DCIT, Ludhiana V. Sh. Radhe Sham Jain, Ludhiana

ITA 728/CHANDI/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63967 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 2 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 25-09-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 12-07-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MANJIT SINGH
• Keywords: Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE SHRI T.R. SOOD, A.M AND MS. SUSHMA CHOWLA, J M ITA NO. 728/CHD/2011 ASSESSMENT YEAR : 2008-09 D.C.I.T. CIRCLE VII, LUDHIANA V. SHRI RADHE SHAM JAIN B-X-718 IQBAL GANJ ROAD LUDHIANA ABAPJ 4542 B (APPELLANT) (RESPONDENT) APPELLANT BY SHRI SUDHIR SEHGAL RESPONDENT BY SHRI MANJIT SINGH DATE OF HEARING 25.09.2012 DATE OF PRONOUNCEMENT .09.2012 O R D E R PER T.R.SOOD, A.M THIS APPEAL IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A)-II, LUDHIANA, DATED 3.5.2011. 2. IN THIS APPEAL THE REVENUE HAS RAISED FOLLOWING TWO GROUNDS: 1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A)-II, LUDHIANA HAS ERRED IN DELETING T HE ADDITION OF RS. 1,81,10,000/- MADE ON ACCOUNT OF DE EMED DIVIDEND. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A)-II, LUDHIANA HAS ERRED IN HOLDING TH AT IT IS ONLY ON 29.3.2008 THE ASSESSEE HAS DEBIT BALANCE OF RS. 11,75,569/- AND THIS AMOUNT CAN BE CONSIDERED AS DEEMED DIVIDEND IN THE HANDS OF APPELLANT. THE LD. CIT(A) HAS FURTHER ERRED IN HOLDING THAT TOTAL ACCU MULATED PROFITS OF RADHE SHAM JAIN DIAMOND JEWELLERS (P) LT D WAS RS. 34,858/- ONLY, WHEREAS, THE RESERVES AND SU RPLUS IN THE BALANCE SHEET OF RADHE SHAM DIAMOND JEWELLER S (P) LTD. AS ON 31.3.2008 SHOWS RS. 11,17,80,000/- U NDER THE HEAD SHARE PREMIUM ACCOUNT. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE WA S RUNNING A PROPRIETORSHIP CONCERN UNDER THE NAME AND STYLE O F M/S JAIN 2 DIAMOND JEWELLERS. THIS PROPRIETORSHIP CONCERN WAS CONVERTED INTO A PRIVATE LIMITED COMPANY UNDER THE NAME AND S TYLE OF M/S RADHE SHAM JAIN DIAMOND JEWELLERS PVT LTD. ON 9 .2.2008. THE ASSESSEE I.E. SHRI RADHE SHAM JAIN WAS ALLOTTED 50% SHARES AND THEREFORE, WAS A SUBSTANTIAL SHARE HOLDE R OF THE SAID COMPANY. DURING ASSESSMENT PROCEEDINGS THE AO NOTICED THAT THE ASSESSEE HAD WITHDRAWN A SUM OF RS. 1,81,1 0,000/- FROM THE SAID COMPANY. ON ENQUIRY IT WAS EXPLAINED THAT THE AMOUNT OF RS. 1.50 CRORES WAS ORIGINALLY WITHDRAWN BY THE ASSESSEE FROM CAPITAL ACCOUNT IN THE PROPRIETORSHIP CONCERN, HOWEVER, THE CHEQUE REMAINED UN-CLEARED BECAUSE THE BUSINESS WAS TAKEN OVER BY THE COMPANY. LATER ON T HIS CHEQUE WAS RETURNED BY SHRI RADHE SHAM JAIN I.E. THE ASSES SEE TO THE COMPANY AND THE COMPANY HAD CREDITED THE SAME ON 15 .3.2008 AND ALL THE MONEY HAS BEEN WITHDRAWN LATER ON ONLY. HOWEVER, THE AO DID NOT FIND FORCE IN THE SUBMISSIONS BECAUS E ENTRY REGARDING CHEQUE OF RS. 1.50 CRORES COULD NOT BE VE RIFIED FROM THE BANK STATEMENT. IT