ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(2), CHENNAI, CHENNAI vs. KISHORE KUMAR JAIN, CHENNAI

The Revenue has raised the following common grounds of appeal for all the assessment years 2012-13, 2013-14 & 2016-17:

The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.

2. The Ld. CIT (A) erred in deleting the addition u/s.2(22)(e) of the Act of Rs.5,97,36,000/- when in section 2(22)(e), the key condition is that a loan or advance is given to a shareholder, a director, or their relative by the company & that such shareholder receiving the loan or advance must hold at least 10% of the voting power in the company & that in the present case all the parameters that trigger section 2(22)(e) of the Act are existent. 2.1 The Ld. CIT(A) erred in not appreciating the fact that the said advances were made from the accumulated profit of the company as the company has offered such impugned unaccounted income in its settlement application before the Income Tax Settlement Commission (ITSC), which makes it clear that the payment was made from the accumulated profits thereby drawing the application of section 2(22)(e) of the Act.

For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the Order of Ld. CIT (Appeals) may be set aside and that of Assessing Officer may be restored. 3. The brief facts of the case are that the assessee is an individual and Managing Director of M/s. Khazana Jewellery Private Limited. A search was conducted at the official premises of M/s.Khazana Jewellery Private Limited and the residential premises of assessee on 21.04.2016 as part of the search of M/s.Khazana Jewellery Private Limited. During the course of search, unaccounted investments in immovable properties over the past six years was found in the name of M/s.Khazana Jewellery Private Limited and the assessee. The assessee in his sworn statement recorded on 23.04.2016 and 03.05.2016 had stated that he had paid on money for the purchase of properties. Subsequently, notice u/s.153A of the Income tax Act (“the Act”) was issued on 10.08.2017 for the said AYs 2012-13, 2013-14 & 2016-17. In response to the notice issued, the assessee filed return of income on 17.10.2017 declaring total income of Rs.27,66,71,681/-, Rs.15,59,46,630/- and that of Rs.2,09,41,540/- on 05.02.2018 for the AYs 2012-13, 2013-14 & 2016-17 respectively.

There was change in incumbent and Notices u/s 143(2) and 142(1) of the Act was issued on 30.08.2018 and 25.09.2018 respectively, in response to which the assessee had submitted the details/ documents called for from time to time.

The assessment was then completed vide order u/s.143(3) r.w.s.153A dated 29.12.2018 by making addition of Rs.8,70,67,200/-, Rs.5,97,36,000/- and Rs.23,24,36,770/- as ‘Deemed Dividend’ u/s 2(22)(e) of the Act for the AYs 2012-13, 2013-14 & 2016-17 respectively in the hands of the assessee stating that M/s.Khazana Jewellery Private Limited had made payments for the benefit of the assessee shareholder holding 38.57% of shares in M/s.Khazana Jewellery Private Limited and hence the provisions of Section 2(22)(e) of the Act are attracted.

Aggrieved by the said assessment orders passed for the AYs 2012-13, 2013- 14 & 2016-17, the assessee had preferred appeals before the Ld. Commissioner of Income Tax (Appeals)(“CIT(A)”) – 19, Chennai on 25.01.2019. On consideration of the submission made during the appellate proceedings, the Ld. CIT(A), vide Order dated 10.09.2024 passed u/s.250 of the Act had allowed the said appeals in favour of the assessee holding as under: (a) “to apply the provisions of Section 2(22)(e) of the Act, it must be conclusively established that the payments were indeed loans or advances made from accumulated profits, and that the shareholder was the beneficial owner receiving these funds for personal benefit. In the assessment order, the AO relied upon the phrase “any payment” but conveniently omitted to consider the subsequent phrase “possesses accumulated profits”. In the case of the Respondent, the Respondent has utilised the unaccounted income generated by the Company and not from any accumulated profit of the Company.” [para 6.3.25] (b) Reliance was placed on the decision of the Hon’ble ITAT Mumbai bench in the case of DCIT V. Sunil Umashankar Rungta in (2005) 94 TTJ Mum 329. “As observed by the Hon’ble ITAT, the amount of unaccounted income which surfaced in the hands of the company can in no way partake the character of accumulated profit as the same is not effected in the financials of the Company. Therefore, the AO's action of treating the on- money payments, sourced from the unaccounted income of the Company as deemed dividend under Section 2(22)(e) of the Act in the hands of the Respondent is not sustainable as the funds utilized for the purchase of properties were not in the nature of loans or advances from KJPL to the Respondent, and therefore, the provisions of section 2(22)(e) of the Act do not apply.” [para 6.3.27]

Aggrieved by the order of the ld.CIT(A) the department preferred an appeal before us.

