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Facts
Cash amounting to ₹2,29,85,400/- was found from the assessee's residence and auditor's office. The Assessing Officer (AO) treated this as a deemed dividend under section 2(22)(e) of the Income Tax Act, holding that the assessee, a substantial shareholder, had withdrawn it for personal use.
Held
The Tribunal held that the cash belonged to the company M/s KDSPL and was not used for personal benefit by the assessee. The Tribunal found that no loan or advance was made by the company and the land purchase was made from personal bank accounts, not cash. Therefore, the conditions of section 2(22)(e) were not satisfied.
Key Issues
Whether cash found with a substantial shareholder, claimed to be company funds, constitutes a deemed dividend under section 2(22)(e) when no loan or advance was formally documented.
Sections Cited
2(22)(e), 153C, 46A
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Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI SOUNDARARAJAN K
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the ld. CIT-A, dated 18/09/2024 in DIN No. ITBA/ALP/M/250/2024- 25/1068763837(1) for the assessment year 2018-19.
The only effective issue raised by the assessee is that the learned CIT(A) erred in confirming the AO’s action of treating cash belonging to the company M/s Kanva Diagnostic Services Pvt Ltd found from the assessee’s residence and office of auditor as deemed dividend u/s 2(22)(e) of the Act.
The facts in brief are that the assessee is an individual, majority shareholder and managing director of M/s Kanva Diagnostic Services Pvt Ltd (hereafter KDSPL). The company was subject to search in connection with the residence of the assessee and the office of auditor Shri H.B. Sunil was also covered under the search. Consequence to search, the proceedings under section 153C of the Act were initiated in case of the assessee.
During the assessment proceedings, the AO observed that unaccounted cash amounting to ₹1,61,98,000/- was found and seized from the office of Shri H.B. Sunil, to which Dr. H.M. Venkatappa (the assessee) admitted to have handed over to Shri H.B. Sunil for purchasing 2 acers of land property bearing survey No. 50/1 at Chikkagubbi village, Bidrahalli Hubli in his and his son’s name (Dr H.V. Vyshak). The copy of purchase agreement for the said property dated 11-10-2017 between the assessee and Shri H.B. Sunil was also found and seized marked as A/HBSC/01.
This cash, according to the assessee, was originated from suppressed V-series bills in the books of M/s KDSPL. Additionally, during a search at the residence of the assessee on 08.11.2017, another cash of ₹ 67,87,400/- was seized, which he also claimed was from suppressed sales in M/s KDSPL. The AO concluded that a total of ₹2,29,85,400/- was withdrawn by Dr. Venkatappa from KDSPL for personal use and therefore, the same should be considered as deemed dividend under section 2(22)(e) of the Act, since Dr. Venkatappa is a substantial shareholder in M/s KDSPL. Thus, the AO issued show cause notice proposing to make an addition on account of deemed dividend.
In response, the assessee contended that the cash in question belonged to M/s KDSPL which was generated through unaccounted sales (suppressed V-series bills). He maintained that the money remained the company’s property and was never withdrawn or used by him for personal purposes. He argued that the seized cash found at Shri H.B. Sunil’s office and his own residence was still in the company’s possession, and had not been used as a loan or advance by him. He denied any personal utilization or diversion of funds from the company. However, the AO rejected the assessee’s contention, citing that the cash amounting to ₹1,61,98,000/- was already handed over to Shri H.B. Sunil for the purchase of property in the name of Dr. Venkatappa’s (assessee) and his son’s personal names, which constituted a personal benefit. Shri H.B. Sunil admitted in his sworn statement the purpose of the cash, which was not disputed by assessee. As such, the AO held that the cash, though unaccounted, was withdrawn from the company for personal use and hence, qualifies as a deemed dividend under section 2(22)(e) of the Act. The fact that these transactions were not recorded in the company’s books further supports this conclusion. Consequently, the AO assessed ₹2,29,85,400/- as deemed dividend income in the hands of appellant assessee.
The aggrieved assessee preferred an appeal before the learned CIT(A).
Before the learned CIT(A), the assessee, strongly contested the applicability of section 2(22)(e) of the Act in the given case. He argued that the essential conditions for invoking the provisions of deemed dividend under this section were not fulfilled, as there was no actual . payment made by the company to him in the nature of a loan or advance. The assessee claimed that he merely held the cash in a fiduciary capacity on behalf of M/s KDSPL, and the seized funds were not used for any personal gain or purpose. To support his claim, the assessee cited the decision of the Pune Bench of the ITAT in the case of ACIT v Anilkumar Phoolchand Sanghvi reported in [2022] 144 taxmann.com 163, where it was held that if a director holds company funds in a fiduciary role and the money is not used for personal purposes, section 2(22)(e) of the Act is not attracted. It was further contended that a company is only an incorporated entity which function through natural persons such as directors or BOD or authorised personal. It is the natural person who controls and handles all the assets owned by the company, but such natural person can never be regarded as the owner of the property held by the company. In the present case, he (the assessee) also kept cash of the company M/s KDSPL as mere custodian.
8.1 Furthermore, he emphasized that the cash in question belonged to the company, generated through suppressed sales, and was acknowledged in the assessment of M/s KDSPL. The assessee referred to the Supreme Court ruling in Shree Ram Mills Ltd. v. Commissioner of Excess Profits Tax (1953 23 ITR 120 SC), reiterating that a valid loan or advance requires a clear agreement between borrower and lender, which was absent in his case. He maintained that there was no debit in the company’s books treating the amount as loan or advance to him, and hence the transaction does not qualify as deemed dividend.
8.2 The assessee to support his contentions also filed additional evidence in the form of board resolution authorising the assessee to keep custody of all the assets including cash.