WAS FURTHER STATED THAT A S UM OF RS. 12,34,430.60 WAS OPENING CREDIT BALANCE IN THE CAPI TAL BALANCE OF SHRI RADHE SHAM JAIN WHICH WAS TRANSFERRED AS CR EDIT TO HIS ACCOUNT BY THE COMPANY. IN THIS RESPECT THE AO WAS OF THE VIEW THAT THIS SUM WAS MEANT FOR THE ISSUE OF SHARE S, THEREFORE, THE SAME COULD NOT BE CONSIDERED AS CRE DIT. IN THIS BACKGROUND, HE HELD THAT SUM OF RS. 1,81,10,000/- I S TO BE TREATED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. 4 BEFORE THE LD. CIT(A) THE SUBMISSIONS MADE BEFORE THE AO WERE REITERATED. 5 THE LD. CIT(A) FOUND FORCE IN THE SUBMISSIONS AND OBSERVED THAT A SUM OF RS. 1.50 CRORES WAS BASICALL Y ON 3 ACCOUNT OF CAPITAL OF THE ASSESSEE ORIGINALLY IN T HE HANDS OF THE PROPRIETORSHIP CONCERN AGAINST WHICH THE CHEQUE WAS ISSUED. SINCE LATER ON THE CHEQUE WAS RETURNED TO THE COMPANY AND THE SAID COMPANY HAS ISSUED THE CHEQUE AND THER EFORE, WITHDRAWAL BY THE ASSESSEE FROM THE COMPANY TO THIS EXTENT COULD NOT BE TREATED AS LOAN. HOWEVER, HE FURTHER NOTED THAT ON 29.3.2008 THAT THERE WAS A DEBIT BALANCE AMOUNTI NG TO RS. 11,75,565/-. AND THEREFORE, TO THIS EXTENT PROVISI ONS OF SECTION 2(22)(E) WERE APPLICABLE. HOWEVER, HE FURTHER NOTE D THAT SINCE ACCUMULATED PROFITS WERE ONLY RS. 34,858/- THEREFOR E, ONLY A SUM OF RS. 34,858/- CAN BE TREATED AS DEEMED DIVIDE ND. ACCORDINGLY HE REDUCED THE ADDITION ON ACCOUNT OF DEEMED DIVIDEND TO RS. 34,858/-. 6 BEFORE US, THE LD. DR FOR THE REVENUE CARRIED US THROUGH THE ASSESSMENT ORDER AND POINTED OUT THAT AMOUNT OF RS. 1.50 CRORES WAS ONLY AN ADJUSTMENT ENTRY AS OBSERVED BY THE AO BECAUSE THIS COULD NOT BE VERIFIED FROM THE BANK ST ATEMENT. HE ALSO SUBMITTED THAT THE AO WAS RIGHT IN OBSERVING T HAT A SUM OF RS. 12,34,430/- SHOWN AS OPENING BALANCE WAS TOWARD S SUBSCRIPTION BY THE ASSESSEE AND THEREFORE, CREDIT COULD NOT BE TAKEN FOR THE SAME. THUS ACTION OF THE AO WAS JUST IFIED. 7 ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESS EE REFERRED TO BALANCE SHEET OF PROPRIETORSHIP CONCERN , M/S JAIN DIAMOND JEWELLERS AND THE CAPITAL ACCOUNT OF THE AS SESSEE IN THE SAID PROPRIETORSHIP CONCERN. HE POINTED OUT TH AT OPENING BALANCE OF CAPITAL WAS RS. 1,64, 34,402/- AND THE V ARIOUS TRANSACTIONS TOOK PLACE DURING THE YEAR. ON 8.2.20 08 THERE WAS A CREDIT BALANCE OF RS. 1,59,39,810/- AND THE A SSESSEE HAD WITHDRAWN A CAPITAL OF RS. 1,.50 CRORES ON THAT DAT E THROUGH A 4 CHEQUE. THE CLOSING BALANCE AS ON 9.2.2008 WAS ONL Y RS. 12,34,430/- WHICH WAS TRANSFERRED TO THE COMPANY. THESE FIGURES ARE REFLECTED IN THE BALANCE SHEET. SINCE THE CHEQUE FOR RS. 1.50 CRORES COULD NOT BE PRESENTED TO THE B ANK BECAUSE OF CONVERSION OF THE PROPRIETORSHIP CONCERN INTO A PRIVATE LIMITED COMPANY, THE SUM WAS SHOWN AS LIABILITY UND ER THE HEAD CHEQUE ISSUED OBC. LATER ON THIS CHEQUE W AS RETURNED TO THE COMPANY WHICH WAS CREDITED BY THE C OMPANY TO THE ASSESSEES