ACIT, Mysore V. Shri. L. Arun Kumar, Mysore

ITA 193/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57558 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 05-03-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 25-02-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUSAN THOMAS JOSE JT
• Assessee Lawyers: R KRISHNAMURTHY
• Keywords: Opportunity of being heard; Deemed to accrue or arise in india; Deemed dividend; Set aside
• Section: 133A; 2(22)(e); 143(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER ITA NOS. A.Y. APPELLANT VS. RESPONDENT 107/BANG/2011 2007-08 MR. K. SHIVASHANKAR, NO. T6/17, NISARGA DAMA, NO.1027/CH 23, JAYALAKSHMI ROAD, CHAMARAJPURAM, MYSORE - 570 002. PAN: AHWPS 6487L THE ADDITIONAL COMMISSIONER OF INCOME-TAX, RANGE 1, MYSORE. 108/BANG/2011 2007-08 MR. L. ARUNKUMAR, NO. 18, V.V. MOHALLA, MYSORE - 570 002. PAN: ABKPA 6690D -- DO -- 109/BANG/2011 2007-08 MR. R. VEERESH, NO.50, SHREE GANDHA, A BLOCK, J.P. NAGAR, MYSORE 570 008. PAN: ABGPV 7780P -- DO -- ITA NOS. A.Y. APPELLANT VS. RESPONDENT 193/BANG/2011 2007-08 THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 1(2), MYSORE. MR. L. ARUNKUMAR, NO. 18, V.V. MOHALLA, MYSORE - 570 002. PAN: ABKPA 6690D 194/BANG/2011 2007-08 -- DO -- MR. R. VEERESH, NO.50, SHREE GANDHA, A BLOCK, J.P. NAGAR, MYSORE 570 008. PAN: ABGPV 7780P 195/BANG/2011 2007-08 -- DO -- MR. K. SHIVASHANKAR, NO. T6/17, NISARGA DAMA, NO.1027/CH 23, JAYALAKSHMI ROAD, CHAMARAJPURAM, MYSORE - 570 002. PAN: AHWPS 6487L ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 2 OF 18 REVENUE BY : SMT. SUSAN THOMAS JOSE, JT.CIT(DR) ASSESSEES BY : SHRI R. KRISHNAMURTHY, ADVOCATE DATE OF HEARING : 05.03.2012 DATE OF PRONOUNCEMENT : 22.03.2012 O R D E R PER BENCH THESE CROSS APPEALS BY THE ASSESSEE AND THE DEPAR TMENT ARE DIRECTED AGAINST THE SEPARATE ORDERS EACH DATED 29. 11.2010 OF THE LD. CIT(APPEALS), MYSORE. SINCE THE ABOVE APPEALS HAV ING IDENTICAL ISSUES WERE HEARD TOGETHER, SO THESE ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST WE WILL DEAL WITH THE APPEALS RELATING TO SHRI L. ARUNKUMAR FOR THE ASSESSMENT YEAR 2007-08. THE ASSESSEE IN ITA N O.108/BANG/2011 HAS RAISED THE FOLLOWING GROUNDS: 1. THE HONBLE CIT(A) ERRED IN HOLDING THAT A SUM OF RS.78,99,072/- HAS TO BE ASSESSED AS DEEMED DIVIDEN D U/S 2(22)(E) OF THE INCOME TAX ACT. 2. THE APPELLANT MAY BE PERMITTED TO RAISE THE LEGA L GROUND RAISED IN THE WRIT PETITION FILED AND ADMITTED IF I T IS NOT PENDING AT THE TIME OF HEARING OF THIS APPEAL AND IF IN LAW IT IS PERMISSIBLE FOR THE APPELLANT TO RAISE THE LEGAL ISSUE RELATING TO THE APPLICABILITY OR OTHERWISE OF SECTION 115O IN THE F ACTS AND CIRCUMSTANCES OF THE CASE. 3. THE GROUNDS RAISED BY THE DEPARTMENT IN ITS APPE AL IN ITA NO.193/BANG/2011 ARE AS FOLLOWS: ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 3 OF 18 1. THE ORDER OF THE LD. CIT(A) IS OPPOSED TO LAW A ND FACTS OF THE CASE. 2. THE CIT(A) FAILED TO APPRECIATE THE FACT THAT AS PER THE INCOME TAX ACT ANY PAYMENT BY A COMPANY BY WAY OF A DVANCE OR LOAN TO THE SPECIFIED SHARE HOLDER WILL ATTRACT THE PROVISIONS OF SEC. 2(22)(E). THEREFORE, THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITION MADE BY THE AO UNDER SECTION 2(22)(E) AS DEEMED DIVIDEND ONLY TO THE EXTENT OF RS.78,99,072/- AS AG AINST THE ADDITION OF RS.94,00,000/- MADE BY THE AO WHICH WAS THE ACTUAL AMOUNT SHOWN AS LOAN TO THE DIRECTOR IN THE BOOKS O F THE COMPANY. 3. THE APPELLANT CRAVES FOR PERMISSION TO ADD OR DE CLARE THE GROUNDS OF APPEAL AT THE TIME OF HEARING OF THE CAS E. 4. FROM THE ABOVE GROUNDS, IT IS GATHERED THAT THE ONLY GRIEVANCE OF BOTH THE PARTIES RELATES TO SUSTENANCE/DELETION OF THE ADDITION MADE BY THE ASSESSING OFFICER U/S. 2(22)(E) OF THE INCOME-TAX A CT, 1961 [HEREINAFTER REFERRED TO AS THE ACT IN SHORT]. 