCEEDINGS ONLY FOR ACHIEVING OBJECTIVES MENTIONED IN THE SAID CLAUSE OF AGREEMENT AND THE DIRECTORS ARE BARRED FROM UTILIZING ANY LOAN PROCEEDINGS FOR PERSONAL BENEFIT OF ITS DIRECTORS. PURSUANT TO THIS CL AUSE, IT IS SUBMITTED THAT, A SUM OF RS.5 CRORES WAS ISSUED BY GIP LTD., IN THE NAME OF M/S. PERSONALITY LTD. THIS AMOUNT WAS UTILIZED TO DISCHARGE ITS BANK LOAN FOR WHICH CORPORATE GUARANTEE WAS ISSUED BY GIP LTD. AFTER DISCHARGING THIS LOAN LIABILITY, G IP LTD., WAS FREED FROM ITS GUARANTEE OBLIGATIONS . FURTHER, IT WAS SUBMITTED THAT OK WAS OWNER OF TWO POPULAR BRANDS VIZ., CHESSKING AND BEST SETTLER . GIP LTD, HAS ENTERED AGREEMENT WITH M/S.PERSONALITY LTD. DATED 01/04/2005 WITH INTENTION OF BUYING THESE BRANDS FOR CONSIDERATION OF RS.5.5 CRORES. THE SAID CONSIDERATION WAS ALREADY PAID BY GIP LTD. TO M/S.PERSONALITY LTD. HOWEVER, PURSUANT TO COVENANT CONTAINED IN SHARE HOLDERS AGREEMENT TO THE EFFECT THAT GIP LTD., HA D TO DISASSOCIATE FROM THE AFFI LIATED COMPANIES THROUGH THE MEDIUM OF ANOTHER AFFILIATED COMPANY CALLED HIP LTD. THE SAID AMOUNT OF RS.5.5 CRORES STOOD TRANSFERRED AS LOAN TO DIRECTORS THEREBY M/S. PERSONALITY LTD CEASED TO BE A CREDITOR. HE FURTHER STATED ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 27 OF 34 THAT IN THE BOOKS OF HIP LTD., THE ACCOUNTS OF THE DIRECTORS I.E. THE ASSESSEES ARE CREDITED WITH A SUM OF RS.5.5 CRORES WITH CORRESPONDING DEBIT TO M/S.PERSONALITY LTD., THUS IT WAS EXPLAINED THAT THE SAID RS.10.5 CRORE FIGURED AS LOAN TO DIRECTORS I.E. THE ASSESSEE IN THE BOOKS OF GI P LTD., WAS ONLY PURSUANT TO SHARE PURCHASE AGREEMENT. THUS, IT WAS PURELY FOR BUSINESS PURPOSE OF THE COMPANY. THUS, IT WAS CONTENDED THAT LOAN BY THE COMPANY TO THE SHAREHOLDER WAS NOT BY WAY OF CHEQUE OR CASH AND THEREFORE, THE PROVISIONS OF SEC TION 2 (22)(E) ARE NOT APPLICABLE. THE ADJUSTMENT ENTRIES RESULTING IN DEBIT TO DIRECTOR S LOAN WERE MADE ONLY TO EFFECT TO SHARE HOLDER S AGREEMENT. HE RELIED ON VARIOUS DECISIONS OF THE HON BLE DELHI HIGH COURT. 1 9 .1 THE CIT(A) DELETED THE ADDITION OF DEEMED DIVIDEND SIMPLY ACCEPTING THE SUBMISSIONS MADE BY THE ASSESSEE. THE CIT(A) HAD NOT GONE INTO THE SUBSTANCE OF THE TRANSACTIONS AS EXPLAINED BY THE ASSESSEE HIMSELF. THE VITAL FACT WHICH ESCAPED THE 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 WHICH THE ASSESSEE SUBSTANTIALLY INTERESTED I.E. PI. IT IS UNDISPUTED FACT THAT THE ASSESSEE, ALONG WITH HIS FAMILY MEMBERS, IS 100% SHAREHOLDER IN M/S.PERSONALITY LTD., ANY PA YMENT MADE BY A COMPANY TO A SHAREHOLDER OR CONCERN IN WHICH HE HAS SUBSTANTIAL INTEREST, IS ALSO COVERED BY CLAUSE (E) OF SUB - SEC.