M/S SOUL SPACE PROJECTS LTD.,,NEW DELHI vs. DCIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘G’ : NEW DELHI) BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER and SHRI A.T. VARKEY, JUDICIAL MEMBER ITA No.3180/Del./2013 (ASSESSMENT YEAR : 2006-07) M/s. Soul Space Projects Limited, vs. DCIT, Central Circle 17, E – 23/B – 1 Extn. MCIE, New Delhi. Mathura Road, New Delhi. (PAN : AAJCS7736F) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/Shri Salil Kapoor & Shubham Rastogi, Advocates REVENUE BY : Smt. Sunita Kejriwal, CIT DR Date of Hearing : 24.09.2015 Date of Pronouncement : 16.12.2015 O R D E R PER A.T. VARKEY, JUDICIAL MEMBER :

This appeal, at the instance of the assessee, is filed against the order of the CIT (Appeals)-II, New Delhi dated 21.03.2013 for the assessment year 2006-07. 2. The grounds of appeal taken by the assessee are as under :-

1. That the notice issued under section 153A and the assessment order made under Section 153A r.w.S. 143(3) is illegal, bad in law, barred by time limitation & without jurisdiction.

2. That the additions/disallowance made by the Assessing Officer by passing the assessment order under Section 153A r.w.s. 143(3) are illegal, bad in law & without jurisdiction.

3. That the additions made by the AO are not based on any incriminating material found during the course of search. Hence assessment order passed U/s 153A/143(3) and the additions/disallowances are illegal, bad in law and without jurisdiction.

5. That, without prejudice, the extension of time granted by the CIT to the special auditor for completion of special audit of the assessee is illegal, bad in law and without jurisdiction. The assessment order is also barred by time limitation and hence illegal, bad in law and without jurisdiction. 6. That the addition/disallowance made is unjust, arbitrary and is not based on any material on record. The total income of the Appellant has been wrongly and illegally assessed by the Assessing Officer and sustained by the CIT(A) at Rs. 48 lakhs as against income declared at Rs. NIL. 7. The Assessing officer in view of the facts and circumstances of the case erred on facts and in law in making the addition of Rs.48 lakhs on account of deemed dividend and the CIT(A) has also erred in upholding the same.

8. The Assessing officer in view of the facts and circumstances of the case erred on facts and in law in holding that Rs 48 lakhs is deemed dividend u/s 2(22)(e) in hands of the appellant and the CIT(A) has erred in upholding that.

9. That the various observations made by the AO and CIT (A) against the assessee in its orders are illegal, based on guess work and surmises and conjectures and contrary to facts on record. 10. That the CIT (A), in view of the facts and circumstances erred on facts and in law in not considering/ rejecting the application made under rule 46A of the Income Tax Act, 1961, for additional evidences, without bringing any material on record and in very summary manner, when the Appellant has specifically raised that there is violation of principle of Natural Justice and he was also prevented by the sufficient and reasonable cause for not filing the details before Assessing officer.

3. Grounds No.1 to 3 are against the assessment order made under section 153A r.w.s. 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’). We find that the addition has been made by the AO based on the material seized during the search, therefore, the Hon’ble jurisdictional High Court’s order in CIT vs. Kabul Chawla order dated 28.08.2015 does not come to the rescue of the assessee and the challenge against validity of the addition u/s 153A has been rightly repelled by the authorities below. We do not find any merit in the said ground of the assessee.

4. Now, we are going to discuss grounds no.6 to 9 which are against the addition of Rs.48 lakhs on account of deemed dividend u/s 2(22)(e) of the Income Tax Act, 1961 (hereinafter ‘the Act’).

5.1 After centralization of the assessee’s case, notice u/s 153A was issued on 24.12.2008 and served upon the assessee on 24.12.2008 for the assessment year under consideration i.e. 2006-07. Pursuant to the said notice, the assessee filed its return on 31.03.2009 declaring ‘nil’ income after carrying forward losses of Rs. (-) 2,16,581/-. The original return in this case was filed on 21.11.2006 declaring the same income. Therefore, the AO issued notices u/s 143(2) and 142(1) along with questionnaire dated 24.09.2009.