ACCOUNT ON 15.3.2008 AND THE MONEY H AS BEEN WITHDRAWN BY THE ASSESSEE ONLY AFTER THE DATE. THU S AT NO POINT OF TIME, THERE WAS A DEBIT BALANCE AND DEBIT BALANCE AROSE ONLY ON 29.3.2008 AMOUNTING TO RS. 11,75,569/ -. HOWEVER, ACCUMULATED PROFITS OF THE COMPANY WAS ONL Y RS. 34,858/- AS REFLECTED IN THE BALANCE SHEET OF THE C OMPANY. THUS THE CIT(A) HAS CORRECTLY APPLIED THE PROVISION S OF SECTION 2(22)(E) OF THE ACT ONLY TO THE EXTENT OF RS. 34,85 8/-. HE ALSO REFERRED TO GROUND NO. 2 AND SUBMITTED THAT REVENUE HAS WRONGLY TAKEN THE GROUND THAT ACCUMULATED PROFITS C OULD NOT BE TAKEN ONLY AT RS. 34,858/- WHEREAS RESERVE AND SURP LUS ACCOUNT IN THE BALANCE SHEET SHOWS A FIGURE OF RS.11,17,80,000/-. HE CONTENDED THAT RESERVE AND S URPLUS ACCOUNT AMOUNTING TO RS. 11,17,80,000/- CONSIST OF ONLY SHARE PREMIUM ACCOUNT WHICH CANNOT BE TREATED AS ACCUMULA TED PROFITS. IN THIS REGARD HE RELIED ON THE DECISION OF DELHI BENCH OF THE TRIBUNAL IN DCIT V. MAIPO INDIA LTD. 116 TTJ (DEL) 791. HE POINTED OUT THAT THE DECISION HAS BEEN FOL LOWED BY MUMBAI BENCH OF THE TRIBUNAL IN CASE OF KETAN B MEH RA V ACIT IN ITA NO. 1939 TO 1943/MUM/2010 (COPY OF THE ORDER ENCLOSED). 5 8 WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY IN THE LIGHT OF THE MATERIAL ON RECORD AS WELL AS THE DECISIONS CITED BY THE PARTIES. SECTION 2(22)(E) READS AS UNDER:- ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WH ETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) [MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF AD VANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BE NEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIX ED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICI PATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING PO WER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFT ER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN)] OR ANY PAY MENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEF IT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS . THE PLAIN READING OF ABOVE PROVISION CLEARLY SHOWS THAT THE PAYMENT BY THE COMPANY IN WHICH PUBLIC IS NOT SUBST ANTIALLY INTERESTED BY WAY OF ADVANCE OR LOAN TO A SHAREHOLD ER WHO IS HOLDING SHARES NOT LESS THAN 10%, IS TO BE TREATED AS DEEMED DIVIDEND. IT IS FURTHER NOTED THAT SUCH DEEMED DIV IDEND CAN BE THERE ONLY TO THE EXTENT OF ACCUMULATED PROFITS. 9 IN CASE BEFORE US, THERE IS NO DOUBT THAT M/S RAD HE SHAM JAIN DIAMOND JEWELLERS (P) LTD IS A COMPANY IN WHIC H PUBLIC IS NOT SUBSTANTIALLY INTERESTED AND THE ASSESSEE I.E. SHRI RADHE SHAM JAIN IS HOLDING MORE THAN 10% SHARES. HOWEVER , THE QUESTION IS WHETHER THE SAID COMPANY HAS GIVEN ANY ADVANCE OR LOAN TO THE ASSESSEE OR NOT? THE COMPANY WAS IN CORPORATED BY WAY OF CONVERSION OF PROPRIETORSHIP BUSINESS OF JAIN DIAMOND JEWELLERS ON 9.2.2008. PERUSAL OF THE BALA NCE SHEET OF THE PROPRIETORSHIP