(22) OF SECTION 2. THE EXISTENCE OF PRE - CONDITIONS FOR INVOKING THE PROVISIONS OF SEC.2(22)(E) TO TAX AS DEEMED DIVIDEND IN THE HANDS ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 28 OF 34 OF SHAREHOLDER ARE NOT IN DISPUTE. THEREFORE, WE ARE NOT GOING INTO THOSE 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 T RANSFERRED AS LOAN TO DIRECTORS IN THE BOOKS OF GIP 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 WHICH THE ASSESSEE IS SUBSTANTIALLY INTERESTED AND THESE AMOUNTS WERE SUBSEQUENTLY TRANSFERRE D TO THE DIRECTORS. THE PROVISIONS OF SECTION 2(22)(E) ARE CLEARLY ATTRACTED EVEN IF PAYMENT IS MADE TO A CONCERN IN WHICH SHAREHOLDER IS HAVING SUBSTANTIAL INTEREST OR ANY PAYMENT MADE BY SUCH COMPANY ON BEHALF OF SHAREHOLDER OR FOR INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER. 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 WHICH THE SHAREHOLDER HAS SUBSTANTIAL INTEREST HAVING REGARD TO THE PLAIN PROVISIONS OF SEC.2(22)(E) O F THE ACT . 1 9 .2 THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF BAGMANE CONSTRUCTION (P) LTD. VS. CIT (2015)(277 CTR 338)(KAR) ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 29 OF 34 FOL LOWING THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. UNIVERSAL MEDICARE (P.) LTD. [2010] 324 ITR 263 HELD THAT WHEN A PAYMENT IS MADE TO ANY CONCE RN FALLING UNDER CLAUSE (E) OF SUB - SECTION (2) OF SECTION 2, TAX IS LEVIABLE AS DEEMED DIVIDEND ON THE SHAREHOLDER ONLY AND NOT IN THE HANDS OF CONCERN. THE RELEVANT PARAGRAPH IS REPRODUCED BELOW: 30. IT WAS ALSO CONTENDED ON BEHALF OF THE REVENUE THAT HA VING REGARD TO THE PLAIN WORDS USED IN CLAUSE (E) 'TO ANY CONCERN', WHEN THE AMOUNT IS PAID OR WHEN ANY PAYMENT IS MADE TO A CONCERN, THE TAX IS LEVIED ON THE CONCERN AND NOT ON THE SHAREHOLDERS. AS FAR AS THIS QUESTION IS CONCERNED, THIS COURT FOLLOWING T HE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF CIT V. UNIVERSAL MEDICARE (P.) (LTD.) [2010] 324 ITR 263/190 TAXMAN 144 HAS CATEGORICALLY HELD THAT WHEN ANY PAYMENT IS MADE BY A COMPANY TO ANY CONCERN, WHICH FALLS UNDER CLAUSE (E), THE TAX IS LEVIABLE ON THE SHAREHOLDER ONLY AND NOT ON THE CONCERN. WE RESPECTFULLY AGREE WITH THE AFORESAID JUDGMENT AND WE DO NOT SEE ANY JUSTIFICATION TO TAKE ANOTHER VIEW OF THIS MATTE R. THEREFORE, THE FINDING RECORDED BY THE TRIBUNAL THAT, THESE ADVANCES MADE BY THE BDPL TO THE SISTER CONCERN AS WELL AS TO ITS SHAREHOLDER DO NOT CONSTITUTE DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT, IS LEGAL AND VALID AND DO NOT CALL FOR ANY INT ERFERENCE. THUS EVEN A PAYMENT IS MADE TO A CONCERN IN WHICH THE SHAREHOLDER HAS SUBSTANTIAL INTEREST, AMOUNT IS TAXABLE AS DEEMED DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER. IT IS UNDISPUTED FACT THAT THE ASSESSEE HAD SUBSTANTIAL INTEREST IN M/S.PER SONALITY LTD., HOLDING 50% SHARES. THEREFORE, THE AMOUNT PAID BY WAY OF LOAN OR ADVANCE TO M/S.PERSONALITY LTD., BY GIP LTD., IS CLEARLY TAXABLE IN THE HANDS OF THE ASSESSEE. ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 30 OF 34 20 . THEN THE QUESTION THAT MAY ARISE IS WHETHER THIS PAYMENT FALLS WITHIN THE EXCEPTIONS LAID DOWN UNDER THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. IF A LOAN OR ADVANCE IS GIVEN TO A SHAREHOLDER OR TO A CONCERN UNDER NORMAL CIRCUMSTANCES WOULD NOT QUALIFY AS DEEMED DIVIDEND. FURTHER, ANY LOAN OR ADVANCE IS GIVEN TO A SHAR EHOLDER OR CONCERN IN WHICH HE IS INTERESTED, AS A CONSEQUENCE OF ANY FURTHER CONSIDERATION WHICH IS BENEFICIAL TO THE COMPANY RECEIVED FROM SUCH SHAREHOLDER OR IN SUCH CASES, SUCH ADVANCES OR LOAN CANNOT BE SAID TO BE DEEMED DIVIDEND WITHIN THE MEANING OF THE ACT. EVEN IF LOAN OR ADVANCE IS GIVEN DURING ORDINARY COURSE OF BUSINESS OF THE COMPANY, THEN IT WILL NOT COME WITHIN THE PURVIEW OF DEEMED DIVIDEND . THE EXPLANATION GIVEN BY THE ASSESSEE IS THAT THE LOAN WAS GIVEN BY THE COMPANY PURSUANT TO CLAUS E (3) OF THE SHARE SUBSCRIPTION AND SHAREHOLDERS AGREEMENT RELATING TO GIP LTD., WHICH IS PLACED AT PAGE 2 TO 149 OF THE PAPER BOOK . T HE SAID CLAUSE READS AS U NDER: ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 31 OF 34 FURTHER, THERE IS AN AGREEMENT ALSO ENTERED INTO BETWEEN THE COMPANY I.E. GIP LTD. A ND ITS SHAREHOLDERS, PLACED AT PAGE 184 TO 187 OF THE PAPER BOOK , AND THE RELEVANT CLAUSES GOVERNING ADVANCING OF EXTENDING LOAN OF RS.10 CRORE TO THE DIRECTORS EXTENDING THE LOAN OF RS.10 CRORE TO THE DIRECTORS I.E. ASSESSEES ARE AS UNDER: ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 32 OF 34 21 . F ROM A MERE PERUSAL OF THE ABOVE CLAUSES IT IS CLEAR THAT THE DIRECTOR I.E. THE ASSESSEE IS ENTITLED TO INTEREST - FREE LOAN OF RS.10 CRORES FROM GIP LTD., AND THE SAME IS REPAYABLE OVER A PERIOD OF 10 YEARS WITHOUT ANY INTEREST. THERE IS NO STIPULATION AS TO THE MANNER IN WHICH THE SAID LOAN OF RS.10 CRORES SHOULD BE UTILIZED BY THE ASSESSEE - COMPANY. FURTHER, THERE IS NO STIPULATION IN THE SAID AGREEMENT THAT THE LOAN AMOUNT SHOULD BE UTILIZED ONLY FOR THE PURPOSE OF DISCHARGING THE LOAN OBLIGATIONS OF M/S.P ERSONALITY LTD. THERE IS NO EVIDENCE ON RECORD TO 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 TO PROVE THAT THESE AMOUNTS WERE ADVANCED AS GRATUITOUS LOAN TO THE SHA REHOLDERS. THE PROVISIONS OF SEC TION 2(22)(E) ARE SQUARELY APPLICABLE. THE EXPLANATION GIVEN BY THE ASSESSEE THAT THE AMOUNTS WERE ADVANCED TO M/S.PERSONALITY LTD., TO FREE ITSELF FROM GUARANTEE OBLIGATIONS AND BUSINESS PURPOSE SHOULD BE VIEWED KEEPING I N VIEW THE TRANSACTIONS ARE BETWEEN TWO CLOSELY HELD AND RELATED COMPANIES IN WHICH THERE IS A COMMON SHARE HOLDING. EVEN IN THE NARRATION GIVEN IN THE BOOKS OF GIP LTD., WHICH IS REPRODUCED BELOW, IT IS CLEAR THAT THE PAYMENTS ARE MADE TO PL ONLY ON BEHA LF OF THE DIRECTORS: ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 33 OF 34 LEDGER: LOANS TO DIRECTORS DATE VOUCHER NO. BILL NO.