The ACIT, Circle-4(1), Visakhapatnam v. Sri Y V Rajasekhara Babu, Visakhapatnam

ITA 281/VIZ/2010 | 2004-2005
Pronouncement Date: 06-09-2011 | Result: Allowed

Appeal Details

RSA Number 28125314 RSA 2010
Assessee PAN AANPY1451A
Bench Visakhapatnam
Appeal Number ITA 281/VIZ/2010
Duration Of Justice 1 year(s) 3 month(s) 29 day(s)
Appellant The ACIT, Circle-4(1), Visakhapatnam
Respondent Sri Y V Rajasekhara Babu, Visakhapatnam
Appeal Type Income Tax Appeal
Pronouncement Date 06-09-2011
Appeal Filed By Department
Order Result Allowed
Bench Allotted DB
Tribunal Order Date 06-09-2011
Date Of Final Hearing 13-04-2011
Next Hearing Date 13-04-2011
Assessment Year 2004-2005
Appeal Filed On 07-05-2010
Judgment Text
ITA NO.281 & 282/V/2010 Y.V. RAJASEKHARA BABU & T. NAGA PRASAD VSKP PAGE 1 OF 12 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SHRI BR BASKARAN ACCOUNTANT MEMBER ITA NO.281/VIZAG/2010 ASSESSMENT YEAR: 2004-05 ACIT CIRCLE-4(1) VISAKHAPATNAM VS. Y.V. RAJASEKHARA BABU VISAKHAPATNAM (APPELLANT) (RESPONDENT) PAN NO.AANPY 1451A ITA NO.282/VIZAG/2010 ASSESSMENT YEAR: 2004-05 ACIT CIRCLE-4(1) VISAKHAPATNAM VS. T. NAGA PRASAD VISAKHAPATAM (APPELLANT) (RESPONDENT) PAN NO.ABX PT 9042B APPELLANT BY: SHRI TH.L. PETER CIT(DR) RESPONDENT BY: SHRI K.J.D. SRINIVAS CA DATE OF HEARING: 27.07.2011 DATE OF PRONOUNCEMENT: 06.09.2011 ORDER PER SHRI B. R. BASKARAN ACCOUNTANT MEMBER: THESE TWO APPEALS FILED AT THE INSTANCE OF THE RE VENUE ARE DIRECTED AGAINST THE RESPECTIVE ORDERS PASSED BY LD CIT(A) VISAKHAPATNAM IN THE HANDS OF THE ASSESSEES HEREIN AND THEY RELATE TO TH E ASSESSMENT YEAR 2004-05. SINCE THE SOLITARY ISSUE URGED IN THESE T WO APPEALS IS IDENTICAL IN NATURE THEY WERE HEARD TOGETHER AND ARE BEING DISP OSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.281 & 282/V/2010 Y.V. RAJASEKHARA BABU & T. NAGA PRASAD VSKP PAGE 2 OF 12 2. THE REVENUE IS ASSAILING THE DECISION OF LD CIT(A) IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER AS DEEMED DI VIDEND U/S 2(22)(E) OF THE ACT IN THE HANDS OF BOTH THE ASSESSEES HEREIN. 3. THE FACTS RELATING TO THE ISSUE ARE STATED I N BRIEF. BOTH THE ASSESSEES ARE DIRECTORS IN A CLOSELY HELD COMPANY NAMED M/S V IKAS EDUCATIONAL INSTITUTIONS LTD (VEIL) AND EACH OF THEM HELD 25% SHA RES IN THAT COMPANY. THE ASSESSING OFFICER NOTICED FROM THE ASSESSMENT R ECORD OF THE VEIL FOR THE ASSESSMENT YEAR 2004-05 THAT THE SAID COMPANY H AS ADVANCED MONEY TO THE ASSESSEES HEREIN AS DETAILED BELOW:- SHRI Y.RAJASEKHAR BABU - ` 1 03 96 950/- (A) SHRIT.NAGA PRASAD - ` 1 01 83 381/- THE ASSESSING OFFICER ASSESSED THE ABOVE SAID AMOUN TS AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT IN THE RESPECTIVE HANDS OF THE ASSESSEES HEREIN. THE APPEALS FILED BY THESE ASSESSEES BEFORE LD CIT( A) WERE ALLOWED. HENCE THE REVENUE IS IN APPEALS BEFORE US CHALLENGI NG THE SAID DECISION OF LD CIT(A). 4. LD D.R SUBMITTED THAT THE LD CIT(A) HAS NOT PROPERLY APPRECIATED THE FACTS SURROUNDING THE ISSUE. THE IMPUGNED ASSESSEE S ARE DIRECTORS IN VEIL HOLDING MORE THAN 10% OF THE VOTING POWER AND THEY HAVE TAKEN LOANS FROM THE SAID COMPANY AND THE COMPANY IS ALSO HAVIN G ACCUMULATED PROFITS IN EXCESS OF THE AGGREGATE LOAN AMOUNTS GIVEN TO BO TH THE ASSESSEES. HENCE THE LOAN SO TAKEN BY THESE ASSESSEES ARE TO B E CONSIDERED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. 