The ld.CIT – DR against the Appellate Orders passed by the Ld. CIT(A) for the AYs 2012-13, 2013-14 & 2016-17, submitted that the ld.CIT(A) has erred in deleting the addition u/s.2(22)(e) of the Act, when the key condition is that a loan or advance is given to shareholder, a director, or their relative by the company and that such shareholder receiving the loan or advance holding at least 10% of the voting power in the company and that in the present case all the parameters are existing to attract the provisions of section 2(22)(e) of the Act.

The ld.DR stated that the ld.CIT(A) has not appreciated the fact that the advances are made from the accumulated profit of the company as the company has offered such impugned unaccounted income in its settlement application before the ITSC, which makes it clear that the payment was made from the accumulated profits thereby drawing the application of section 2(22)(e) of the Act.

In light of the above submission the ld.DR prayed for setting aside the order of the ld.CIT(A) by allowing the appeal of the revenue.

Per contra the ld.AR for the assessee submitted that pursuant to the search proceedings, M/s.Khazana Jewellery Pvt. Ltd. (“KJPL” or “the company”) had filed an application before the Hon’ble Income Tax Settlement Commission (“ITSC”) in S.A.No. TN/CN 52/2018-19/17/IT for settlement of its income for the AYs 2011-12 to 2017-18.

Based on the materials/loose sheets found/seized during the course of search at the business premises of the company and at the assessee’s residence, it was :-5-: ITA. Nos.:2847 to 2849 /Chny/2024 admitted therein that undisclosed income was earned by KJPL through transactions involving inflation of ‘old gold refining losses’ debited in the books of accounts of the company and the same was applied/utilised towards on-money payment for investments in properties in the name of the assessee and company for the commercial use of the company, including the subject properties presently in dispute before Your Authority for the AYs 2012-13, 2013-14 & 2016-17 respectively.

The modus operandi for earning undisclosed income through inflation of ‘old gold refining losses’ was explained as below: - The entire process of purchase of Old Gold from customers, melting, refining and issuing them for manufacturing and bringing the same into showrooms as the company’s stock has element of process loss. - The said process loss pertains to the difference between quantity of Old Gold received and tested and that of the refined stock that comes out of refinery recorded in the books of accounts. - The company had inflated the above quantity lost in the refining process and debited the same as an expense in the profit and loss account. - Thus, the company was left with surplus bullion at the refinery, which formed the basis for the additional income offered before the Settlement Commission. - Part of such surplus bullion available with the company was sold outside the banking channels and the proceeds were not accounted in the books of accounts. - The unaccounted money thus generated was then used to pay on-monies for the purchase of multiple properties in the name of the company as well as in the name of the Managing Director, being the assessee, for commercial

The details of the properties and the payments made for its purchase out of the undisclosed income is tabulated as under, as disclosed before the Hon’ble Settlement Commission:

The Hon’ble Income Tax Settlement Commission, in its order dated 26.10.2018 and 11.12.2018 passed u/s.245D(1) & 245D(2C) of the Act, had accepted the said income as part of the disclosure and the case was heard and allowed to be proceeded with as per the applicable provisions laid down in this regard. (Copies of the settlement application reflecting the said ‘Sources and Application of funds’ and the Orders passed by ITSC u/s.245D(1) & 245D(2C) of the Act is enclosed as item nos. 2,3 & 4 respectively of the paper book filed by the assessee).