5.2 The facts relating to the aforesaid addition of Rs.48 lakhs on account of deemed dividend are that the AO observed that under the Term of Reference No.10, Special Auditors were mandated to examine and comment upon the following :-

“It is found that the assessee is having a number of group companies, associates and affiliated and there are a number of transactions of loans, Advances, movement of money between the assessee company and its group companies, affiliates, associates running in to several crores. The Special Auditor is directed to examine and comment upon the nature of these transactions done through their account books. You are directed to give categorical findings with regard to applicability of section 2(22)(e) of the Income Tax Act in the hands of the concerns and the assessee company.”

The Special Auditor observed that B.L. Kashyap & Sons Ltd. being the same management company had paid Rs.48 lakhs to one Shri Girija Shanker ASOPA on behalf of the assessee company i.e. Rs.30 lakhs on 10.03.2006 and Rs.18 lakhs on 13.03.2006. The AO observed that the Special Auditor asked for specific evidence from the assessee in relation to the aforesaid sums but there was no clear response. The Special Auditor also reported that this advance had not been settled or refunded by Shri Girija Shanker till 31.03.2008 which made it evident that this advance / loan to the said person by M/s. B.L. Kashyap & Sons Ltd. on behalf of the assessee was of non- business nature. The Special Auditor further reported that from the comparison of share holding pattern of M/s. B.L. Kashyap & Sons Ltd. and the assessee, more than one third of the total voting power with respect to any matter relating to each of the two bodies corporate was exercised and controlled by same individual or body corporate. As regards attracting the provisions of section 2(22)(e) of the Act, firstly, the Special Auditor reported that M/s. B.L. Kashyap & Sons Ltd. was not a company in which public was substantially interest and company became public only on 17.03.2006 whereas the advances were given on 09.03.2006 and 11.03.2006; secondly, the person receiving loan was holding more than 20% shares/voting rights in the company giving loans; and thirdly, deemed dividend income was to be taxed to the extent the company giving the loan/advance possesses accumulated profit. The AO also observed that M/s. B.L. Kashyap & Sons Ltd. was having substantial accumulated profits. Thus, the Special Auditor opined that these advances of Rs.48 lakhs should be treated as deemed dividend with the purview of section 2(22)(e) of the Act. Accordingly, the AO required the assessee to file specific replies and explanations with necessary documentary evidences on the points raised by the Special Auditors in the Special Audit Report. The AO, after going through the submissions made by the assessee and the Special Audit Report, made the addition of Rs.48 lakhs on the following reasons :-

(i) That the shareholders i.e. Mr. Vinod Kashyap, Mr. Vineet Kashyap and Mr. Vikram Kahyap held the substantial voting power (i.e. 10%) and more than 20% shares in profit on the dates on which such advances were given and transferred to the assessee and in fact, on the dates of advance, the shareholding pattern of M/s. B.L. Kashyap & Sons Ltd. and the assessee was more than one third of the total voting power with respect to any matter relating to each of the two bodies corporate which was exercised and controlled by same individual or body corporate, which is evident from the chart incorporate by the Special Auditors in the audit report; (ii) That the company could be held to be public limited company only if it is recognized in any of stock exchange and not at the time of opening of public issue or from the date of allotment. The company became public only on 17.03.2006 when it was listed on Bombay Stock Exchange and the advances were given on 09.03.2006 and 11.03.2006; and (iii) The plea of the assessee that no funds had been actually passed any point of time between two companies as the payment was made directly to Shri Girija Shanker and not to the assessee; was not accepted as the provisions of section 2(22)(e) also covered the payments made on behalf of any person who had substantial interest in the company who had paid advances on its behalf.

In view of the above, the AO held that the provisions of section 2(22)(e) were applicable in this case and accordingly, Rs.48 lakhs was held to be deemed dividend income in the hands of the assessee and the same was added to the income of the assessee.

