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1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU
ON THE 10TH DAY OF DECEMBER, 2018
BEFORE
THE HON'BLE MR. JUSTICE RAVI MALIMATH
AND
THE HON’BLE MR.JUSTICE K.NATARAJAN
INCOME TAX APPEAL NO.73 OF 2010
BETWEEN:
THE COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE, C.R.BUILDING, QUEENS ROAD, BENGALURU
THE DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE – 1(1), C.R.BUILDING, QUEENS ROAD, BENGALURU. ... APPELLANTS
(BY SRI K.V.ARAVIND, ADVOCATE)
AND:
SHRI. BASANT PODDAR NO.487, 10TH CROSS, RMV EXTENSION, SADASHIVNAGAR, BENGALURU – 560 080 ... RESPONDENT
(BY SRI A.SHANKAR, SENIOR COUNSEL FOR SRI M.LAVA, ADVOCATE)
2 THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 11.09.2009 PASSED IN ITA NO.521/BNG/2009, FOR THE ASSESSMENT YEAR 2004- 2005, PRAYING TO; FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN; ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BENGALURU IN ITA NO.521/BNG/2009, DATED 11.09.2009, AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(1), BENGALURU, IN THE INTEREST OF JUSTICE AND EQUITY.
*****
THIS INCOME TAX APPEAL COMING ON FOR HEARING THIS DAY, RAVI MALIMATH J., DELIVERED THE FOLLOWING:
JUDGMENT
The assessee filed the return of income for the assessment year 2004-2005 on 28.10.2004, declaring the total income of Rs.3,85,250/-. The same was processed under Section-143(1) of the Income tax Act (for short ‘Act’). The assessee is also the Managing Director of M/s.Mineral Enterprises Limited (for short ‘MEL’). The assessee was holding 74.84% shares and his wife, viz., Mrs.Vandana Poddar was holding 15.08% shares, along
3 with other family members. The company was being managed and administered by the assessee-Basant Poddar.
A search action under Section-132 of the Act was initiated against the assessee on 22.07.2005. During the course of the search proceedings, several books of accounts and incriminating documents were found which were seized. Consequent to the search, a Notice under Section-153A of the Act was issued on 07.02.2006. In response, the assessee filed a return of income on 20.02.2006, declaring the said income at Rs.3,85,250/-, as per the originally returned income. Subsequently, a Notice dated 15.03.2007, under Section-143(2) of the Act, was issued to the assessee. Thereafter, Notices under Section- 142(1) of the Act along with questionnaires were issued to the assessee on various occasions.
While going through the seized books of accounts and documents, it was found that the assessee
4 had paid a sum of Rs.11 Crores as on 24.05.2004 to his wife Smt.Vadana Poddar, apparently, on a personal commitment to her. The same was indicated as ‘gift from Sri.Basant Poddar’ to his wife, in a sum of Rs.25 Crores, which constituted Rs.11 Crores already paid, Rs.6 Crores to be paid before 10.06.2004 and Rs.8 Crores to be paid between July-August’2004, along with certain other commitments. The same was signed by the assessee as well as his wife, which was witnessed by Sri.S.Badrinarayan.
A Notice dated 20.06.2007, under Section-142(1) of the Act, along with a questionnaire was issued to the assessee. The same were replied by him. The material on record indicated that MEL had paid a sum of Rs.11.05 Crores to M/s.Solid Real Estate Private Limited (for short ‘SREL’) on various dates. Thereafter, SREL in turn paid a sum of Rs.10.80 Crores to Smt.Vandana Poddar. The Assessing Officer considered the reply to various questions put to the assessee.
The Directors of SREL in reply to the questionnaire stated that MEL had made a deposit of around Rs.10 Crores with the company, on which SREL was paying interest at 5%. That this amount in turn was given to Vandana Poddar at 5.25% interest. That other than this, they were not aware of the transactions.
In view of the reply given by the assessee and SREL, conclusions were drawn by the Assessing Officer, holding that SREL has no transaction other than those mentioned in the books of accounts and that the Directors of SREL were not aware as to what are the other transactions. That the assessee had paid Rs.11.05 Crores to Vandana Poddar through SREL. That the assessee being the beneficial owner of the shares of M/s.MEL to an extent of 75%, had made the payment due to a personal commitment to his wife. The same could be deduced from the settlement plan, which was seized from the assessee.