5. THE FACTS OF THE CASE IN BRIEF ARE THAT THE ASSE SSEE WAS A SHAREHOLDER-CUM-DIRECTOR IN THE COMPANY CALLED M/S. SKILLTECH ENGINEERS AND CONTRACTORS PVT. LTD. OVER THE LAST SEVERAL YEA RS. HE ALONG WITH SHRI R. VEERESH AND SHRI K. SHIVASHANKAR WERE PARTNERS IN T HE FIRM CALLED M/S. SKILLTECH. THE FIRM WAS IN REAL ESTATE BUSINESS AN D WAS TAKEN OVER BY M/S. SKILLTECH ENGINEERS AND CONTRACTORS PVT. LTD. WITH ALL ITS ASSETS AND LIABILITIES AS A GOING CONCERN W.E.F. 01.04.2006. AS A RESULT THE ASSESSEE ALONG WITH HIS OTHER PARTNERS STOOD AS CREDITORS OF THE COMPANY, FROM THE DATE THE ASSETS AND LIABILITIES OF THE FIRM BECAME THE ASSETS AND LIABILITIES OF THE SAID COMPANY. THE ASSESSEE BEING A DIRECTOR WA S ALSO A SALARIED EMPLOYEE OF THE COMPANY AND SALARY DUE TO HIM EVERY MONTH WAS CREDITED ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 4 OF 18 TO HIS ACCOUNT AND AS AND WHEN NEEDED MONEY WAS BEI NG DRAWN FROM THE POOL AVAILABLE. 6. THE ASSESSEE FILED HIS RETURN OF INCOME ON 06.11 .08 DECLARING A TOTAL INCOME OF RS.48,70,644. THE SAID RETURN WAS PROCES SED U/S. 143(1) OF THE ACT. SUBSEQUENTLY A SURVEY U/S. 133A OF THE ACT WA S CONDUCTED ON 18.01.08 IN THE CASE OF THE COMPANY AND THEREAFTER RETURN OF INCOME OF THE ASSESSEE BEING THE DIRECTOR HAD BEEN TAKEN UP FOR S CRUTINY. DURING THE ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT ON THE LIABILITY SIDE OF THE BALANCE SHEET, THE DIRECTORS LOAN FROM THE SAID C OMPANY STOOD AT RS.71,37,518 (LOAN) AND RS.6,58,359.15 (ADVANCE). AT THE SAME TIME, IN THE BALANCE SHEET OF THE COMPANY AS ON 31.03.2007, THE DIRECTORS LOAN AMOUNT WAS EMBEDDED IN LOANS AND ADVANCES UNDER T HE HEAD CURRENT ASSETS. THE AO NOTICED THAT THE TOTAL AMOUNT OF L OAN GIVEN TO ALL THE THREE DIRECTORS CAME TO RS.2,81,00,000 OF WHICH THE ASSES SEES INDIVIDUAL LOAN FROM COMPANY CAME TO RS.93 LAKHS. THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE AMOUNT OF RS.77,95,877.15 (RS .71,37,518 + RS.6,58,359.15) SHOULD NOT BE ASSESSED AS DEEMED DI VIDEND UNDER THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. IN RESP ONSE TO THAT, THE ASSESSEE FURNISHED A RECONCILIATION STATEMENT FOR DIRECTORS LOAN AS ON 31.3.2007, THE SAME IS REPRODUCED BELOW: RECONCILIATION STATEMENT FOR DIRECTOR LOANS AS ON 3 1.3.2007 PARTICULARS DIRECTORS NAME TOTAL RS. ARUNKUMAR L. SHIVASHANKAR K. VEERSH R. LOANS & ADVANCES AS PER B/S. DIRECTORS LOAN 9,333,333.34 9,333,333.33 9,433,333.33 28,100,000.00 ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 5 OF 18 LIABILITY AS PER BALANCE SHEET 2,195,815.34 2,351,427.33 2,367,633.33 6,914,876.00 7,137,518.00 6,981,906.00 7,065,700.00 21,185,124.00 LOAN VEERESH - - 100,000.00 100,000.00 NET LIABILITY 7,137,518.00 6,981,906.00 6,965,700.0 0 21,085,124.00 7. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HELD SHA RE APPLICATION MONEY TO THE TUNE OF RS.78.99 LAKHS WHICH WAS IN EX CESS OF THE AMOUNT DRAWN FROM THE COMPANY AND HENCE NO PART OF SAME CO ULD BE ADDED AS DEEMED DIVIDEND AS ON 31.03.2007. IN SUPPORT OF TH E ABOVE, THE ASSESSEE FURNISHED THE LEDGER ACCOUNT OF SHARE APPLICATION M ONEY WHICH READS AS UNDER: SKILLTECH ENGINEERS AND CONTRACTORS PRIVATE LIMITED .. SHARE APPLICATION MONEY LEDGER ACCOUNT 1-APR-2006 TO 31-MAR-2007 DATE PARTICULARS VCH. TYPE VCH. NO DEBIT CREDIT 1-4-2006 DR OPENING BALANCE 10,42,000.00 6-1-1007 CR CAPITAL ACCOUNT BEING TRANSFERRED TO CAPITAL A/C. JOURNAL 3946 40,42,000.00 4-3-2007 DR K.SHIVASHANKAR- US-LOAN BEING AMOUNT TRANSFER- RED TO SHARE APPLICATION MONEY JOURNAL 4664 78,99,072.73 5-3-2007 DR L. ARUNKUMAR- US-LOAN BEING AMOUNT TRANSFER- RED TO SHARE APPLICATION MONEY JOURNAL 4681 78,99.072.74 