The AO in the remand report strongly objected the admission of additional evidence as the condition provided under rule 46A of IT Rule was not satisfied. The AO also contended as per the provision of Companies Act 2013, when BOD of a company passes any resolution then such a company is required to file specified form to the registrar of the company. In this case, no such form was filed by the assessee or brought on record. Further, the AO in remand report reiterated his findings supporting the addition.
The assessee in rejoinder submitted that the AO misunderstood the provision of companies Act. As such companies Act does not require reporting of all resolution passed in board meetings.
The learned CIT(A) after considering the facts in totality rejected the additional evidence filed by the assessee. The learned CIT(A) noted that the appellant had several opportunities to submit this evidence during the original assessment proceedings but failed to do so without any valid reason. Since, the submission came at a later stage, it raised questions about its credibility and appeared to be an afterthought. Therefore, the evidence was not accepted.
Further, the ld. CIT(A) held that it is a confirmed fact that ₹67,00,000/- was found and seized from the appellant’s residence and ₹1,61,98,000 was given to an auditor for handling property matters. The . assessee holds more than 10% voting rights in the company, which means he is a substantial shareholder. Based on the facts, the ld. CIT(A) concluded that the total withdrawal of ₹2,29,85,400/- from the company was used for his personal benefit. Even though the transaction was not formally recorded as a loan or advance in the company’s books, the cash was clearly diverted for personal use.
The learned CIT(A) pointed out that the appellant did not provide any solid proof to show that the cash was not used personally. The assessee submitted Board Resolution merely stating that he had custody of the company’s assets, but that alone did not prove that the money wasn't used personally. Simply, having the cash in his custody created a strong presumption that he intended to use it for himself.
In conclusion, the ld. CIT(A) agreed with the AO’s view that the use of company’s funds by a shareholder for personal purposes whether recorded or not, is still considered a deemed dividend under section 2(22)(e) of the Act. The claim that the cash was later brought into the books or might have been used for company purposes doesn't change the tax implications. Hence, the ld. CIT(A) upheld the AO’s addition and dismissed the appellant’s appeal on this matter. Hence, the learned CIT(A) confirmed the addition made by the AO.
Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
The learned AR before us filed paper book running from pages 1 to 113 and contended that under the provisions of section 2(22)(e) of . the Act, the amount borrowed by the assessee is deemed as dividend in the hands of the assessee subject to the conditions provided therein. But the foremost condition is that there has to be borrowing by the assessee from the company. In the present case, the assessee was holding cash merely as a custodian and the same has not been utilized for any personal purposes. The assessee has purchased the property without using the fund belonging to the company. Furthermore, the impugned cash was duly recorded in the books of accounts and utilized by the company in the course of the business, otherwise the company would not have used the fund for its activities.
On the other hand, the learned DR submitted that there was found an agreement to sale which strongly suggests that the cash belonging to the company was used by the assessee for his personal benefit. Accordingly, the learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available in record. Form the materials available on record, we note that the main question is whether the cash seized during the search should be treated as a deemed dividend under section 2(22)(e) of the Act in the hands of the assessee. The cash amounting to ₹2,29,85,400/- was found partly at the residence of the assessee and partly at the office of the auditor. The AO treated it as if the assessee had withdrawn this cash from M/s Kanva Diagnostic Services Pvt Ltd (KDSPL) for his personal use.
18.1 The assessee has explained that this cash belonged to M/s KDSPL and came from suppressed sales (V-series bills). He did not use it for personal expenses. He held the cash only as a custodian for the company. He did not receive it as a loan or advance. This position is supported by a board resolution, which authorized him to manage and hold the company’s assets, including cash.
18.2 There is no entry in the company’s books to show that any amount was paid to the assessee as a loan. There is no agreement or understanding that suggests any such loan existed. Therefore, the basic requirement for invoking section 2(22)(e) is missing. A loan or advance must be shown in the records, and that is not the case here.
18.3 We have also considered the explanation about the alleged land deal. The AO concluded that cash was used to buy property in the name of the assessee and his son. However, this is not supported by the evidence. The assessee has placed on record the documents at pages 61 to 98 of the paper book. These include copy the agreement, sale deed, and the relevant bank account statements. They clearly show that payment for the property bearing survey No. 50/1 of Chikkagubbi village, Bidrahalli Hubli was made through banking channels from the personal accounts of the assessee and his son. There is no finding and material on record suggesting any amount was paid over and above the disclosed consideration. Hence this proves that no cash was used for the purchase of said property by the assessee. The allegation that the seized cash was diverted for personal use is, therefore, without any basis.
18.4 We find merit in the assessee’s reliance on judicial precedents, including the Pune ITAT decision in ACIT v. Anilkumar Phoolchand Sanghvi (supra). In that case, it was held that where a director holds funds on behalf of the company and does not use them for personal benefit, the provision of section 2(22)(e) of the Act does not apply.
18.5 We are also conscious to the fact that the board resolution, although filed later, is relevant. It supports the assessee’s claim that he acted in a fiduciary role. Therefore, in our considered opinion the rejection of this evidence by the ld. CIT(A) was not justified. A delay in submission does not by itself makes evidence unreliable, especially when it clarifies the assessee’s role. 18.6 In view of the above, we hold that the cash belonged to M/s KDSPL which duly accepted and offered to tax by the said company. It was not used for personal benefit by the assessee and no personal use of company funds has been proved. No loan or advance was made by the company to the assessee. The purchase of land was made from personal bank accounts, not cash. Hence, the conditions of section 2(22)(e) of the Act are not satisfied. Accordingly, we hereby set aside the addition made by the AO and confirmed by the CIT(A) as not sustainable and direct the AO to delete the same. Hence the ground of appeal filed by the assessee is allowed.