CONCERN ON 9.2.2008 (SEE PAPE R BOOK PAGE 1). CLEARLY SHOWS THAT THERE WAS A CAPITAL BA LANCE OF RS. 12,34,430/-. THERE WAS ALSO A LIABILITY ON ACCOUNT OF CHEQUE ISSUED OBC TO THE EXTENT OF RS. 1.50 CRORES. PER USAL OF THE COPY OF THE CAPITAL ACCOUNT OF THE ASSESSEE IN THE PROPRIETARY 6 CONCERN AT PAGE 11 TO 13 CLEARLY SHOWS THAT THERE W AS OPENING CAPITAL BALANCE OF RS. 1,64,34,402/-. THERE ARE VA RIOUS TRANSACTIONS DONE IN THE CAPITAL ACCOUNT TILL 8.2.2 008 AND THERE WAS A CREDIT BALANCE OF RS. 1,59,39,810/- ON THAT D ATE. AGAINST WHICH PAYMENT OF RS. 1.50 CRORES WAS MADE BY THE PROPRIETORSHIP CONCERN TO THE ASSESSEE I.E. SHRI RA DHE SHAM JAIN ON 8.2.2008. THIS CHEQUE WAS NOT ENCASHED AND SHOWN AS LIABILITY IN THE BALANCE SHEET. BECAUSE OF THE CON VERSION OF PROPRIETARY CONCERN INTO A PRIVATE LIMITED COMPANY THE CHEQUE COULD NOT BE ENCASHED LATER ON AND THE SAME WAS RET URNED TO THE PRIVATE LIMITED COMPANY WHICH HAS BEEN CREDITED BY THE COMPANY TO THE ASSESSEES ACCOUNT ON 15.3.2008. TH US IT IS CLEAR THAT THIS AMOUNT BELONGED TO THE ASSESSEE ON ACCOUNT OF CAPITAL IN THE PROPRIETORSHIP CONCERN AND BECAUSE T HE CHEQUE COULD NOT BE ENCASHED, THEREFORE, THE MONEY BELONGE D TO THE ASSESSEE WHICH HAS CREDITED BY THE COMPANY. THE SO CALLED CHEQUE ON ACCOUNT OF LOAN OR ADVANCE WHICH HAVE BEE N ISSUED BY THE COMPANY HAVE BEEN ISSUED ONLY AFTER 15.3.200 8. THE AO HAS MAINLY STRESSED ON THE FACT THAT THIS SEEMS TO BE ADJUSTMENT ENTRY. WE ARE OF THE OPINION THAT THE A O HAS FAILED TO APPRECIATE THAT BECAUSE OF THE CONVERSION OF THE PROPRIETORSHIP CONCERN, THE CHEQUE COULD ONLY BE EN CASHED BY THE ASSESSEE. THE CHEQUE HAS BEEN SHOWN AS LIABILI TY IN THE BALANCE SHEET OF PROPRIETORSHIP CONCERN AND WAS LAT ER ON RETURNED BY THE ASSESSEE TO THE PRIVATE LIMITED COM PANY. SINCE ALL THE ASSETS HAVE BEEN TAKEN OVER BY THE PRIVATE LIMI TED COMPANY, THE SAID COMPANY OWNED ASSESSEE THIS AMOUNT OF RS. 1.50 CRORES WHICH WAS CREDITED TO HIS ACCOUNT ON 15.3.2008. BE CAUSE OF NON ENCASHMENT OF THE CHEQUE THE SAME IS NOT REFLECTED IN THE BANK 7 STATEMENT. THIS FACT HAS BEEN CORRECTLY APPRECIATE D BY THE LD. CIT(A). 10 THE LD. CIT(A) HAS FURTHER CORRECTLY NOTED THAT THERE WAS DEFINITELY A DEBIT BALANCE AMOUNTING TO RS. 11,75, 569/- ON 29.3.2008 IN THE NAME OF THE ASSESSEE IN THE BOOKS OF THE PRIVATE LIMITED COMPANY. HOWEVER, HE HAS CORRECTLY RESTRICTED THE ADDITION TO RS. 34,858/- I.E. TO THE EXTENT OF ACCUMULATED PROFITS. THERE IS NO FORCE IN THE GROUND OF THE RE VENUE THAT ACCUMULATED PROFITS ARE RS. 11,17,80,000/-. SCHEDU LE A AT PAGE 17 OF THE PAPER BOOK VERY CLEARLY SHOW THAT TH IS AMOUNT IS ON ACCOUNT OF SHARE PREMIUM ACCOUNT AND NET PROFIT IS ONLY RS. 34,858/-. DELHI BENCH OF THE TRIBUNAL IN CASE OF D CIT V. MAIPO INDIA LTD. 116 TTJ (DEL) 791 HAS CLEARLY OBSE RVED THAT SHARE PREMIUM ACCOUNT COULD NOT BE TAKEN INTO CONSI DERATION AS PART OF