“8.1. The special audit revealed a credit balance of Rs 48 lakhs in the account of B L Kashyap & Sons Ltd appearing in the books of the appellant company. It was noted that B L Kashyap & Sons Ltd had paid Rs.30 lakhs and Rs.18 lakhs on 10-3-2006 and 13-3-2006 to one Girija Shankar on behalf of the appellant company. In the absence of the appellant company substantiating its claim that the payments were made in connection with a purchase order, the payments were held to be of non business nature. While the appellant claimed through a journal entry dated 31-3-2006 that interest was payable on Rs 48 lakhs, the seized paper revealed that B L Kashyap & Sons Ltd had advanced the sum at 0% interest.

8.2. The special auditors compared the share holding patterns of B L Kashyap & Sons Ltd and the appellant company and noted that the shareholders, Vineet Kashyap, Vinod Kashyap and Vikram Kashyap held more than 10% voting power and more than 20% share in profits in both the companies on the dates of the aforesaid transactions. It was also noted that B L Kashyap & Sons Ltd, which was not a company in which the public were substantially interested on the dates of making the payment, was holding sufficient free reserves on the transaction dates. This, since the three mandatory conditions stipulated in section 2(22)(e) were satisfied, the special auditors were of the opinion that the payment of Rs.48 lakhs was deemed dividend. The AO considered the report of the special auditors, sought the explanation of the appellant company, and after considering its reply, held Rs.48 lakhs as deemed dividend u/s 2(22)(e). 8.3. During the appellate proceedings, as per the written submission dated 21/1/2011, the AR contended that the appellant company was a 100% subsidiary of B L Kashyap & Sons Ltd; that B L Kashyap & Sons Ltd was the actual beneficial owner of all the shares of the appellant company; that Vineet Kashyap, Vinod Kashyap and Vikram Kashyap were merely holding the shares of the appellant company as nominees of B L Kashyap & Sons Ltd; that B L Kashyap & Sons Ltd became a public limited company on 8/312006 in pursuance to public issue which opened on 20/2/2006 and closed on 23/212006; that since it was listed on BSE on 17/312006, it became a company in which the public were substantially interested for FY 05-06; that payment had been made by B L Kashyap & Sons Ltd to Girija Shankar and not to the appellant company, which merely passed a journal entry in its books; and that inter corporate deposits do not attract section 2(22)(e). 8.4. While making the aforesaid submissions dated 21/112011, the AR enclosed several additional evidences including the declarations of Vineet Kashyap, Vinod Kashyap and Vikram Kashyap as nominees of B L Kashyap & Sons Ltd in the appellant company. However, these evidences were not accompanied by the application for admission u/r 46A. The AO, in his remand report dated 28/3/2011, objected to the admission of additional evidences on the grounds that the provisions of Rule 46A had not been met by the appellant; that sufficient opportunity had been provided at the assessment stage by him and the special auditor; that if these evidences existed at the time, it should have been produced; and that in the absence of sufficient cause, these could not be filed at the appellate stage. Without prejudice, the AO referred to the three mandatory conditions for invoking section 2(22)(e); and stated that under the Income Tax Act there was no concept of nominee shareholder; and that B L Kashyap & Sons Ltd was listed with BSE on 17/3/2006 which was after the date of the relevant transactions. III the rejoinder dated 26/4/2011, the AR contended that since the two companies 'did not have shares in each other', section 2(22)(e) was not attracted; and that beneficial shareholding as per section 2(32) was a necessary condition. The AR also filed a formal application u/r 46A, claiming that the AO was 'apparently satisfied' with the contentions made during the assessment proceedings and 'never asked for filing some more documents', and that this constituted 'reasonable cause' for admission of additional evidences.

