SHRI. SUMIR J. HINDUJA vs. THE DEPUTY COMMISSIONER OF INCOME TAX

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 2ND DAY OF AUGUST 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR.JUSTICE HEMANT CHANDANGOUDAR I.T.A. NO.7 OF 2017 BETWEEN: SHRI. SUMIR J. HINDUJA NO.7 & 12, INDUSTRIAL SUBURB 2ND STAGE, YESHWANTHPUR BENGALURU-560022.

... APPELLANT (BY SRI. ASHOK A. KULAKARNI, ADV.,) AND: THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-11(3), BENGALURU.

... RESPONDENT (BY SRI. E.I. SANMATHI, ADV., FOR SRI. K.V. ARAVIND, ADV.,) - - - THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 12.08.2016 PASSED IN ITA NO.1374/BANG/2012 AND CROSS OBJECTION NO.49/BANG/2013 AND ASSESSMENT ORDER DATED 24.12.2010, FOR THE ASSESSMENT YEAR 2006-07, PRAYING TO:

I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. II. ALLOW THE APPEAL BY SETTING ASIDE THE ORDER OF THE ITAT IN ITA NO.1374/BANG/2012 & CROSS OBJECTION NO.49/BANG/2013 DATED 12.08.2016 AND ASSESSMENT ORDER DATED 24.12.2010 AND SUITABLY MODIFY IT AS SOUGHT IN THE APPEAL. III. PASS SUCH OTHER SUITABLE ORDER AS THIS HON'BLE COURT DEEMS FIT TO GRANT IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN THE INTEREST OF JUSTICE AND EQUITY. THIS I.T.A. COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the assessee. The subject matter of the appeal pertains to the Assessment Year 2006-07. The appeal was admitted by a Bench of this Court on the following substantial questions of law: 1) Whether the Assessing Officer to justify action u/s 147 can travel beyond his recording u/s 148(2) and the material therein? 2) Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in law in upholding that the action of the Assessing Officer in assuming jurisdiction u/s 147

3 of the Income Tax Act, 1961 is valid on the basis of the recoding of his u/s 148(2)? (3) Whether on the facts and in the circumstances of the case the Appellate Tribunal was correct in upholding the reassessment proceedings on the basis of reasons not contained in the recorded reasons for reopening of assessment? (4) Whether on the facts and in the circumstances of the case and having regard to the material on record the Appellate Tribunal was justified in holding that the requirements for invoking provisions of Section 147 are satisfied? (5) Whether on the facts and in the circumstances of the case, there was any reliable and cogent material in the recording u/s 148(2) of the Assessing Officer to initiate reassessment proceedings? (6) Whether on the facts and circumstances of the case the funds provided to the associate concerns by GIP Ltd as per the terms of the SSSA the understanding and agreements thereunder can be treated as deemed dividend u/s 2(22)(e) of the Income Tax Act in the hands of the appellant, without appreciating the fact that such advances were given for business purposes including capital induction of GI(P) Ltd.

4 (7) Without prejudice even if the books of accounts and material on record showed that moneys were lent to the "Directors" a group as such and not to the appellant one of the 5 Directors as such, can such lending be deemed dividend in the hands of the appellant. (8) When no benefit whatsoever as such is derived by the loanee director through the alleged lending benefiting the lending company can see 2(22)(e) be invoked. (9) Whether on the facts and in the circumstances of the case the finding of the Tribunal that there is absence of any stipulation in the records of the case indicating the manner in which the loan given and treated as dividend should be utilized in a particular manner is a perverse finding of fact and therefore the entire order is vitiated. (10) Whether on the facts of the case Sec.2(22)(e) was rightly applied in respect of any part of the sum of Rs.5,00,00,000/- taxed as deemed dividend. 2. Facts leading to filing of this appeal briefly stated are that the assessee is an individual deriving income under the heads namely 'salary' and 'other sources'. The assessee filed the return of income for the Assessment Year 2006-07