DR. R. VEERESH - US- LOAN BEING AMOUNT TRANSFER- RED TO SHARE APPLICATION MONEY JOURNAL 4682 78,99.072.74 ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 6 OF 18 10,42,000.00 2,47,39,218.20 CR CLOSING BALANCE 2,36,97,218.00 2,47,39,218.00 2,47,39,218.20 8. IT WAS FURTHER STATED THAT THE UNSECURED LOAN OF RS.78.99 LAKHS GIVEN BY HIM TO THE COMPANY EARLIER WAS TRANSFERRED TO TH E SHARE APPLICATION MONEY ON 5.3.07 BY WAY OF TRANSFER ENTRY, THEREFORE THE LOAN GIVEN TO THE COMPANY WAS DUE TO HIM PRIOR TO THE BORROWAL OF LOA N AND IF THE LOAN GIVEN BY THE COMPANY WAS IN EXCESS OF THE LOAN TAKEN BY T HE COMPANY, THEN ONLY THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT COULD BE ATTRACTED. REGARDING ADVANCE OF RS.6,58,359.15 THE ASSESSEE CONTENDED TH AT THE TRANSACTION BETWEEN THE COMPANY AND THE DIRECTOR WAS MEANT FOR THE PURPOSE OF DAY TO DAY CONDUCT OF THE BUSINESS AND IN BUSINESS EXPEDIE NCY. IT WAS FURTHER STATED THAT THE ADVANCES PAID TO THE DIRECTORS WERE ADJUSTED IN THE COMPANYS ACCOUNT BY WAY OF OBTAINING PROPER VOUCHE RS FROM THE DIRECTORS FOR VARIOUS PURCHASE AND EXPENSES. AS REGARDS TO T HE LOAN TO THE DIRECTORS BY THE COMPANY WAS CONCERNED, THE ASSESSEE STATED T O THE AO THAT THE DIRECTORS HAD ALSO GIVEN LOAN TO THE COMPANY IN THE PREVIOUS YEAR, THEREFORE DIRECTORS LOAN TO THE COMPANY WAS NOT ISOLATED ISSU E, HENCE THERE WAS NO SPECIFIC LOAN AND IT WAS ONLY AN ADVANCE ADJUSTED A GAINST THE CREDIT BALANCE OF THE DIRECTORS. IT WAS SUBMITTED THAT TH E RUNNING ACCOUNT BALANCE (CREDIT) OF THE ASSESSEE IN THE ERSTWHILE FIRM, M/S . SKILLTECH, AFTER MERGER WITH THE PRIVATE LIMITED COMPANY WAS AT RS.82,70,07 2.73 WHICH THE COMPANY OWED TO THE ASSESSEE BEFORE AVAILING LOAN O F RS.77,98,877.15, AS SUCH THE NET EFFECT OF IT WAS THAT THE COMPANY OWED RS.4,74,195.58 TO THE ASSESSEE DIRECTOR, THEREFORE, THE PROVISIONS OF SEC TION 2(22)(E) OF THE ACT WERE NOT APPLICABLE. THE AO HOWEVER DID NOT FIND M ERIT IN THE SUBMISSIONS ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 7 OF 18 OF THE ASSESSEE AND OBSERVED IN PARA 4.3 OF THE ASS ESSMENT ORDER DATED 14.12.2009 THAT FOLLOWING CONDITIONS AND ASPECTS WE RE LAID DOWN BY SECTION 2(22)(E) OF THE ACT: 4.3 (I) THERE MUST A COMPANY NOT BEING A COMPANY I N WHICH PUBLIC ARE SUBSTANTIALLY INTERESTED. IN OTHER WORDS , THERE MUST BE A COMPANY WHICH IS A PRIVATE LIMITED COMPANY (II) ANY PAYMENT MADE BY SUCH COMPANY TO ITS SHAREH OLDER AFTER 31.05.1987 (II) PAYMENT BY A COMPANY OF ANY SUM (NO DISTINCTIO N BETWEEN CAPITAL/REVENUE AND NO LIMITATION IS PRESCRIBED EXC EPT TO THE EXTENT OF ACCUMULATED PROFITS) (IV) BY WAY OF ADVANCE OR LOAN ( EITHER ASSETS OR P ROFITS / WITH OR WITHOUT INTEREST) (V) PAYMENT TO A SHAREHOLDER BEING A PERSON WHO IS BENEFICIAL OWNER OF SHARES HOLDING NOT LESS THAN 10% OF VOTING POWER IN THE COMPANY. IN OTHER WORDS, THE VOTING POWER SHOULD BE MORE THAN 10%) (VI) TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (20% OF THE INCOME OF THE CONCERN) (VII) IN EITHER OF THE CASES, PAYMENT WILL BE DEEM ED TO BE DIVIDEND ONLY TO THE EXTENT TO WHICH COMPANY POSSES SES ACCUMULATED PROFITS. (VIII) ADVANCES OR LOAN MADE TO A SHAREHOLDER OR TH E SAID CONCERN IN THE ORDINARY COURSE OF ITS BUSINESS, WHERE LENDI NG OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY I S NOT REGARDED AS DIVIDEND ( EXEMPTION PROVIDED) (IX) ANY DIVIDEND PAID WHICH IS SET OFF OF AGAINST THE SUM PREVIOUSLY PAID AND TREATED AS DIVIDEND WILL ALSO N OT BE REGARDED AS DIVIDEND. (X) NO DEEMED DIVIDEND TAX ON SUCH SET OFF DIVIDEND U/S. 115-0. (EXEMPTION PROVIDED). ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 8 OF 18 9. THE AO MADE ADDITION OF RS.94 LAKHS BY OBSERVING IN PARA 5 OF THE ASSESSMENT ORDER DATED 14.12.2009 AS UNDER: 5. APPLICATION OF PROVISIONS OF SECTION 2(22)(E) TO THE FACTS OF THE CASE : (I) IT IS NOT IN DISPUTE THAT THE ASSESSEE I.E., SRI. L . ARUNKUMAR IS ONE OF THE DIRECTORS OF M/S. SKILL TECH ENGINEE RS AND CONTRACTORS PVT. LTD., WHICH IS NOT A LIMITED COMPA NY WHERE PUBLIC ARE SUBSTANTIALLY INTERESTED. IN OTHER WORDS, THE CONDITION THAT THE ASSESSEE BEING A SHAREHOLDER OF A PVT. LTD., COMPANY IS FULFILLED. (II) THE ASSESSEE BEING A DIRECTOR OF SUCH COMPANY IS HO LDING MORE THAN 10% OF SHARES OF THE COMPANY. IN FACT, TH E ASSESSEE IS HOLDING 33.33% OF SHARES OF THE COMPANY AS ON 31.03.2007. THEREFORE, THE CONDITION THAT THE SHARE HOLDER SHOULD HAVE VOTING POWERS NOT LESS THAN 10% IS FULF ILLED. (III) AS PER THE LEDGER ACCOUNT OF THE ASSESSEE, IN THE B OOKS OF THE COMPANY AS ON 28.10.2006, THE COMPANY HAS PAID AN AMOUNT OF RS. 94,00,000 AS LOAN BY A SINGLE CHEQUE NO.464371. THIS IS EVIDENT IN THE LEDGER ACCOUNT OF ASSESSEE IN THE BOOKS OF THE COMPANY WHICH IS PRODU CED AS UNDER: SKILLTECH ENGINEERS AND CONTRACTORS PRIVATE LIMITED L. ARUN KUMAR LOAN TO DIRECTOR LEDGER ACCOUNT 1-APR-2006 TO 31-MAR-2007 DATE PARTICULARS VCH.TYPE VCH.NO DEBIT CREDIT 28-10-09 CR. CANARA BANK OC 10551 CH.NO.464371 BEING THE AMOUNT PAID TOWARDS LOAN TO DIRECTOR, MR. L. ARUN KUMAR RS.93,33,333 AND DIRECTION REMUNERATION *RS.66,666,66 PAYMENT- BANK 2521 93,33,333.34 DR. CLOSING BALANCE 93,33,333.34 93,33,333.34 93,33,333.34 93,33,333.34 ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 9 OF 18 * INCLUSIVE OF REMUNERATION, THE AMOUNT DRAWN BY TH E DIRECTOR COMES TO RS.94,00,000/-. FROM THE LEDGER ACCOUNT, IT IS BEYOND DOUBT THAT TH E PAYMENT MADE TO THE DIRECTOR IS INDEED A LOAN AMOUNT. THE C ONDITION THAT THE PAYMENT MUST BE MADE BY THE COMPANY AFTER 31.05 .1987 IS ALSO FULFILLED SINCE IT WAS PAID ON 28.10.2006. THU S, THE EXISTENCE OF LOAN TO THE DIRECTOR IN THE BOOKS IS ALSO AN UND ISPUTED FACT. THE ASSESSEE HAS UTILIZED THE LOANS OF RS. 94,00,00 0/- AVAILED FROM THE COMPANY FOR PURCHASE OF IMMOVABLE PROPERTY IN HIS NAME AS EVIDENT FROM THE CURRENT ACCOUNT OF THE DIR ECTOR (CURRENT A/C. NO. 3538 OF CANARA BANK). THE CONDITION THAT T HE PAYMENT SHOULD BE USED FOR THE INDIVIDUAL BENEFIT OF THE SHAREHOLDER IS ALSO FULFILLED. (V) THE SCRUTINY OF FINANCIAL STATEMENTS OF THE COM PANY FOR THE F.Y, 2006-07 RELEVANT TO THE A.Y. 2007-08 CLEARLY C ONFIRMS THE EXISTENCE OF ACCUMULATED PROFITS OF MORE THAN RS. 10.00 CRORES. THE ANOTHER CONDITION THAT ON THE DATE OF PAYMENT O F LOAN, THE COMPANY SHOULD POSSESSES ACCUMULATED PROFITS IS ADE QUATELY FULFILLED. (VI) ALL THE CONDITIONS LAID DOWN IN SECTION 2(22) (E) R.W. EXPLANATION TO SECTION 115-Q ARE SQUARELY APPLICABL E IN THIS CASE. ALL THE CONDITIONS, FACTORS, SITUATIONS CONTEMPLATE D U/S. 2(22)(E) ARE FULFILLED IN THE LIGHT OF THE FACTS OF THE CASE. THEREFORE, THE LOAN AMOUNT OF RS.94,00,000/- ADVANC ED BY THE COMPANY TO THE DIRECTOR/ASSESSEE IS APPROPRIATELY T REATED AS DEEMED DIVIDEND AND ASSESSABLE IN THE INDIVIDUAL HANDS OF THE ASSESSEE AS INCOME FROM OTHER SOURCES. 10. THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT( APPEALS) AND SUBMITTED THAT THE DEEMED INCOME U/S. 2(22)(E) OF T HE ACT WAS ALSO INCLUDIBLE IN THE DEFINITION OF DIVIDEND FOR THE PU RPOSE OF SECTION 115O OF THE ACT AND THEREFORE THE COMPANY PAYING DEEMED DIVIDEN D WAS REQUIRED TO DEDUCT TAX AT THE PRESCRIBED RATES. IT WAS FURTHER STATED THAT AS THE PROVISIONS OF SECTION 115O OF THE ACT WERE ATTRACTE D TO THE DEEMED DIVIDENDS, THE EXEMPTION PROVIDED U/S. 10(34) OF TH E ACT ALSO APPLIES TO ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 10 OF 18 SUCH INCOME, THEREFORE THE DEEMED DIVIDEND U/S. 2(2 2)(E) OF THE ACT IN THE ASSESSEES CASE WAS