The plea of the assessee that it was a commercial transaction between M/s. MEL and M/s.SREL was negated. That even the contentions of the assessee that the payment of interest is reflected in the books of accounts M/s.MEL, as well as in the books of M/s.SREL were not accepted on the ground that they are mere ‘Journal Entries’ and therefore there was no real transactions or payment of interest. That the motive behind using M/s.SREL was that it could act as a conduct to make payment to Smt.Vandana Poddar, only to evade tax on the dividend, since the assessee was holding more than 10% of the shares of M/s.MEL. That any amount taken out of ‘Reserves And Surplus’ on his behalf would amount to Dividend under Section-2(22)(e) of the Act. Consequently, such dividend is taxable. Therefore, the entire sum of Rs.29,78,154/-, declared as payment made on behalf of Vandana Poddar was considered as dividend within the meaning of Section.2(22)(e) of the Act. Therefore, the entire sum of Rs.11.05 Crores advanced by M/s.MEL to
7 M/s.SREL was held as payment made on behalf and for the personal benefit of Smt.Vandana Poddar and accordingly the said payment was considered as ‘dividend’ within the meaning of Section-2(22)(e) of the Act.
Questioning the order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) was of the view that the Assessing Officer was not justified in treating the entire amount of 11.05 Crores as ‘deemed dividend’ in the hands of the assessee. That since M/s.SREL had advanced only a sum of Rs.10.80 cores to Vasanth Poddar, the same has to be treated as ‘deemed dividend’. Therefore, it upheld the addition of Rs.10.80 Cores, as ‘deemed dividend’ at the hands of the assessee by granting partial relief of Rs.25 lakhs on that ground.
Aggrieved by the same, the assessee preferred an appeal before the Tribunal. The Tribunal on
8 reconsidering the facts of the case, was of the view that the assessee had no direct or indirect control over M/s.SREL. That SREL is a ‘Separate Corporate Entity’ and is separately assessed to Income tax. That the company M/s.MEL during the course of its ordinary activity has given ‘Inter-Corporate Deposit’ of Rs.11.05 Crores to M/s.SREL. That M/s.MEL has received interest of Rs.10,71,926/- from SREL during the assessment year ending 31.03.2004. That this amount has been assessed to Income Tax by the same Assessing Officer in the assessment made at the hands of M/s.MEL without recording any adverse observations. That the interest received from SREL for the assessment year 2005-2006 has also been assessed to tax in the hands of M/s.MEL, as interest received from M/s.SREL. In the assessment of M/s.SREL, interest received from Smt.Vandana Poddar and the interest paid to M/s.MEL has been accepted by the Revenue authorities as shown. The assessment of Smt.Vandana Poddar has also been completed by the very
9 Assessing Officer wherein, the loan liability shown by M/s.SREL has been accepted by the Assessing Officer. That admittedly the assessee has no shareholding in M/s.SREL nor is he on the Board of Directors of M/s.SREL. Therefore, when the Assessing Officer accepted the amount given by M/s.MEL to M/s.SREL as ‘Inter Corporate Deposit’ and similarly accepted the loan received by Smt.Vadana Poddar as loan received from M/s.SREL and also the interest paid and received in the case of M/s.MEL, M/s.SREL and Vandana Poddar, it could not have come to the conclusion that the amount paid to M/s.MEL is for the sole benefit of the assessee. Furthermore, the Assessing Officer has not even examined Smt.Vandana Poddar for the transaction effected between her and M/s.SREL. That the transactions are through proper banking channels.
The Tribunal came to the conclusion that Section-2(22)(e) of the Act is inapplicable to the case of the assessee. That the transactions between M/s.MEL, M/s.SREL and Vandana Poddar are business transactions.
10 That M/s.MEL has not given any payment for the benefit or on behalf of the assessee to bring the amount assessable under Section-2(22)(e) of the Act. Therefore, the Assessing Officer was directed to delete the addition at the hands of the assessee. Questioning the same, the present appeal is filed by Revenue.
By the order dated 29.09.2010, the appeal was admitted to consider the following substantial questions of law: “1. Whether the Tribunal was correct in setting-aside the findings of the AO which was confirmed by the CIT(A) that agreement between the assessee and Smt. Vandana Poddar dated 24.05.2004 (seized documents A/BP/1) to pay her Rs.11 Crores and the payment of Rs.11.05 Crores by MEL at the instance of the assessee who was the MS and the shareholder to M/s.Solid Real Estate Private Limited and in turn to Smt. Vandana Poddar would amount to deemed dividend as per Section.2(22)(e) of the Act, and the
11 judgments of the Apex Court in 229 ITR 444, 290 ITR 893?
Whether the Tribunal was correct in holding that the amount paid by MEL to M/s.Solid Real Estate Private Limited and thereafter to Smt.Vandana Poddar was a commercial transaction, despite the 5% interest shown was only on paper and not actual and the entire series of transactions was entered into is the sole object of avoiding tax?
Whether the Tribunal was correct in not taking into consideration the relevant material considered by the AO and CIT(A) which clearly shows that the entire income was dividend income liable to tax, which had been avoided by entering into these series of transactions?”
