COMM. OF I.T. (CENTRAL) LDH vs. RADHE SHAM JAIN

Income Tax Appeal No.225 of 2013 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. Income Tax Appeal No.225 of 2013 Date of Decision: 29.10.2013 The Commissioner of Income Tax (Central), Ludhiana ..Appellant. Versus Radhe Sham Jain Respondent CORAM: HON'BLE MR. JUSTICE RAJIVE BHALLA HON'BLE MR. JUSTICE DR. BHARAT BHUSHAN PARSOON Present: Mr. Rajesh Katoch, Advocate, for the appellant. RAJIVE BHALLA, J. The revenue lays challenge order dated 28.9.2012 passed by the Income Tax Appellate Tribunal, Chandigarh Bench `A', Chandigarh by alleging that the following questions of law arise for adjudication:- “ Whether the Hon'ble ITAT was right in upholding the fact that the assessee had given a loan of Rs.1.50 crores to the company on 15.03.2008 whereas no such evidence was filed nor there was any entry of this amount in the bank account of the assessee.” “ Whether the Hon'ble ITAT was right in giving a finding that the share premium amount lying as reserve and surplus of the company is not an income of the company and thus are not accumulated profit of the company.” Counsel for the appellant submits that the Income Tax Appellate Tribunal has ignored relevant facts, disregarded evidence on record and erred in holding that Rs.1.50 crores was given by the assessee Varinder Kumar 2013.11.27 14:43 I attest to the accuracy and integrity of this document High Court Chandigarh

Income Tax Appeal No.225 of 2013 2 to the company on 15.3.2008, whereas no such evidence was filed before the Assessing Officer or before the Commissioner of Income Tax (Appeals). The Tribunal has also erred in recording a finding that the share premium amount cannot be considered as income of the assessee- company because it does not represent accumulated profits of the company. We have heard counsel for the revenue, perused the assessment order, orders passed by the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal and find that no question of law, much less a substantial question of law, arises for consideration. The assessee was running a proprietorship concern in the name and style of M/s. Radhe Sham Jain Diamond Jewellers. The proprietorship concern was converted into private limited company in the name and style of M/s. Radhe Sham Jain Diamond Jewellers Private Limited on 9.2.2008. The assessee was allotted 50% shares in the aforesaid company. During assessment proceedings, the Assessing Officer noticed that the assessee had withdrawn Rs.1,81,10,000/- from the company. Upon inquiry, the assessee explained that Rs.1.50 crores withdrawn from the capital account of the proprietorship concern, was originally withdrawn, from the proprietorship concern, but the cheque remained uncleared. The cheque was returned by the assessee to the company, which, had, in the meanwhile, come into existence and credited on 15.3.2008. The Assessing Officer, however, rejected the explanation and treated Rs.1,81,10,000/- as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”). Aggrieved by this order, the assessee filed an appeal. The Commissioner of Income tax (Appeals), accepted the appeal by holding that Rs.1.50 crores was the Varinder Kumar 2013.11.27 14:43 I attest to the accuracy and integrity of this document High Court Chandigarh

Income Tax Appeal No.225 of 2013 3 assessee's capital, originally in the hands of the proprietorship concern, which issued a cheque to the assessee, who deposited the cheque with the company, which, in turn, returned the amount to the assessee. The Commissioner of Income Tax, Ludhiana, held that since accumulated profits were only Rs.34,858/-, it has to be treated as deemed dividend. The revenue and the assessee filed separate appeals. The Income Tax Appellate Tribunal considered the entire controversy and held as follows:- “...... However, the question is whether the said company has given any advance or loan to the assessee or not? The company was incorporated by way of conversion of proprietorship business of Jain Diamond Jewellers on 09.02.2008. Perusal of the balance sheet of the proprietorship concern on 09.02.2008 (see paper book page -1). Clearly shows that there was a capital balance of Rs.12,34,430/-. There was also a liability on account of cheque issued- OBC to the extent of Rs.1.50 crores. Perusal of the copy of the capital account of the assessee in the proprietary concern at page 11 to 13 clearly shows that there was opening capital balance of Rs.1,64,34,402/-. There are various transactions done in the capital account till 08.02.2008 and there was a credit balance of Rs.1,59,39,810/- on that date. Against which payment of Rs.1.50 crores was made by the proprietorship concern to the assessee, i.e., Shri Radhe Sham Jain on 08.02.2008. This cheque was not encashed and shown as liability in the balance sheet. Because of the conversion of the proprietary concern into a Private Limited Company the cheque could not be encashed later on and the same was returned to the Private Limited company which has been credited by the company to Varinder Kumar 2013.11.27 14:43 I attest to the accuracy and integrity of this document High Court Chandigarh

Income Tax Appeal No.225 of 2013 4 the assessee's account on 15.03.2008. Thus it is clear that this amount belonged to the assessee on account of capital in the proprietorship concern and because the cheque could not be encashed, therefore, the money belonged to the assessee which has credited by the company. The so called cheque on account of loan or advance which have been issued by the company have been issued only after 15.03.2008. The AO has mainly stressed on the fact that this seems to be adjustment entry. We are of the opinion that the AO has failed to appreciate that because of the conversation of the proprietorship concern, the cheque could only be encashed by the assessee. The cheque has been shown as liability in the balance sheet of proprietorship concern and was later on returned by the assessee to the Private Limited Company. Since all the assets have been taken over by the Private Limited Company, the said company owed assessee this amount of Rs.1.50 crores which was credited to his account on 15.03.2008. Because of non encashment of the cheque the same is not reflected in the bank statement. This fact has been correctly appreciated by the ld. CIT(A).” A perusal of the order passed by the Income Tax Appellate Tribunal reveals that after considering that a cheque was issued in favour of the assessee, from the account of the proprietorship concern, the assessee deposited the cheque in the account of the newly formed company, which returned this amount to the assessee, held that the amount belonged to the assessee on account of his capital in the proprietorship concern. The Income Tax Appellate Tribunal also held that the Commissioner of Income Tax (Appeals) rightly restricted addition of Varinder Kumar 2013.11.27 14:43 I attest to the accuracy and integrity of this document High Court Chandigarh

Income Tax Appeal No.225 of 2013 5 Rs.34,858/-, i.e., to the extent of accumulated profits. We have considered the arguments advanced by counsel for the revenue and are not inclined to take a view different from the opinion recorded by the Tribunal. The arguments raise disputed questions of fact, which have been answered in favour of the assessee. In the absence of any error, while considering the facts or in applying any provision of the Act, we find no reason to hold that findings of facts recorded by the Income Tax Appellate Tribunal and the Commissioner of Income Tax (Appeals) give rise to a question of law, much less, the questions of law framed by the revenue. In view of what has been recorded hereinabove, the appeal is dismissed. ( RAJIVE BHALLA )

JUDGE 29.10.2013 ( DR. BHARAT BHUSHAN PARSOON ) VK JUDGE Varinder Kumar 2013.11.27 14:43 I attest to the accuracy and integrity of this document High Court Chandigarh