Then, the final order u/s.245D(4) of the Act was passed by the ITSC on 11.06.2020, rejecting the application on the following grounds (Copy of the said order enclosed as item no. 5 of the paper book filed by the assessee) :

The Assessing Officer, during the assessment proceedings u/s.153A r.w.s 143(3) of the Act, had held that the said on-money payment on purchase of the above properties in the name of the assessee by KJPL amounts to deemed dividend u/s.2(22)(e) of the Act in his hands for the respective AYs and had taxed accordingly the sum of Rs.8,70,67,200/-, Rs.5,97,36,000/- and Rs.23,24,36,770/- for the AYs 2012-13, 2013-14 & 2016-17 respectively.

The ld.AR submitted that the there is no dispute raised by the Department / Settlement Commission on the properties in dispute being purchased out of on- money earned by the Company in the name of the assessee and its subsequent use for commercial purposes of the company. The said fact had been accepted and no queries had been raised in this regard.

In this regard, the ld.AR drew our attention to the applicable provisions of Section 2(22)(e) of the Act reproduced below for ease of reference:

On reading the above, it is evident that for the provisions of deemed dividend to be made applicable in the hands of a shareholder, the essential ingredients are as under:

Further the ld.AR in support of the above points placed a reliance on the following decisions:

Therefore, the ld.AR submitted that in the present case of the assessee, the company had disclosed the additional income before the Hon’ble Settlement Commission based on its inflated expenses and had made investment in properties for the company’s use sourced from the said undisclosed income, as explained in the Application filed with the Hon’ble Commission. Thus, the undisclosed funds available with the company and the investment in properties under dispute was contemporaneous and hence, the same cannot be termed as ‘accumulated profits’ to attract section 2(22)(e) of the Act, as held by Hon’ble Mumbai Tribunal in the above- mentioned case. The relevant case-law copy is enclosed as item no. 7 of the paper book filed by the assessee.

According to section 2(22)(e) of the Act, the amount should have been paid by the company to: o the shareholder himself, or o a concern where he has beneficial interest or o payment made on behalf of / for the benefit of the share-holder.

In the present case, the amount paid by the Company towards purchase of immovable properties is ‘NOT FOR THE BENEFIT OF THE ASSESSEE’ but for the commercial use of the company, i.e., these properties were used as Company’s Showrooms as stated above, whereby the provisions of Section 2(22)(e) of the Act shall not apply to the assessee’s case in hand.

In this regard, the ld.AR placed reliance on the decision of the Hon’ble Karnataka HC in Bagmane Constructions P Ltd V. CIT in TS-785-HC-2014(KAR)

Considering the above submissions, the ld.AR prayed that the Department appeal be dismissed since the investment made by the company in immovable properties in the name of the assessee for the commercial use of the company out of its undisclosed income cannot be treated as deemed dividend u/s.2(22)(e) of the Act in the assessee’s hands for the subject AYs 2012-13, 2013-14 & 2016-17.

We have heard the rival contentions perused the material available on record and gone through the orders of lower authorities along with the paper books and case laws relied on by both the parties. The assessee is an individual and Managing Director of M/s.Khazana Jewellery Private Limited. A search was conducted at the official premises of M/s.Khazana Jewellery Private Limited and the residential premises of assessee on 21.04.2016 as part of the search of M/s.Khazana Jewellery Private Limited. During the course of search, unaccounted investments in immovable properties over the past six years was found in the name of M/s.Khazana Jewellery Private Limited and the assessee. The assessee in his sworn statement recorded on 23.04.2016 and 03.05.2016 had stated that he had paid on money for the purchase of properties. The notice u/s.153A of the Act was issued on 10.08.2017 for the AYs

The assessment was completed vide order u/s.143(3) r.w.s.153A dated 29.12.2018 by making an addition of Rs.8,70,67,200/-, Rs.5,97,36,000/- and Rs.23,24,36,770/- as ‘Deemed Dividend’ u/s.2(22)(e) of the Act for the AYs 2012-13, 2013-14 & 2016-17 respectively by stating that M/s.Khazana Jewellery Private Limited had made payments for the benefit of the assessee who is a shareholder holding 38.57% of shares of the company. On appeal filed by the assessee, the Ld.CIT(A) vide Order dated 10.09.2024 had allowed the appeals in favour of the assessee holding that the provisions of section 2(22)(e) of the Act is not attracted to the present case in hand for the following reasons: - The investment made by the assessee in the commercial properties were not purchased from the loans and advances received from the company out of the accumulated profits of the company. - The assessee was not the beneficial owner of the assets purchased - The unaccounted income which was surfaced in the hands of the company cannot partake the character of the accumulated profits as the same is not effected in the financials of the company.

