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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”: HYDERABAD
Before: SHRI SATBEER SINGH GODARA & LAXMI PRASAD SAHU
O R D E R PER L.P. SAHU, A.M.: Both these appeals filed by the assessees are directed against CIT(A) - 10, Hyderabad’s separate orders dated 16/12/2015 involving proceedings u/s 143(3) rws 147 of :- 2 -: & 1441/Hyd/2016 Rajendra Kumar V and another. Hyd. the Income- Tax Act, 1961 ; in short “the Act. As the facts and grounds are identical in both the appeals, they were clubbed and heard together and, therefore, a common order is passed for the sake of convenience.
2. To dispose of these appeals, we refer to the facts from the appeal in and the grounds raised in this appeal, which are common in both the appeals, are as under:
“1. The CIT (A) erred in not appreciating the contention of the assessee that he is not the real recipient of the money/did not derive any benefit from out of transaction/did not derive any indirect benefit from the transaction/that the company and another shareholder with substantial holding are the real beneficiaries of the transaction. 2, The CIT (A) erred in treating the company as having allocable profits/surplus to declare dividends at the point of alleged loan/advance to the director.
The CIT (A) erred in not appreciating the point raised by the assessee that the company cannot validly declare any dividends u/s. 205 of the Companies Act 1956 at the time of alleged loan/advance to the director 4. The CIT (A) erred in coming to an assumption that there was creditor debtor relationship between the company and the director at the time of the loan/advance.
:- 3 -: & 1441/Hyd/2016 Rajendra Kumar V and another. Hyd.
The CIT (A) erred in not taking the realizable value of the company's assets for the purposes of determining accumulated profits u/s.2(22) (e) of the IT Act.
6. The CIT (A) erred in not allowing deductible expenditures of depreciation as assessed under IT act, miscellaneous expenditure, differed tax provision while calculating accumulated profits/surplus of the company at the time calculating deemed dividend u1s.2(22)(e) of the IT Act 7. The CIT (A) erred in not writing off all fictitious and unreal assets for arriving at the accumulated profits/surplus while determining profits u/s.2(22)(e) of the IT Act. 8. The CIT (A) erred in not taking the accumulated profits available to the company as on 31.03.2006 instead of taking profits available to the company as on 31.03.2005 9. Any other ground as may be raised at the time of hearing.”
Briefly the facts of the case are that the assessee is a director in M/s Kalanikethan Textiles & Jewels pvt. Ltd. and filed his return of income for the impugned AY on 30/10/2006 declaring total income of Rs. 16,45,157/-. The return was processed u/s 143(1) of the I.T. Act. And subsequent1y the case was reopened u/s.147 of the Income Act, 1961, for the reasons mentioned as under:
"During the course of scrutiny proceedings for AY 2007- 08 in case of M/s Kalanikethan Textiles and Jewels Pvt. Ltd., it was observed that assessee has drawn an amount of Rs. 28,52,612/- from company over and :- 4 -: & 1441/Hyd/2016 Rajendra Kumar V and another. Hyd. above his credit balance. M/s Kalanikethan Textiles and Jewels Pvt. Ltd., in which assessee is a director and held 31/7% of shares is closely held company in which public are not substantially interested. Reserves and surplus of company for the year under consideration are Rs. 1,14,79,654/-. In view of provisions of section 2(22)(e) of IT Act excess amount withdrawn Rs. 28,52,612/- is in the nature of deemed dividend, taxable in hands of assessee for AY 2006-07.”
2.1 Accordingly, notice u/s.148 of the Act was issued and served on the assessee on 20/07/2010, in response to which, the assessee vide letter dated 28/07/2010 submitted that the return of income flied on 30.10.2006 may be treated as a response the notice u/s,148 of the Act. Subsequently, notices u/s.143(2) and 142(1) of the Act, along with questionnaire, was issued and served on the assessee. In response to the said notices, the AR of the assessee furnished the details as called for.
2.2 During course or scrutiny proceedings, the AO asked the assessee to explain as to why the excess amount withdrawn to the extent of Rs. 28,52,612/- should not be added to the total income for the year under consideration in view of the provisions of section 2(22)(e).
2.3 In response to the above, the assessee Vide letter dated 04.11,2011 objected for the proposed addition u/s 2(22)(e) of the Act, which is as under:
:- 5 -: & 1441/Hyd/2016 Rajendra Kumar V and another. Hyd.
“ In my personal assessment for the AY 2006-07 an amount of Rs.28,52,612/- is proposed to be added u/s.2(22)(e) of the Income Tax Act 1961. This amount was drawn to acquire more shares in the company and to take over a dissident Shareholder/director. The act of taking over has done lot of good to the company and the dissident director/shareholder is out of the picture and the company was able to carry on with its own Business without any distractions. The amount was not borrowed from the company for personal use, but only to acquire the shares of the director/shareholder, who was creating lot of trouble to the company and Its working. Further Section 2(22)(e) is not Applicable to the facts of the case and the amount should not be assessed In my personal case. 4.2. After considering the submissions of the assessee and referring to the provisions of section 2(22)(e) of the Act, the AO held that as the assessee is having substantial interest in M/s Kalanikethan Textiles and Jewels Pvt. Ltd., i.e. more than 10% shareholding, the amount withdrawn of Rs. 28,52,612/- from the above company over and above his credit balance, is treated as deemed dividend u/s 2(22)(e) of the Act in the hands of the assessee and accordingly added back the same to the total income of the assessee.