8.5. Before examining the submissions of the AR, the admissibility of the additional evidences u/r 46A is considered. It is noted that while furnishing the 'evidences' along with the written submissions on 21/1/2011, the AR falsely claimed that the evidences' were 'furnished to the AO / SA'. It was only when the AO stated in his remand report of28/312011 that 'fresh' evidences had been brought by the appellant during the appellate proceedings, which was not permissible without complying with the requirements of Rule 46A, that the AR in the rejoinder dated 26/4/2011 admitted that additional evidences had indeed been filed. It was on this date (26/4/2011) that a formal application was made U/T 46A ill respect of the 'evidences' filed on 21/1/2011, contending that there was 'reasonable cause' for not filing the evidences at the time of assessment, viz, there was no occasion to furnish the documents since the AO was 'apparently satisfied' with their claims and 'he never asked for filing some more documents in support of this contention'. Clearly these arguments are not maintainable. The' assessment proceedings were long drawn since section u/s 142(2A) was also invoked by the AO, and the matter of deemed dividend came up before the special auditors also. This is documented in detail in para 13 of the special audit report. It is noted that the appellant chose to keep quiet even upon confrontation of the special audit report by the AO, whereas it was for them to substantiate their claims, and not wait for any prompting from the AO. The non co-operation or volitional silence during the assessment and special audit proceedings cannot be used to advantage by the recalcitrant taxpayer in making a case of, 'reasonable cause' for admission of additional evidence u/r 46A. Since adequate opportunity was afforded to the appellant by the AO, and also by the special auditors, to furnish evidences, in support of its claim about the non applicability of section 2(22)(e), and it was not prevented by sufficient cause from producing evidences before the AO, the appellant has failed to satisfy the conditions envisaged in Rule 46A that permit admission of additional evidences at the appellate stage. Moreover, even a cursory look at the 'evidences' suggests that, in the absence of any stamp/seal of the receiving office, these are yet again unauthenticated claims purported to have been made under the Companies Act. Therefore, after due consideration and absence of any 'reasonable cause', request for admission of additional evidences is denied u/s 46A.

8.6. On perusal of the special audit report, the impugned order, the written submissions and the rejoinder of the AR and the remand report of the AO and the provisions of the Income Tax Act, it is held that the case of the appellant falls within 'the ambit of section 2(22)( e). The 3 necessary conditions for invoking section 2(22) (e) are: • The company making the payment should not be one in which the public are substantially interested within the meaning of section 2(18). • The payment is made to its shareholder who beneficially owns 10% of voting power or to any concern in which such shareholder holds 20% voting power, • The company should possess accumulated profits at the time payment is made.

8.7. In the case at hand, it is an admitted position that at the time of making the payment of Rs.48 lakhs to the appellant company, B L Kashyap & Sons Ltd was not a company in which the public were substantially interested. The shareholding patterns of B L Kashyap & Sons Ltd and the appellant company, as extracted from the memorandum and articles of association by the special auditors in their report, show that Vineet Kashyap, Vinod Kashyap and Vikram Kashyap together had 70.73% voting rights in the former B L Kashyap &Sons Ltd) and 99.21 % voting rights in the latter i.e. the appellant. It is also evident from the report of the special auditors that B L Kashyap & Sons Ltd possessed accumulated profits at the time of making the payment. Thus, with the meeting of the 3 essential conditions, the application of section 2(22)(e) is inevitable. 8.8. The specific arguments of the AR are considered. The claims that B L Kashyap & Sons Ltd was a public limited company; that the appellant company was its 100% subsidiary; and that the shares were held by Vineet Kashyap, Vinod Kashyap and Vikram Kashyap as nominees of the beneficiary. B L Kashyap & Sons Ltd, are all incorrect assertions in so far as the matters stood on the dates of the payment which are under consideration, On 10.3.2006 and 13-3-2006, the dates when payments were made by B L Kashyap & Sons Ltd on behalf of the appellant company, B L Kashyap & Sons. Ltd was not a public limited company; and Vineet Kashyap, Vinod Kashyap and Vikram Kashyap held substantial voting power and share in profits in both the companies. The contention that Vineet Kashyap, Vinod Kashyap and Vikram Kashyap were nominees of B L Kashyap & Sons Ltd cannot be taken cognisance of as the concept of nominee shareholder is alien to the Income-tax Act. Moreover, the act of nominating these three shareholders of the appellant company as nominees of B L Kashyap & Sons Ltd appears more of an arrangement between the related patties set up as an afterthought to avoid taxability u/s 2(22)(e), than a genuine transaction with any commercial purpose. Yet another argument, that a mere journal entry in the books of the appellant company does not translate into actual transactions between the two companies, is also rejected since it is evident from the facts that payment was made by B L Kashyap & Sons Ltd on behalf of the appellant company, which situation stands covered by section 2(22)(e). Also, the journal entry made by the appellant is the record of acknowledgment of its debt to B L Kashyap & Sons Ltd. The claim that the sum represented inter-corporate deposit is also not borne out by the facts brought out in the special audit report. Therefore, all the arguments advanced by the AR fail. 8.9. In view of the discussion above, ground 16 of the appeal is dismissed.”