Shri.K.V.Aravind, learned counsel appearing for the Revenue contends that the order of the Tribunal is erroneous and liable to be interfered with. That the material on record would indicate that incriminating documents were seized from the assessee. That the documents would clearly indicate that an amount of Rs.11
12 Crores has been paid to Vandana Poddar by her husband. That this is as a result of a settlement or otherwise arrived at between the assessee and his wife. Therefore, there cannot be any interpretation so far as the seized documents are concerned. The said document is signed not only by the assessee, but also by his wife Smt.Vandana Poddar, along with signature of the witness Sri.S.Badrinarayan. That the findings recorded by the Tribunal that the said transaction is not in anyway related to the transaction between M/s.MEL, M/s.SREL and Vandana Poddar is incorrect. That the notings should be considered as they are.
He further contends that the findings of the Tribunal that Section-2(22)(e) of the Act is not applicable, is also incorrect. The findings would indicate that the entries shown by the assessee are journal entries. Therefore, accepting the case of the assessee is incorrect. That the third requirement in Section-2(22)(e) of the Act with regard to the payment made by the company on
13 behalf and for the individual benefit of any of its shareholders to the extent to which the company in either case possesses accumulated profits would stand applicable to the case on hand. Therefore, Section-2(22)(e) of the Act requires to be applied to the case on hand.
On the other hand, Sri.A.Shankar, learned Senior Counsel appearing for the respondents’ counsel disputes the same. He contends that the Tribunal was justified in arriving at the conclusion. That the entire material has been reconsidered and hence no interference is called for. The contention of the Revenue that the transactions in question are only ‘journal entries’ and did not reflect the true transactions between the parties are not correct. The books of accounts have been produced before the authorities. Even though there has been a reference to ‘Journal Entries’, the same is also subsequently reflected in the actual payment made through banking channels. Therefore, the contention that
14 they are mere Journal Entries without any banking transaction is incorrect.
Secondly, the learned Senior Counsel submitted that Section-2(22)(e) of the Act is applicable to the facts of the case is also incorrect. That the payments made are the deposits made by one company to another. That there is no individual interest of the assessee herein. That M/s.SREL has also paid interest to M/s.MEL for the amounts borrowed by it, inasmuch as, it has received interest for the amounts paid to Smt.Vandana Poddar. All these transactions are reflected in the books of accounts and are also reflected in the bank entries. Therefore, the Tribunal was justified in passing the order so far as the recovery of the incriminating material is concerned. That there is no nexus between the payments made and the suspected payment herein and the material seized.
It is the further contention that the material seized would only indicate that the transaction in question
15 is a settlement plan arrived at between the husband and wife. That even if the said settlement is not accepted, the same has no nexus with the instant transaction in question, and has to be considered as a separate transaction and not relatable to the issue on hand. That the transaction being inter-related between the assessee, M/s.MEL and Vandana Poddar are assessed by the same Assessing Officer. That since it is related to one and the same transaction and the same having been accepted in the case of M/s.MEL and Smt.Vandana Poddar, the question of raising the said issue only so far as the assessee is concerned is unacceptable.
Heard learned counsels.
The seized material which was also extracted in the assessment order would indicate that the settlement plan arrived at has been signed by the assessee and his wife M/s.Vandana Poddar, which was witnessed by one Sri.Badrinarayana. The same would read as, it is a
16 settlement plan between the assessee-Basant Poddar and his wife Smt.Vandana Poddar. That a sum of Rs.11 Crores was already paid, Rs.6 Crores was to be paid before 10.06.2004 and Rs.8 Crores was to be paid between July- August’2004, along with certain other commitments, which in all constituted a total sum of Rs.25 crores. Three other items have also been mentioned therein, which we are not concerned herein. It is also indicated that it is a financial settlement and there is no further claim from Smt.Vandana Poddar. The Revenue contends that it has a direct nexus with the amount involved herein. That the amount has been paid to M/s.MEL and M/s.SREL and in turn to Smt.Vandana Poddar. That M/s.SREL has been treated as a conduce for the transfer of this money.
The Tribunal on considering the contentions, was of the view that relying on the said noting would be inappropriate. That the seized documents refers to the transaction between M/s.MEL, M/s.SREL and Smt.Vandana Poddar. The transaction involved herein is the amounts of
17 Inter Corporate Deposit made between M/s.MEL, M/s.SREL and thereafter from M/s.SREL to Smt.Vandana Poddar. The same are satisfied by various entries made so far as M/s.MEL and M/s.SREL are concerned. The deposit made by M/s.MEL to M/s.SREL is also reflected in the books of accounts. The deposit received by M/s.SREL from M/s.MEL and further payment to Smt.Vandana Poddar are also reflected in the books of accounts of M/s.SREL. That tax has also been paid on the interest received from M/s.MEL and M/s.SREL as well as for the interest received from M/s. SREL to Smt. Vandana Poddar. These are all matters of fact which can be deduced from the books of accounts produced by both the companies, as well as the relevant material produced so far as the relevant bank transactions are concerned.