5. When the assessee preferred an appeal before the CIT(A), the CIT(A) sustained the addition to the extent of Rs. 25,88,970/-, which was advanced during the year and there was an opening debit balance of Rs. 11,56,202/- in assessee’s account.
:- 6 -: & 1441/Hyd/2016 Rajendra Kumar V and another. Hyd.
The assessee is in appeal before the ITAT against the order of the CIT(A).
Ld. AR reiterated the submissions as made before the lower authorities and further submitted that there was a current account maintained by the assessee in the name of the Directors where on different dates the appellants remunerations are credited into their accounts and on different occasions appellants contributed in cash and has withdrawn from the accounts. He, therefore, submitted that there is a business exigency and on some dates the balance is ‘zero’ or negative. He submitted that the AO has not calculated the reserves and surplus on the date of advance to the directors and he has taken closing balance of reserves and surplus as at the end of the year i.e. 31/03/2006, which is not correct and while calculating the reserves and surplus, depreciation as per the IT Act has also not been calculated by the AO. He submitted that reserves and surplus appearing in the balance sheet were after charging depreciating as per the Companies Act, which is also not correct. He submitted that on 08/09/2005, Rs. 20 lakhs was given to Mr. Ch.N.K.D. Prasad, who was the director of the company and the payments were made to him has been recorded in the accounts of the appellants, which is a mere book entry and no physical amounts were transferred in to the accounts of the assessee. He submitted
:- 7 -: & 1441/Hyd/2016 Rajendra Kumar V and another. Hyd. that there is also prohibition for buy-back of shares of the own company and, therefore, the amount was debited to the accounts of the appellants. In support of his arguments, the ld. AR relied on the judgments, which are placed in the paper book at pages 1 to 64.
Ld. DR, on the other hand, relied on the orders of the authorities below and submitted that the CIT(A) has rightly upheld the action of the AO after calling remand report from the AO and considering the entire submissions made by the assessee as well as the case law relied upon by the ld. AR before him, the amount confirmed by the CIT(A) is under the provisions of section 2(22)(e) of the Act. Regarding the allegation of the assessee that reserves and surplus has not been calculated by the AO correctly, the ld. DR submitted that it was the duty of the assessee to calculate the reserves and surplus on the date of advancing/loan to the directors. He contended that the assessee has also not charged any interest on the debit balance of the directors and, therefore, there is no business exigency in this regard. In view of the above submissions, he submitted for confirming the order of the CIT(A).
Considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. On perusal of the current account maintained with the company placed at pages 9 to 11 of the :- 8 -: & 1441/Hyd/2016 Rajendra Kumar V and another. Hyd.
paper book, there was an opening debit balance of Rs. 11,56,202/- on 07/05/2005 which is a current account maintained by the assessee. We find that the accounts of the director has been credited by the remuneration and other cash deposits. On 08/09/2005, Rs. 20 lakhs have been paid and it has also been debited into the Director’s account. As per the ledger account, it is clear that the amount was transferred from HDFC Bank through DD to Ch.N.K.D. Prasad, who was director of the company in which the appellant holds substantial shares of the company. The shares owned by Ch.N.K.D. Prasad was transferred in the name of the appellant i.e. the amount was transferred for the purchase of shares in the name of the appellant. The company has also debited to the current account as maintained by the company of the director. The AR of the assessee has also alleged that the AO has not calculated the reserves and surplus on the date of advance to the directors and he has taken closing balance of reserves and surplus as at the end of the year i.e. 31/03/2006, which is not correct and while calculating the reserves and surplus, depreciation as per the IT Act has also not been calculated by the AO. It was the duty of the assessee to prove that on the date of advance the assessee must calculate the reserves and surplus, which has not done by the assessee. In regard to “Reserves & Surplus”, it should be read in general terms as used in the IT Act. The payer is a company and the financial statements are prepared as per the :- 9 -: & 1441/Hyd/2016 Rajendra Kumar V and another. Hyd.
Companies Act. Therefore, both the contentions raised by the ld. AR is rejected. We also find that the current account maintained in the name of the appellants in the company’s ledger, there are debit balances on different occasions, but, no interest has been charged. The ld. AR of the assessee could not prove any business exigency in the present case.
9.1 In view of the above observations, we are of the view that since the assessee is having substantial interest in M/s Kalanikethan Textiles and Jewels Pvt. Ltd., i.e. more than 10% shareholding, the amount withdrawn from the above company over and above his credit balance, is treated as deemed dividend u/s 2(22)(e) of the Act in the hands of the assessee to the extent of Rs. 20,00,000/- Accordingly, the grounds raised by the assessee on this issue are partly allowed.
10.1 The facts and grounds are materially identical in the case of Nagabhushanam Vemuluri in to that of Rajendra Kumar Vemuluri and this assessee is also having substantial interest in M/s Kalanikethan Textiles and Jewels Pvt. Ltd., i.e. more than 10% shareholding, the amount withdrawn from the above company over and above his credit balance, is treated as deemed dividend u/s 2(22)(e) of the Act in the hands of the assessee to the :- 10 -: & 1441/Hyd/2016 Rajendra Kumar V and another. Hyd. extent of Rs. 25,00,000/-. Thus, the grounds raised by the assessee on this issue are partly allowed.
In the result, both the appeals of the assessees’ are partly allowed. Pronounced in the open court on 20th April, 2021.