ALSO EXEMPT. THE LD. CIT(A) DI D NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE BY OBSERVING THAT THE P ROVISIONS OF CHAPTER XII-D WHICH COVERS THE SECTIONS 115O, 115P, 115Q OF THE ACT DID NOT APPLY TO DEEMED DIVIDENDS AT ALL. HE ACCORDINGLY REJECTE D THE ABOVE CONTENTION OF THE ASSESSEE. ACCORDING TO HIM, THE TAX TREATME NT OF DEEMED DIVIDEND WAS ON AN ENTIRELY DIFFERENT FOOTING DUE TO ITS INH ERENT DISTINGUISHING CHARACTERISTICS. RELIANCE WAS PLACED ON THE FOLLOW ING CASE LAWS: (I) JAYSHREE TEA & INDUSTRIES LTD. V. UOI (2006) 285 IT R 506 (II) KHYERBARI TEA COMPANY LTD. V. STATE OF ASSAM (AIR 1964 SC 925) 11. THE ASSESSEE ALSO SUBMITTED TO THE LD. CIT(A) T HAT ON 28.10.06 WHEN THE COMPANY PAID THE ADVANCE OF RS.94 LAKHS, T HE ASSESSEE HAD A CREDIT BALANCE OF RS.1,02,71,517 DUE FROM THE COMPA NY, THUS THE AMOUNT DRAWN BY THE ASSESSEE ON 28.10.06 WAS HIS OWN MONEY AND DID NOT MAKE HIM A DEBTOR OF THE COMPANY, THEREFORE NO ADDITION U/S. 2(22)(E) OF THE ACT SHOULD HAVE BEEN MADE IN THE ASSESSEES CASE. RELI ANCE WAS PLACED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF CIT, BOMBAY V. P.K. BADIANI (76 ITR 369). 12. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSION S OF THE ASSESSEE OBSERVED THAT THE ASSESSEE OWNED MORE THAN 10% OF T HE TOTAL SHARE CAPITAL OF THE COMPANY, M/S. SKILLTECH ENGINEERS AND CONTRA CTORS PVT. LTD., WHICH HAD ENOUGH RESERVES OUT OF ITS PAST PROFITS. HE PO INTED OUT THAT THE PROFIT & LOSS APPROPRIATION ACCOUNT OF THE COMPANY SHOWED A POSITIVE BALANCE OF RS.2,18,06,669 ON 31.3.2006 AND A POSITIVE BALANCE OF RS.12,01,18,436 AS ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 11 OF 18 ON 31.3.2007, THUS THERE WAS ENOUGH ACCUMULATION OF PROFITS IN THE HANDS OF THE COMPANY TO TREAT THE LOAN GIVEN TO THE ASSES SEE AS DEEMED DIVIDEND. HE FURTHER OBSERVED THAT THE ASSESSEE IN THE CAPACITY OF DIRECTOR WAS ENTITLED TO CERTAIN REMUNERATION AND IF HE WITH DREW HIS REMUNERATION IN THE FORM OF CASH OR CHEQUE PAYMENT, THE SAME COULD NOT HAVE BEEN TREATED AS DEEMED DIVIDEND, SIMILARLY, IF THE ASSESSEE WITH DREW ANY AMOUNT FROM THE COMPANY WHICH WAS ALREADY DUE TO HIM, THE SAME COULD NOT BE INCLUDED AS DEEMED DIVIDEND. THE LD. CIT(A) ALSO P OINTED OUT THAT THE COMPANY WAS MAINTAINING DIFFERENT ACCOUNTS IN THE N AME OF THE ASSESSEE WHICH RELATED TO REMUNERATION AND LOAN. HE FURTHER OBSERVED THAT ANOTHER ACCOUNT COPY IN THE NAME OF DIRECTORS WHICH CONSIST ED OF BUSINESS TRANSACTION BETWEEN THE DIRECTORS IN THE COMPANY HA D NOT BEEN CONSIDERED AT ALL FOR THE PURPOSE OF DEEMED DIVIDEND BY THE AO . THE LD. CIT(A) REPRODUCED THE EXPLANATION OF THE ASSESSEE VIDE LET TER DATED 7.12.2009 BEFORE THE AO IN PARA 6.3 OF THE IMPUGNED ORDER WHI CH READS AS UNDER: 6.3 WITH REFERENCE TO THE ABOVE I WOULD LIKE TO S UBMIT FOLLOWING CLARIFICATION ON BEHALF OF R.VEERESH, L.A RUN KUMAR AND K.SHIVASHANKAR ON THE LOANS AND ADVANCES IN THE BOOKS OF THE M/S SKILL TECH ENGINEERS AND CO NTRACTORS PVT LTD., FOR THE A.Y.2007-2008. M/S SKILL TECH A PARTN ERSHIP FIRM WAS TRANSFERRED ONGOING CONCERN BASIS TO M/S SKILL TECH ENGINEERS & CONTRACTORS PVT. LTD., AS PER BUSINESS TRANSFER AGREEMENT WITHOUT ANY REVALUATION OF ASSETS, AFTER THE CLOSURE OF BUSINESS ON 31.03.2006. ON TRANSFER OF BUSINESS OF FIRM THE CAPITAL AND CUR RENT ACCOUNT BALANCE OF THE PARTNERS TRANSFERRED TO DIRECTORS LO ANS TO COMPANY IN THE BOOKS OF ACCOUNT OF THE COMPANY. ON 28TH OCT OBER 2006 DIRECTORS JOINTLY PURCHASED HOUSE PROPERTY FOR THAT THEY WITHDRAW THE AMOUNT FROM THE COMPANY. AT THE TIME OF WITHDRA WING THE MONEY THERE IS NO LIABILITY FROM DIRECTORS TO COMPA NY THAT CAN BE SEEN FROM ENCLOSED STATEMENT OF ACCOUNT. ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 12 OF 18 ON 05.03.2007 FOR THE PURPOSE OF BANK LOAN AND TO O BTAIN BANK GUARANTEE THE BANKERS INSISTED FOR INCREASE IN SHAR E CAPITAL OF THE COMPANY. IN ORDER TO OVERCOME THE PROBLEM OF BANK F INANCE A JOURNAL ENTRY HAS BEEN PASSED ON THAT DATE BY CREDI TING SHARE APPLICATION MONEY AND DEBITING DIRECTORS LOAN. WITH THE ABOVE THE LIABILITY OF THE DIRECTORS TO TH E COMPANY IS ONLY AFTER THE ABOVE JOURNAL ENTRY. 13. THE LD. CIT(A) CONSIDERED THE ABOVE EXPLANATION OF THE ASSESSEE TO BE MISLEADING BY OBSERVING THAT THE OPENING BALANCE OF RS.78,99,072.74 WAS NEVER CREDITED TO THE DIRECTORS INDIVIDUAL ACCO UNT AND THIS AMOUNT REPRESENTED THE CAPITAL ACCOUNT BALANCE OF THE ASSE SSEE IN THE BOOKS OF THE FIRM, M/S. SKILLTECH ENGINEERS WHICH MERGED WIT H M/S. SKILLTECH ENGINEERS AND CONTRACTORS PVT. LTD. HE ALSO POINTE D OUT THAT IN THE BUSINESS TRANSFER AGREEMENT BETWEEN THE FIRM AND TH E COMPANY, IT WAS CLEARLY MENTIONED THAT THE CLOSING CAPITAL BALANCES OF THE PARTNERS WOULD BE CONVERTED INTO SHARE CAPITAL OF THE COMPANY. THERE FORE IN VIEW OF THE TERMS AND CONDITIONS OF THE BUSINESS TRANSFER AGREEMENT, THE CLOSING CAPITAL BALANCES OF THE PARTNERS IN THE ERSTWHILE FIRM COUL D NOT HAVE BEEN TAKEN TO THE INDIVIDUAL LEDGER ACCOUNT OF THE PARTNERS, THAT IS WHY THIS AMOUNT WAS NOT FOUND CREDITED IN THE DIRECTORS ACCOUNT, BUT WA S SHOWN AS SHARE APPLICATION MONEY IN THE COMPANYS BALANCE SHEET. THE LD. CIT(A) THEREFORE DID NOT FIND MERIT IN THIS CLAIM OF THE A SSESSEE THAT IT WAS AT THE BANKERS INSISTENCE THAT A JOURNAL ENTRY WAS MADE D EBITING THE DIRECTORS ACCOUNT AND CREDITING THE SHARE APPLICATION ACCOUNT . THE LD. CIT(A) HOWEVER WAS IN AGREEMENT WITH THIS CONTENTION OF TH E ASSESSEE THE ASSESSEE THAT ANY PAYMENT OF THE SUM ALREADY DUE TO THE ASSESSEE CANNOT BE CONSIDERED AS DEEMED DIVIDEND. ACCORDING TO HIM , THE ASSESSEE WAS ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 13 OF 18 ENTITLED TO WITHDRAW THE REMUNERATION WHICH WAS DUE TO HIM AND THIS AMOUNT WAS ALREADY TAXED IN THE HANDS OF THE ASSESS EE AS SALARY AT THE TIME OF CREDIT, THEREFORE IT COULD NOT BE TAXED AGA IN AS DEEMED DIVIDEND AT THE TIME OF WITHDRAWAL. 14. AS REGARDS TO THE CREDIT OF RS.78,99,072 APPEAR ING IN THE ASSESSEES ACCOUNT, THE LD. CIT(APPEALS) WAS OF THE VIEW THAT IT WAS NOTHING BUT BALANCE OF THE CAPITAL ACCOUNT IN THE ERSTWHILE PAR TNERSHIP FIRM AND THIS AMOUNT WAS TO BE CONVERTED INTO SHARE CAPITAL OF TH E COMPANY AND SHARES WERE TO BE ALLOTTED TO THE ASSESSEE, THUS THE ASSES SEE HAD NO RIGHT TO WITHDRAW THIS AMOUNT IN CASH, SO IT SHOULD NOT BE C ONSIDERED AS SIMPLE CREDIT BALANCE AVAILABLE TO THE ASSESSEE FOR WITHDR AWAL. THE LD. CIT(A) HELD THAT THE ASSESSEE AS ON 27.10.06 WAS A NATURAL CREDITOR OF THE COMPANY, M/S. SKILLTECH ENGINEERS AND CONTRACTORS P VT. LTD., TO THE EXTENT OF RS.23,72,498 ONLY, SUCH CREDIT BALANCE BASICALLY REPRESENTED SALARY CREDITED TO THE ASSESSEES ACCOUNT & SOME OTHER SMA LL SUMS AND WHEN THE ASSESSEE ASKED FOR NETTING OF CREDIT AND DEBIT BALA NCES, ONLY THIS AMOUNT CAN BE CONSIDERED ON THE CREDIT SIDE. THE LD. CIT( A) CONFIRMED THE ADDITION TO THE EXTENT OF RS.78,99,072 CONSIDERING THE SAME AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE. THE LD. CIT(A) ALSO REF ERRED TO THE FOLLOWING CASE LAWS: (I) MISS P. SARADA V. CIT (229 ITR 444) (SC) (II) MUKUNDRAY SHAH (290 ITR 433)(SC) 15. THE LD. CIT(A) ALSO OBSERVED THAT IN ASSESSEES CASE THE CREDIT OF RS.78,99,072 DID NOT REPRESENT MONEY DUE BY THE COMPANY TO THE DIRECTOR AND THAT AS PER THE TERMS AND CONDITIONS O F THE BUSINESS TRANSFER ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 14 OF 18 AGREEMENT, THE AMOUNT WAS TO BE ADDED TO THE SHARE CAPITAL OF THE COMPANY, THE AGREEMENT WAS A BINDING AGREEMENT