The contention of the Revenue is that they are only Journal Entries, may not be a true reflection of the books of accounts of both the companies. The bank entries have also been produced before the Authorities. However,
18 the Revenue by placing reliance on some of the documents would contend that they are only ‘Journal Entries’. One such document is that of M/s.MEL with reference to M/s.SREL. A copy of the paper book produced before the Tribunal is placed before us. The said material would also indicate that there is a ‘journal entry’ with regard to Rs.8,52,181/-, with regard to the interest received from M/s.SREL. The same would also further indicate that interest has also been received. That there is a total receipt of Rs.35,44,763/-, through American Express Bank Limited and therefore the accounts stands closed. Therefore, the Tribunal was justified in holding that all the entries did not constitute mere ‘Journal Entries’. That the same are backed by the relevant bank entries. Therefore, it held that firstly there is no nexus so far as the seized documents are concerned. Secondly, the transactions between M/s.MEL and M/s.SREL and Smt.Vandana Poddar are business transactions which are reflected in the books of accounts of the three of them. Therefore, the Tribunal
19 was justified in coming to such a conclusion. We do not find any ground to interfere in the order of the Tribunal. The same is an appropriate finding recorded on the facts and circumstances of the case.
So far as the contention of the Revenue with regard to Section-2(22)(e) of the Act is concerned, the Tribunal on considering the same held that invoking the provisions of Section-2(22)(e) of the Act to the case on hand is inappropriate. On coming to such a conclusion, the Tribunal relied on the judgment of the High Court of Kolkatta, reported in 124 ITR 405, in the case of SHRI.NANDLAL KANORIA VS. CIT, wherein at para-8 of its order it was held that transactions in the ordinary course of business are outside the purview of Section 2(22)e of the Act. In the facts of the present case, the transaction between M/s.MEL and M/s.SREL being admittedly a business transaction, as is evident from the evidence on record, Section-2(22)(e) of the Act is not applicable.
20 22. Reliance is also placed on order of the Hon’ble Kolkatta High Court in the case of SRI NANDLAL KANORIA v. THE COMMISSIONER OF INCOME TAX reported in 122 ITR 405. Therefore, on considering the facts involved and the material produced by the assessee, the Tribunal held that the same constitutes a business transaction and therefore, the provisions of Section-2(22)(e) of the Act would not be applicable. We do not find any reason to take a different view of the matter. The material on record would indicate that all transactions are routed through bank channels. Hence, it cannot be construed as mere journal entries and therefore, it is a business transaction between the assessee and M/s.SREL.
Furthermore, the Tribunal was also of the view that the Assessing Officer was the same with reference to the assessee, Sri Basant Poddar, M/s.MEL and Smt. Vandana Poddar. When he accepted the case so far as this transaction is concerned, with regard to MEL as well Vandana Poddar, the question of raising such a doubt only
21 so far as the assessee is concerned would be inappropriate. Therefore, when the transactions are interrelated and when the Assessing Officer has accepted the case, so far as M/s. MEL as well as Smt. Vandana Poddar is concerned, the question of doubting the transaction so far as assessee is concerned is inappropriate and stands opposed to the transaction made towards SREL and Smt. Vandana Poddar.
For the aforesaid reasons, we are of the view that the Tribunal was justified in setting aside the findings of the Assessing Officer, as well as the Commissioner of Income Tax (Appeals) by holding that the agreement between the assessee and Smt. Vandana Poddar does not result in a deemed dividend as per Section-2(22)(e) of the Act. Hence, the first substantial question of law is held against the Revenue and in favour of the assessee.
So far as second substantial question of law is concerned, we are of the view that the Tribunal was
22 justified in holding that the amount paid by M/s.MEL to M/s.SREL and thereafter to Smt. Vandana Poddar was a commercial transaction and the said transaction cannot be said to have been entered with the sole object of avoiding tax. Hence, the second substantial question of law is held against the Revenue and in favour of the assessee.
On answering the first and the second substantial questions of law, the third substantial question of law would not arise for consideration, since the same becomes academic. The judgment referred to in framing the substantial questions of law, therefore, would not arise for consideration in determining the said question under the facts and circumstances of the present case.
Consequently, the appeal is disposed off.
Sd/-
Sd/- JUDGE
JUDGE
JJ / kvk