THE ACCUMULATED PROFITS. HEAD NOTE READ S AS UNDER:- DIVIDEND DEEMED DIVIDEND U/S 2(22)(E) ACCUMULA TED PROFITS ASSESSEE COMPANY RECEIVED A SUM OF RS. 25,42,772/- IN THE NATURE OF LOANS AND ADVANCES FRO M COMPANY GCPL, IN WHICH ASSESSEE-COMPANY HELD 40 PER CENT SHARES ASSESSEE REPAID A SUM OF RS. 14,31,00 0/- TOWARDS THE END OF THE YEAR AND THE BALANCE OF RS. 11,11,772/- WAS TREATED BY AO AS DEEMED DIVIDEND CIT(A) ON APPEAL, FOUND THAT OUT OF RESERVES AND SU RPLUS ACCOUNT OF GCPL, RS. 1.90 CRORES REPRESENTED SHARE PREMIUM AND RS. 1,85,821/- WAS ON ACCOUNT OF BALAN CE IN PROFIT AND LOSS ACCOUNT WHICH WAS TREATED AS DEEMED DIVIDEND JUSTIFIED THERE BEING A STATUTORY BAR U/S 78 OF THE COMPANIES ACT, 1956 ON THE SHARE PREMIUM ACCOUNT BEING USED FOR DISTRIBUTION OF DIVIDEND, TH E DEEMING PROVISIONS OF SECTION 2(22)(E) CANNOT APPLY SECTION 78(1) OF THE COMPANIES ACT, 1956 SAYS THAT ANY PAYMENT OUT OF THE SHARE PREMIUM ACCOUNT, EXCEPT FO R PURPOSES AUTHORIZED BY SUB-SECTION (2) WILL BE TREA TED AS REDUCTION OF SHARE CAPITAL ATTRACTING THE PROVISION S OF THE COMPANIES ACT IN RELATION THERETO THE EXPRESSION WHETHER CAPITALIZED OR NOT CAN HAVE APPLICATION O NLY WHERE THE PROFITS ARE CAPABLE OF BEING CAPITALIZED AND NOT WHERE THE RECEIPT IN QUESTION FORMS PART OF THE SHA RE CAPITAL OF THE COMPANY UNDER THE PROVISIONS OF THE COMPANIES ACT IN VIEW OF THE PROVISIONS OF THE COMPANIES ACT, SHARE PREMIUM CANNOT BE STATED TO BE COMMERCIAL PROFITS AMOUNT OF RS. 1,85,821/- ALONE OUT OF 8 THE AMOUNT OF RS. 25,42,772/- CAN BE ASSESSED AS DEEMED DIVIDEND U/S 2(22)(E). THE ABOVE VIEW HAS BEEN TAKEN PARTICULARLY FOLLOWIN G THE DECISION OF HON'BLE SUPREME COURT IN CASE OF P.K. B ADIANI V CIT, 105 ITR 642. IN THAT DECISION IT WAS CLEARLY OBSERVED THAT ACCUMULATED PROFITS WOULD MEAN PROFIT IN THE COMMER CIAL SENSE AND NOT ASSESSABLE TAXABLE PROFITS. IN THAT CASE D EVELOPMENT REBATE RESERVE CREATED BY THE COMPANY BY CHARGING P ROFIT AND LOSS ACCOUNT WAS HELD TO BE ACCUMULATED PROFITS THO UGH THE SAME WAS LIABLE TO BE DEDUCTED AS REBATE. FOLLOWIN G THIS RATIO IT IS CLEAR THAT SHARE PREMIUM ACCOUNT WOULD NOT PA RTAKE THE NATURE OF COMMERCIAL PROFITS AND THEREFORE, BY NO S TRETCH OF IMAGINATION, THIS CAN BE CALLED ACCUMULATED PROFITS . THEREFORE, IN CASE BEFORE US ACCUMULATED PROFITS CAN BE TAKEN ONLY AT RS. 34,858/- AND THE LD. CIT(A) HAS CORRECTLY CONFIRMED THE ADDITION DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT TO THE EXTE NT OF RS. 34,858/- WHICH HAS NOT BEEN CHALLENGED BY THE ASSES SEE. IN THESE CIRCUMSTANCES WE FIND NOTHING WRONG IN THE OR DER OF THE LD. CIT(A) AND THE SAME IS CONFIRMED. 11 IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. ORDER PRONOUNCED ON .09.2012 SD/- SD/- (SUSHMA CHOWLA) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEM BER DATED : .09. 2012 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR 9 10