We find that there is no dispute raised by the Department / Settlement Commission and accepted that the properties in dispute were purchased out of on- money earned by the company in the name of the assessee and its subsequent use for commercial purposes of the company.

Now we will read the relevant provisions of Section 2(22)(e) of the Act, which is reproduced below:

Any amount to be considered as ‘deemed dividend’ in the hands of the recipient as per section 2(22)(e) of the Act the following conditions are essential: i. There has to be a payment of loan or advance to the shareholder and same should have been recorded in the books of accounts of the Company. ii. The recipient should be a share holder of the company having shareholding of not less than 10% of voting power. iii. The payment is made for the individual benefit of such shareholder. iv. The company should possess the accumulated profits and the such loan or deposit paid should have been out of the accumulated profits of the Company.

In the present facts of the case though the assessee is a beneficial owner of share having not less than 10% in the company, we find that the assessee has not received the loans or advances from the company out of its accumulated profits recorded in the books of accounts. Since, the amount received by the assessee from the company, to pay on money for purchase of properties was out of the unaccounted income of the company and not from the accumulated profits of the company as per the provisions of section 2(22)(e). We also note that the properties which were purchased in the name of the assessee are being used by the company to carry on its business activities. Therefore, the other condition of section 2(22)(e) is :-14-: ITA. Nos.:2847 to 2849 /Chny/2024 not satisfied as the loan or advance given for the individual benefit of the shareholder.

In view of the matter, the ‘on-money’ paid by the assessee for purchase of properties from the unaccounted income of the company cannot be treated as ‘deemed dividend’ in the hands of the assessee. Hence, we do not find any reason to interfere in the order of the ld.CIT(A) in deleting the addition made by the AO.

Our above view is supported by the decision of the Mumbai Tribunal in the case of DCIT V. Sunil Umashankar Rungta (2005) 94 TTJ Mum 329, wherein it was held as under: “14. We considered the matter in detail. Regarding the legal contention raised by the learned CIT, we find that her argument was quite relevant and be considered seriously. But at the same time the facts relating to the issue do not prima facie endorse the view advanced by the learned CIT that the amount of Rs. 6 lakhs need to be treated as deemed dividend in the hands of the assessee. As pointed out by the learned chartered accountant, the undisclosed income discernible in the hands of the company M/s.Sunvin Industries (P) Ltd. and the investment made by the assessee in IVPs and KVPs were contemporaneous and within the immediate vicinity of the search. It is to be seen that the search was made on 28th July, 1998. It is again to be seen that the investments were made on various dates of the same month July, 1998 and June, 1998. Therefore, if at all undisclosed income disclosed by the assessee-company is treated as its profits, it could not be treated as accumulated profits. The maximum it could be considered as current income alone. All the events are contemporaneous and there is a clear proximity writ large in all the events. Therefore, we find that the application of Section 2(22)(e) is highly improbable in this case. 15. Now coming to the facts of the issue we find that the company M/s Sunvin Industries (P) Ltd. has already offered an undisclosed income of Rs. 8 lakhs. The assessee has explained that the sum of Rs. 6 lakhs has been appropriated by the assessee out of the above amount and was utilized for investing in IVPs and KVPs. The availability of the fund with the company and the investments in IVPs and KVPs are contemporaneous and there is no doubt that there is a clear proximity of timing with reference to all these events. So also, as pointed out by the CIT(A) the undisclosed income offered in the hands of the company was not stated to be applied for any other specific purpose so as to establish the non-availability of funds with the company for the purpose of withdrawal by the assessee. At the same time the assessee also has stated in his statement that his regular income is by way of salary from the company with an inference that there is no mention of any other source by which the assessee could make investment in IVPs and KVPs. All the above circumstances putting together, we find that the assessee has fairly and reasonably established a formidable link between the undisclosed income declared in the hands of the company M/s Sunvin Industries (P) Ltd. and the investment made by the assessee in IVPs and KVPs. Therefore, we cannot object to the finding of the CIT(A) that there is :-15-: ITA. Nos.:2847 to 2849 /Chny/2024

Therefore, the undisclosed funds available with the company and the investment in properties under dispute was contemporaneous and hence, the same cannot be termed as ‘accumulated profits’ to attract section 2(22)(e) of the Act, as held in the above decision.