7.1 The major thrust of the argument of the ld. AR was that there was no incriminating material found from the premises of the assessee which could have triggered 153A proceedings for the relevant assessment year. However, we find that this argument is not correct, in fact, there has been two letters which have been seized and are placed on pages 120 & 121 of the Paper Book, which was the basis on which Rs.48 lakhs addition was made. The contents of the seized letters are as follows :-

“B L KASHYAP WE BUILD YOUR WORLD Date 11th March 2006 Soul Space Projects Limited, B-1/A-21, Mohan Cooperative Industrial Estate, Mathura Road, New Delhi-44 Sub : Short Term Inter Corporate Deposits Dear Sir, We hereby place a sum of Rs.18,00,000 vide Cheque No.004908 dated 13/03/2006 as Inter Corporate Deposit repayable on demand, bearing interest rate @ 0% per annum. You are requested to acknowledge and accept the same. Accepted For B.L. Kashyap & Sons Ltd. For Soul Space Projects Limited Sd/- sd/- (Authorised Signatory) (Authorised Signatory)” ………………………………………………………………………

“B L KASHYAP WE BUILD YOUR WORLD Date : 9th March 2006 Soul Space Projects Limited, B-1/A-21, Mohan Cooperative Industrial Estate, Mathura Road, New Delhi-44 Sub : Short Term Inter Corporate Deposits Dear Sir, We hereby place a sum of Rs.30,00,000 vide Cheque No.004907 dated 10/03/2006 as Inter Corporate Deposit repayable on demand, bearing interest rate @ 0% per annum. You are requested to acknowledge and accept the same. Accepted For B.L. Kashyap & Sons Ltd. For Soul Space Projects Limited Sd/- sd/- (Authorised Signatory) (Authorised Signatory)”

This receipt of Rs.48 lakhs has been seen in the balance sheet at page 54 of the Paper Book as unsecured loan from the holding company. However, during the reassessment proceedings u/s 153A of the Act, it came to light that this amount has been given by cross cheque (not account payee cheque) to Shri Girija Shanker, and the assessee says that in its own words in page 15 of AO order which is reproduced below :-

“the transactions appeared in the books only on account of journal entries………… Thus, since there is no payment by BLK to SSPL, therefore, there is no question of application of sec. 2(22)(e).”

It must be kept in mind that loan transaction could not have been shown as a mere journal entry as per the Act. Whether such an act could have attracted section 269SS r.w.s.271D of the Act or not is not the question before us.

7.2 Be that as it may be; let us look how the AO has treated this amount which has gone to Shri Girija Shanker, which fact could not have come to the notice of the department without seizure of the two letters during search which have been reproduced above. According to the assessee, the assessee company has not received this money but, as per the letter, the money has been given to the assessee company @ NIL interest, whereas the assessee has claimed to have incurred 11% interest on the said amount which has not come into its Kitty and as aforesaid, the amount has gone by cross cheque (not by account payee cheque) to Shri Girija Shanker. The short question before us is whether the said amount will attract section 2(22)(e) as done by the AO. We find force in the argument of the ld. AR that the payer of this amount that is the holding company, B.L. Kashyap & Sons Limited has been listed in the Bombay Stock Exchange on 17.03.2006 and as per section 2(18)(b) of the Act, since on the last day of the relevant previous year, the holding company B.L. Kashyap & Sons Ltd was listed in a recognized Stock Exchange in India, the holding company has to be treated as a public limited company, where public are substantially interested. Since the payment in question is emanating from a company, which is the holding company of the assessee, and the basic requirements of section 2(22)(e) are not fulfilled, thus section 2(22)(e) is not applicable in the instant case. Accordingly, we direct deletion of the said addition on this ground only. We order accordingly.