& DT. QTY REFERENCE DIVISION FORM TYPE NARRATION ACCOUNT NAME FC AMT DEBIT CREDIT 7/DEC/200B{JB/976 353094 N/A CH ISSUED TO HONGKONG BANK 0 5,00,00,000.00 27 DEC. 2005 PERSONALITY ON BEHALF 071 - 034821 - 001 0 OF TOWARDS LOAN TO DIRECTOR MAR/200JV/700 N/A BEING GIWPL SHARE INVESTMENT - GOKALDAS 0 1,35,000.00 SOLD INTIMATEWEAR P. LTD. MAR/200JV/974 N/A BEING COONOR PROFIT/LOSS ON SALE OF 0 43,57,400 PROPERTY SOLD AS PER FIXED ASSETS VALUATION REPORT AND AGREEMENT MAR/200JV/999 JV N/A BEING AMOUNT PAID TO PERSONALITY WEEKENDER 0 5,50,00,000 31 - MAR - 06 PERSONAL ITY WEEKENDER TRFD TO LOAN TO DIRECTOR TOTAL 0 122,857,400.00 CLOSING BALANCE 122,857,400.00 0 THERE IS NO STIPULATION IN THE SHAREHOLDERS AGREEMENT AS CANVASSED BY THE ASSESSEE THAT THE COMPAN Y COULD BE FREED IT SELF FROM THE GUARANTEE OBLIGATIONS OF ITS AFFILIATED COMPANIES. THERE IS NO SUCH CONDITION PRECEDENT IN THE SAID AGREEMENT. THIS CONDITION IS FOUND ONLY IN THE AGREEMENT BETWEEN PROMOTERS I.E THE DIRECTORS AND THE ASSESSEE, MAY BE TO SERVE THE SELF - PURP OSE , WHICH IS A SELF - SERVING DOCUMENT ENTERED INTO WITH THE INTENTION OF AVOIDING TAX LIABILITY. THE SUBMISSIONS MADE BY THE ASSESSEE CANNOT BE GIVEN ANY CREDENCE AS NO EVIDENCE WAS FILED IN SUPPORT OF THE PROPOSITION THAT LOANS GIVEN BY THE ASSESSEE TO T HE DIRECTORS ARE UTILIZED ONLY FOR BUSINESS PURPOSE OF THE COMPANY. IT APPEARS TO US THAT THE ASSESSEE MADE AN ATTEMPT TO COVER HIS CASE TO FALL WITHIN THE LAW LAID DOWN BY SEVERAL HIGH COURT DECISIONS RELIED UPON BY HIM DURING THE COURSE OF HEARING. IT IS NOTHING BUT A MAKE BELIEF STORY INTENDED TO COME OUT OF THE CLUTCHES OF SEC TION 2(22)(E) OF THE ACT. THE CIT(A) OUGHT NOT TO ITA NO S . 1373 & 1374 /BANG/201 2 & CO 48 & 49/BANG/2013 PAGE 34 OF 34 HAVE ACCEPTED THE SUBMISSIONS WITHOUT GOING INTO THE SUBSTANCE OF THE S UBMISSIONS MADE BY THE ASSESSEE AND WITHOUT UNDERSTANDI NG THE PURPORT OF THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. THEREFORE, WE ARE OF THE OPINION THAT THE AMOUNTS PAID BY GIP LTD., TO M/S.PERSONALITY LTD., ARE TAXABLE IN THE HANDS OF THE SHAREHOLDERS AND WE RESTORE THE ORDER OF THE AO AND QUASH THE ORD ERS OF PASSED BY THE CIT(A) IN BOTH THE CASES. 22 . IN THE RESULT, THE APPEALS FILED BY THE REVENUE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 12 TH AUGUST , 2016 SD/ - S D/ - ( SUNIL KUMAR YADAV ) (I NTURI RAMA RAO) J UDICIAL MEMBER ACCOUNTANT MEMBER PLACE : BANGALORE D A T E D : 12 /0 8 /2016 SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) - II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME - TAX APPELLATE TRIBUNAL BANGALORE