5 and declared a sum of Rs.18,10,150/- as taxable income. Admittedly, there was no scrutiny assessment in respect of the aforesaid return of income filed by the assessee. The Assessing Officer received an information that assessee had received loan from a Company namely Gokuldas Images Pvt. Ltd. in which assessee was holding 27.3% of equity shares. The Assessing Officer also received an information that the aforesaid company was having profits and surplus to the extent of Rs.84,35,22,753/- as on 31.03.2006. The Assessing Officer thereupon issued a notice on 12.03.2010 under Section 148 of the Act requiring the assessee to file return of income for the Assessment Year 2006-07, as reason to believe that income escaped assessment. 3. The assessee by a communication dated 22.04.2010, requested the Assessing Officer to treat the return of income as originally filed on 31.10.2006 as return in response to notice under Section 148 of the Act. The Assessing Officer furnished the reasons recorded under Section 148(2) of the Act to the assessee. The assessee filed a detailed objection to the proceeding. Thereafter, an order

6 of re-assessment was passed under Section 148 of the Act on 24.12.2010. The assessee filed an appeal before the Commissioner of Income Tax (Appeals), who by an order dated 16.07.2012 upheld the validity of order of re-assessment and directed deletion of addition made under Section 2(22)(e) of the Act. The revenue filed an appeal against the aforesaid order, whereas the assessee filed a cross-objection.

The Tribunal, by an order dated 12.08.2016, allowed the appeal preferred by the revenue and dismissed the cross-objection filed by the assessee. In the aforesaid factual background, this appeal has been filed. 3. Learned counsel for the assessee submitted that validity of notice under Section 148 of the Act has to be determined with reference to the reasons recorded by the Assessing Officer for formation of belief. It is further submitted that the finding recorded by the Tribunal that assessee has received loan from the company namely GIPL is based on surmises and conjectures. It ought to have been appreciated by the Tribunal that the names of Directors are not mentioned in the ledger account. It is also contended

7 that the appellant is one of the Directors of the company namely M/s. Gokaldas Images Pvt. Ltd. which had entered into an agreement on 21.11.2005 for infusion of capital to the tune of Rs.44 crores by the new investors and the new investors insisted that the company namely GIPL should disassociate itself in all possible ways which would free from its obligation and possible liabilities. It is also pointed out that no money was made available to the assessee and in pursuance of agreements dated 02.11.2005 and 24.12.2005, a Cheque for a sum of Rs.5 crores was issued in the name of Personality Ltd., an affiliate group concern and the loan was taken in pursuance of share purchase of the agreement and was purely for the business of the company. It is also urged that the Tribunal has over looked clause 5 and 6 of the agreement and the material available on record. In support of aforesaid submission, reliance has been placed on the decisions in 'INDIVEST PTE LTD. Vs. ADDL. DIT & OTHERS' 350 ITR 120 (BOM) 129, 130, 'CIT Vs. KELVINATOR OF INDIA LTD.' 320 ITR 561 (SC) 564 AND 'BAGMANE CONSTRUCTION (P) LTD. Vs. CIT' 277 CTR 338 (KAR) and Circular No.19 of 2017 dated

8 12.06.2017 issued by Central Board of Direct Taxes (CBDT). 4. On the other hand, learned counsel for the revenue submitted that Assessing Officer has rightly formed the belief that income escaped assessment in the hands of the assessee which was reflected in the reasons recorded by him which show that assessee had received loans of Rs.6.85 crores from GIPL in which assessee was substantially interested as he was holding 25.3% of the share capital and the same company was having surplus to the extent of 81.8 crores as on 31.03.2006. It is also argued that conditions of invocation of Section 2(22)(e) of the Act are fulfilled in this case. It is also submitted that any payment made by a company to a shareholder or concern in which he has a substantial interest, is also covered under Section 2(22)(e) of the Act. It is also urged that there is no material on record that the amount of loan was to be utilized only for the purpose of business of the company and the amount was advanced as gratuitous loan to the share holders. It is also urged that the aforesaid finding is a finding of fact. In

9 support of aforesaid submission, reliance has been placed on the decisions in 'RAYMOND WOOLLEN MILLS LTD. Vs. ITO' (1999) 236 ITR 34 (SC), 'ACIT Vs. RAJESH JHAVERI STOCK BROKERS P. LTD.' 291 ITR 500 AND 'ITO Vs. SELECTED DALURBAND COAL CO. (P) LTD. (1996) 132 CTR (SC) 162 and 'BAGMANE CONSTRUCTION (P) LTD. Vs. CIT' (2015) 277 CTR 338 (KAR). 5. We have considered the submissions made on both sides and have perused the record. When a loan is advanced by a company to a registered share holder and other conditions mentioned in Section 2(22)(e) of the Act having been satisfied, the amount of loan has to be treated as deemed dividend within the meaning of Section 2(22)(e) of the Act. The Commissioner of Income Tax (Appeals), in its order dated 16.07.2012, held as under: "4.6. The said financial transaction narrated above does not constitute loan or advance for the purpose of section 2(22)(e) of the Act. The said transaction, even though considered as a loan in the books of account, cannot be considered for the purpose of section 2(22)(e) as there was no