AND WAS DULY ACTED UPON. THE LD. CIT(A) CATEGORICALLY STATED THAT AS PER THE AGREEMENT THE AMOUNT OF RS.78,99,072 WAS IN FACT FIRST TREATED AS SHARE APPLICATION MONEY AND THEN CONVERTED INTO SHARE CAPITAL, THUS AT NO P OINT OF TIME THIS AMOUNT COULD HAVE BEEN TREATED AS MONEY DUE TO THE DIRECTO RS AND THAT IN THE COMPANYS BOOKS ALSO, THE LOAN OF THE DIRECTORS WAS ACCOUNTED FOR SEPARATELY FROM THE SHARE APPLICATION MONEY. THE L D. CIT(A) ALSO REFERRED TO THE DECISION OF THE ITAT CHANDIGARH BENCH IN THE CASE OF AJANTA CYCLES (99 TTJ 1159) AND OBSERVED THAT EVEN IF IT WAS ASSUMED THAT THE ASSESSEE WAS CORRECT IN CLAIMING THAT AS ON 28.10.2006 HE DI D NOT BECOME A DEBTOR OF THE COMPANY CONSIDERING THE OVERALL CREDITS AVAI LABLE, INCLUDING THE CAPITAL BALANCE TRANSFERRED FROM THE ERSTWHILE FIRM , IT WAS ADMITTED THAT AS SOON AS THE AMOUNTS WERE TRANSFERRED TO SHARE APPLI CATION ACCOUNT, HE BECAME A DEBTOR OF THE COMPANY AND THE SITUATION DI D NOT CHANGE FOR THE REST OF THE YEAR AND EVEN IN THE SUCCEEDING YEAR TH E SITUATION REMAINED THE SAME WHEN THE SHARE APPLICATION MONEY WAS CONVERTED INTO SHARE CAPITAL. ACCORDING TO THE LD. CIT(A), ONCE THE AMOUNT WAS TR ANSFERRED TO SHARE APPLICATION MONEY ACCOUNT, THE ASSESSEE BECAME A NE T DEBTOR OF THE COMPANY. THUS, TO THAT EXTENT THE COMPANY HAD ADV ANCED HIM A DEBT OR LOAN AND THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT WOULD BE ATTRACTED. A REFERENCE WAS MADE TO THE JUDGMENT OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF M.D. JINDAL REPORTED IN 64 ITR 28. THE LD. CIT(A) SUSTAINED THE ADDITION OF RS.78,99,072 OUT OF THE ADDITION OF RS.94 LAKHS MADE BY THE AO. NOW BOTH THE PARTIES ARE IN APPEAL. ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 15 OF 18 16. THE ASSESSEE IS IN APPEAL AGAINST THE SUSTENANC E OF ADDITION OF RS.78,99,072, WHILE THE DEPARTMENT IS IN APPEAL AGA INST THE RELIEF ALLOWED TO THE ASSESSEE. 17. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DIRECTORS TO WHOM LOAN HAS BEEN GIVEN WERE HAVING CREDIT BALANCE S IN THE ERSTWHILE PARTNERSHIP FIRM IN THE CAPACITY OF PARTNERS AND TH E ASSETS & LIABILITIES OF THE SAID FIRM WERE TAKEN OVER BY THE COMPANY, THEREFORE THE SO-CALLED LOAN WAS NOTHING BUT REPAYMENT OF ALREADY EXISTING CREDIT BA LANCES. IT WAS SUBMITTED THAT THE CREDIT BALANCE WAS SHOWN AS SHARE APPLICAT ION MONEY JUST TO AVAIL THE LOAN FROM THE FINANCIAL INSTITUTIONS AND THE CO MPANY WAS HAVING AUTHORIZED SHARE CAPITAL OF RS.1 CRORE, WHILE THE S HARE APPLICATION MONEY WAS OUTSTANDING AT RS.2,36,97,218.20 AND THE PAID U P CAPITAL WAS OF RS.15,48,000, THEREFORE OUT OF THE SHARE APPLICATIO N MONEY ONLY A SUM OF RS.84,52,000 (RS.1,00,00,000 RS.15,48,000) COULD HAVE BEEN TRANSFERRED TO THE CAPITAL ACCOUNT, AS SUCH THERE W AS SURPLUS SHARE APPLICATION MONEY WHICH WAS THE CREDIT BALANCE OF D IRECTORS/SHAREHOLDERS AND WAS TO BE ADJUSTED AGAINST THE LOANS GIVEN TO T HEM. IT WAS POINTED OUT THAT THE BUSINESS OF THE FIRM WAS TAKEN OVER BY THE COMPANY ON 01.04.2006, ON THE SAID DATE CREDIT BALANCES OF THE DIRECTORS WERE APPEARING IN THE BALANCE SHEET, WHILE THE LOANS HAD BEEN GIVEN ON 28.10.2006, THEREFORE IT WAS A REPAYMENT OF THE ALR EADY EXISTING CREDIT BALANCES. IT WAS ALSO POINTED OUT THAT CREDIT BALA NCES WERE CONVERTED INTO SHARE APPLICATION MONEY ONLY IN MARCH, 2007, THEREF ORE THE CREDIT BALANCES WERE AVAILABLE TO BE ADJUSTED AGAINST THE SO-CALLED LOANS. AS SUCH, THERE ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 16 OF 18 WAS NO LOAN GIVEN TO THE DIRECTORS AND THE DEEMING PROVISIONS OF SECTION 2(22)(E) OF THE ACT WERE NOT APPLICABLE. 