Further, the Delhi Tribunal has held that the undisclosed income assessed by the AO cannot be construed as ‘accumulated profits’ in the case of Parmod Kumar Dang vs Joint Commissioner Of Income Tax in (2006) 105 TTJ Delhi 511 wherein it was held as under: “7. Insofar as the first question is concerned, in our view, the expression 'accumulated profits' as appearing in Section 2(22)(e) should be understood as meaning profits in the commercial sense that is the profits which have been earned by a company in the usual course of carrying out its business activities. The Hon'ble Supreme Court in the case of P.K. Badiani (supra) has held that 'accumulated profits' occurring in Clause (e) of Section 2(6A) of Indian IT Act, 1922 (corresponding to the present Section 2(22)(e) of the Act which is before us) means the profits in the commercial sense and not 'assessable or profits liable to be taxed as income'. Further, Supreme Court in the case of CIT v. Urmila Ramesh (supra) while dealing with the expression 'accumulated profits' under Section 2(22)(e) held that the profits assessable by way of legal fiction under Section 41(2) could not be deemed to be part of 'accumulated profits' as the same could not be considered as profits in the commercial sense. Therefore, in the above light we proceeds to examine as to whether the Revenue is justified in including the amount of undisclosed income assessed in the hands of the company under Section 158BC (i.e., block assessment) for the purposes of determining 'accumulated profits' as referred to in Section 2(22)(e) of the Act. The said addition has been made on account of unexplained credit in terms of Section 68 and amounts to Rs. 55,50,000. Evidently, the said addition does not represent any commercial profits. Therefore, having regard to the parity of reasoning enunciated by the apex Court, as discussed above, we do not find any justifiable reason to hold, in the instant case, that the undisclosed income assessed by the AO in an order under Section 158BC would constitute 'accumulated profits' in the hands of the company for the purposes of considering the applicability of Section 2(22)(e) of the Act. It has also been stated by the learned Counsel for the assessee that the addition of Rs. 55,50,000 made under Section 158BC is a subject-matter of dispute before the Tribunal and that it has not attained finality. Notwithstanding the above, in our view the same is outside the purview of 'accumulated profits' envisaged for the purpose of Section 2(22)(e) of the Act having regard to the legal situation discussed above.” (emphasis supplied).

We note that as per section 2(22)(e) of the Act, the amount should have been paid by the company to:

In the present case, the amount paid by the Company towards purchase of immovable properties is ‘not for the benefit of the assessee’ but for the commercial use of the company, i.e, these properties were used by the company for its showrooms, whereby the provisions of Section 2(22)(e) of the Act shall not apply to the assessee’s case in hand.

We find that the above understanding of the provision is supported by the decision of the Hon’ble Karnataka High Court in Bagmane Constructions P Ltd V. CIT in TS-785-HC-2014(KAR) [2015] 57 taxmann.com 120 (Karnataka), wherein it was acknowledged by the Court that:

In the present facts and circumstances of the case and by respectfully following the various judicial precedents discussed supra, we are of the considered view that the on-money paid for purchase of commercial properties by the assessee out of the undisclosed income earned by the company does not attract the provisions of Section 2(22)(e) of the Act. Hence, we are not inclined to interfere in the orders of :-17-: ITA. Nos.:2847 to 2849 /Chny/2024 the ld.CIT(A) for having deleted the additions made by the AO in the hands of the assessee for the A.Y. 2012-13, 2013-14 & 2016-17 on account of ‘deemed dividend’ as per Section 2(22)(e) of the Act. Thus, we are dismissing the all the grounds of appeal raised by the revenue.

In the result the three appeals filed by the revenue are dismissed.