10 individual or personal benefit to the shareholder taking the loan or advance. The AO in his order explained the transaction in the assessment order very elaborately but there is no material available on record to prove the point that the said loan to the Directors had resulted in any personal benefit to the appellant, either directly or indirectly. In fact, the said transactions were meant for the business purpose, strengthening the company on a better financial footing and freeing it from existing possible obligations flowing from its past dealings. To this objective, the above transactions were entered into by the appellant with M/s GIPL. In the instant case, the loans were given by M/s GIPL to the Directors not for the personal benefit of loanee i.e. appellant but for the benefit of the lender i.e. M/s. GPIL to improve the financial strength. The arguments of the appellant are acceptable in this regard. In this context, the appellant relied on the following decisions in his submission". 6. The Tribunal has held as under: "19.1 The CIT(A) deleted the addition of deemed dividend simply accepting the submissions made by the assessee. The CIT(A) had not gone into the substance of the transactions as explained by the assessee himself. The vital fact which escaped the attention of the CIT(A) is that the

11 money of the company in which the assessee is substantially interested, had gone to the concern in which the assessee substantially interested i.e. PI. It is undisputed fact that the assessee, along with his family members, is 100% shareholder in M/s. Personality Ltd., Any payment made by a company to a shareholder or concern in which he has substantial interest, is also covered by clause (e) of sub-sec.(22) of section 2. The existence of pre-conditions for invoking the provisions of sec.2(22)(e) to tax as deemed dividend in the hands of shareholder are not in dispute. Therefore, we are not going into the issues. The only aspect to be examined herein is payment made by GIP Ltd., to M/s. Personality Ltd., is taxable in the hands of shareholder. The payments made to PL are transferred as 'loan to directors in the books of GIP Ltd'. The purpose of making payment to M/s. Personality Ltd., was stated to be (i) Rs.5 crores was paid for discharging of its bank loan obligation so as to free GIP Ltd., from this guarantee obligation (ii) An amount of Rs.5.5 crores was paid initially as consideration for buying the trade brand of M/s. Personality Ltd., but subsequently transferred to HIP Ltd. in which the assessee is substantially interested

12 and these amounts were subsequently transferred to the directors. The provisions of section 2(22)(e) are clearly attracted even if payment is made to a concern in which shareholder is having substantial interest or any payment made by such company on behalf of shareholder or for individual benefit of such shareholder. Even accepting for argument sake, the submission of the assessee that the loan to shareholder is only by way of book entry does not involve any payment, still provisions of sec.2(22)(e) are attracted when payment is made by a company to any concern in which the shareholder has substantial interest having regard to the plain provisions of sec.2(22)(e) of the Act. 21. From a mere perusal of the above clauses it is clear that the director i.e. the assessee is entitled to interest-free loan of Rs.10 crores from GIP Ltd., and the same is repayable over a period of 10 years without any interest. There is no stipulation as to the manner in which the said loan of Rs.10 crores should be utilized by the assessee-company.

Further, there is no stipulation in the said agreement that the loan amount should be utilized only for the purpose

13 of discharging the loan obligations of M/s. Personality Ltd. There is no evidence on record to show that this loan was to be utilized only for purpose of business of the company or in any other manner. Therefore, these facts go to prove that these amounts were advanced as gratuitous loan to the shareholders. The provisions of section 2(22)(e) are squarely applicable." 7. However, the Tribunal while recording the aforesaid finding and while reversing the finding recorded by the Commissioner of Income Tax (Appeals), has not taken into account the ledger report, certificates issued by a standard chartered bank, books entries as well as the provisions of the agreements dated 22.11.2005 and 24.12.2005. Since the issue with regard to applicability of Section 2(22)(e) of the Act requires factual adjudication, the order dated 12.08.2016 passed by the Tribunal is quashed and the matter is remitted to the Tribunal for decision afresh after taking into account

14 the material available on record. It is therefore not necessary for us to answer the substantial questions of law. In the result, appeal is disposed of. Sd/- JUDGE Sd/- JUDGE RV