18. IN HER RIVAL SUBMISSIONS, THE LD. DR STRONGLY S UPPORTED THE ORDERS OF AUTHORITIES BELOW AND FURTHER SUBMITTED THAT IN THE BUSINESS TRANSFER AGREEMENT OF THE ERSTWHILE FIRM AND THE COMPANY, TH ERE WAS NO CLAUSE TO WITHDRAW THE CREDIT BALANCE OF THE FIRM, THEREFORE THE LOANS GIVEN TO THE DIRECTORS WERE DIFFERENT AND INDEPENDENT FROM THE A MOUNT APPEARING IN THE CREDIT BALANCES. IT WAS SUBMITTED THAT THE LOANS W ERE GIVEN TO DIRECTORS ON 28.10.2006, WHILE THE CREDIT BALANCES WERE TRANSFER RED TO THE SHARE APPLICATION MONEY ONLY IN THE MONTH OF MARCH, 2007. THEREFORE AT THE TIME OF GRANTING THE LOANS, NO ADJUSTMENT WAS MADE BECAU SE THE AMOUNT AVAILABLE IN THE ACCOUNTS OF CREDITORS WAS MEANT FO R RAISING THE SHARE CAPITAL, THEREFORE THE AO RIGHTLY MADE THE ADDITION BY INVOKING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT AND THE L D. CIT(A) WAS JUSTIFIED IN CONFIRMING THE SAID ADDITION. 19. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RE CORD. IN THE PRESENT CASE, IT IS NOTICED THAT THE AO NOWHERE DISCUSSED T HE VARIOUS CLAUSES OF BUSINESS TRANSFER AGREEMENT BETWEEN THE PARTNERSH IP FIRM AND THE COMPANY, SO IT IS NOT CLEAR AS TO WHETHER THERE WAS ANY CLAUSE FOR NOT WITHDRAWING THE CREDIT BALANCES OF PARTNERS FROM TH E PARTNERSHIP FIRM. IN THE INSTANT CASE, IT IS NOT IN DISPUTE THAT THE DIR ECTORS WERE HAVING CREDIT BALANCES IN THE PARTNERSHIP FIRM AND THOSE BALANCES WERE TRANSFERRED IN THE COMPANY IN WHICH THE PARTNERS BECAME THE DIRECTORS. IN THE SAID COMPANY, THE LOANS WERE GRANTED TO THE DIRECTORS ON 28.10.06 , THEREFORE AT THE TIME OF ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 17 OF 18 GRANTING THOSE LOANS, CREDIT BALANCES IN THE NAME O F DIRECTORS WERE AVAILABLE BECAUSE THOSE CREDIT BALANCES WERE TRANSF ERRED IN THE SHARE APPLICATION MONEY ACCOUNT ONLY IN THE MONTH OF MARC H, 2007. HOWEVER, THE AO HAD NOT CONSIDERED THIS FACT WHILE MAKING TH E ADDITION IN THE HANDS OF THE ASSESSEE. IT IS ALSO NOTICED THAT THE AUTHO RISED CAPITAL OF THE COMPANY WAS RS.1 CRORE AND THE PAID UP CAPITAL WAS AT RS.15,48,000, THEREFORE THE COMPANY COULD HAVE RAISED THE SHARE C APITAL ONLY TO THE EXTENT OF RS.84,52,000 (RS.1,00,00,000 RS.15,48,0 00), BUT THE AMOUNT APPEARING IN THE SHARE APPLICATION MONEY WAS AT RS. 2,36,97,218.20. IN THE PRESENT CASE, IT IS NOT CLEAR AS TO WHETHER THE SHARE APPLICATION MONEY WAS ONLY FROM THE DIRECTORS/PARTNERS TO WHOM LOAN W AS GRANTED ON 28.10.2006 AND NOT FROM THE OTHER SHAREHOLDERS. SI NCE THE FACTS ARE NOT CLEAR PARTICULARLY THIS FACT THAT THE LOANS GRANTED TO THE DIRECTORS WERE ONLY OUT OF THE ALREADY EXISTING CREDIT BALANCES. WE TH EREFORE DEEM IT APPROPRIATE TO SET ASIDE THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE AND REMAND THE MATTER BACK TO THE FILE OF THE ASSES SING OFFICER, TO BE ADJUDICATED AFRESH IN ACCORDANCE WITH LAW, AFTER PR OVIDING DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. 20. IN ALL OTHER APPEALS I.E., CASES RELATING TO SH RI K. SHIVASHANKAR AND SHRI R. VEERESH, THE FACTS ARE IDENTICAL, THEREFORE OUR FINDINGS GIVEN IN THE FORMER PART OF THIS ORDER WHILE ADJUDICATING THE CA SE RELATING TO SHRI L. ARUNKUMAR SHALL APPLY MUTATIS MUTANDIS TO THOSE CASES. ACCORDINGLY, THE ORDERS PASSED BY THE LD. CIT(A) IN THOSE CASES ARE ALSO SET ASIDE AND THE CASES ARE REMANDED BACK TO THE FILE OF THE ASSESSIN G OFFICER FOR FRESH ITA NO.107 TO 109 & 193 TO 195/BANG/11 PAGE 18 OF 18 ADJUDICATION IN ACCORDANCE WITH LAW, AFTER PROVIDIN G DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 21. IN THE RESULT, ALL THE APPEALS ARE ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 22 ND DAY OF MARCH, 2012. SD/- SD/- ( GEORGE GEORGE K. ) ( N.K. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 22 ND MARCH , 2012. DS/- COPY TO: 1. REVENUE 2. ASSESSEES 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.