5. ON THE OTHER HAND THE LD A.R CONTENDED VEHE MENTLY THAT THE PROVISIONS OF SEC.2(22)(E) OF THE ACT ARE NOT ATTRA CTED TO THE TRANSACTIONS ENTERED BETWEEN THE ASSESSEES HEREIN AND THE COMPAN Y M/S VEIL. HIS CONTENTIONS ARE SUMMARIZED BELOW:- ITA NO.281 & 282/V/2010 Y.V. RAJASEKHARA BABU & T. NAGA PRASAD VSKP PAGE 3 OF 12 (A) THE COMPANY M/S VIKAS EDUCATIONAL INSTITUTION LTD IS HAVING MAXIMUM NUMBER OF SHARE HOLDERS AND HENCE THE COMPA NY IS NOT A CLOSELY HELD COMPANY IN TERMS OF SEC. 2(22)(E) OF T HE ACT. (B) THE ASSESSEES HEREIN HAVE INVESTED IN THIS COM PANY IN THE FORM OF SHARE CAPITAL/UNSECURED LOANS BY MOBILIZING FUND S IN THE FORM OF SUPPLY OF MATERIALS/UNSECURED LOANS. THE SAID INVE STMENTS HAVE BEEN MADE IN ORDER TO SAVE THE COMPANY FROM FINANCI AL CRISIS FULLY KNOWING THAT THE COMPANY WAS HAVING FINANCIAL PROBL EMS. SUBSEQUENTLY THE COMPANY OBTAINED CORPORATE LOAN FR OM A BANK AND THE SAID LOAN WAS UTILIZED TO REPAY THE LOANS OBTAI NED BY THE ASSESSEES FOR THE PURPOSE OF MAKING INVESTMENT IN T HE COMPANY. HENCE THE COMPANY IS ACTUALLY THE BENEFICIARY IN TH ESE TRANSACTIONS. (C) THE BANKER WHO GAVE THE LOAN HAS DIRECTLY DISB URSED THE AMOUNT TO THE CREDITORS OF THE ASSESSEES HEREIN. T HUS THE COMPANY HAS NOT DISBURSED ANY AMOUNT FROM ITS BANK ACCOUNT EITHER TO THE ASSESSEES HEREIN OR TO THEIR RESPECTIVE CREDITORS. SUBSEQUENTLY THE COMPANY PASSED BOOK ENTRIES/CONTRA ENTRIES IN ITS B OOKS OF ACCOUNT. THE SAID COMPANY DID NOT USE ANY OWN FUND FOR MAKIN G SUCH PAYMENTS I.E. IT HAS USED ONLY THE CORPORATE LOANS . RELIANCE WAS PLACED ON THE DECISION OF COCHIN BENCH OF ITAT IN T HE CASE OF ACIT VS. SMT. LAKSHMI KUTTY NARAYANAN (2006)(112 TTJ (CO CH) 396). (D) THE ASSESSEE HAS ACTUALLY INCURRED LOSSES AND CONSEQUENT TO THE SURVEY OPERATION CONDUCTED ON 7 TH MAY 2004 THE COMPANY DECLARED ADDITIONAL INCOME. HOWEVER THE RESERVES AS ON 31. 3.2004 HAVE GONE UP SINCE THE ADDITIONAL INCOME SO DECLARED DUR ING THE COURSE OF SURVEY AND SEARCH WERE BROUGHT INTO THE BOOKS B ECAUSE THE ASSESSEE HAS BROUGHT IN THE PROFITS ASSESSED AS PER THE DISCLOSURE MADE IN THE SURVEY AS ON 31.3.2004 THOUGH THE QUAN TIFICATION OF THE SURRENDERED INCOME TOOK PLACE AFTER THAT DATE. HENCE THE SAID ASSESSED INCOME SHOULD NOT BE CONSIDERED FOR THE PU RPOSES OF ASCERTAINING THE ACCUMULATED PROFITS FOR THE PURPOS ES OF SEC.2(22)(E) OF THE ACT. RELIANCE WAS PLACED ON THE DECISION OF ITAT DELHI IN THE CASE OF PRAMOD KUMAR DANG VS. JCIT (2006)(6 SOT 301 )(DELHI). (E) THE ASSESSEES HEREIN AND THE COMPANY VEIL HAVE CARRIED OUT SERIES OF FINANCIAL TRANSACTIONS OVER THE YEARS. HE NCE THE TRANSACTIONS BETWEEN THE ASSESSEES HEREIN AND THE C OMPANY SHOULD BE TREATED AS TRANSACTIONS CARRIED OUT IN THE ORDIN ARY COURSE OF BUSINESS. HENCE THE PROVISIONS OF SEC. 2(22)(E) SHA LL NOT APPLY TO SUCH TRANSACTIONS. RELIANCE WAS PLACED ON THE FOLL OWING CASE LAW: (A) NH SECURITIES LTD VS. D.C.I.T (2007)(11 SOT (MUM B) 302) ITA NO.281 & 282/V/2010 Y.V. RAJASEKHARA BABU & T. NAGA PRASAD VSKP PAGE 4 OF 12 (B) D.C.I.T VS. LAKRA BROTHERS (2007) (106 TTJ (CH D) 250) (F) ACCUMULATED PROFITS DO NOT INCLUDE CURRENT PRO FITS AND ALL LIABILITIES ARE TO BE DEDUCTED FROM PROFITS FOR ASC ERTAINING THE ACCUMULATED PROFITS. THE COMPANY MUST POSSESS ACCU MULATED PROFITS ON THE DATE OF GIVING LOAN. RELIANCE WAS PL ACED ON THE FOLLOWING CASE LAW: (A) CIT VS. DAMODARAN (1972)(85 ITR 590)(KER). (B) R.K.SONI VS. ITO (2006)(6 SOT (DEL) 29 2) (C) PRAMOD KUMAR DANG (2006)(6 SOT (DEL) 301) (D) CIT VS. JAMNADAS KHIMJI KOTHARI (1973)(92 ITR 105)(BOM) (E) CIT VS. BHAGWAT TEWARI (1976)(105 ITR 62)(CA L) (F) PRAMOD KUMAR DANG VS. J.C.I.T (6 SOT 301)(DEL) (G) THE PAY ORDERS ISSUED BY THE BANK TO THE CREDI TORS WERE ACTUALLY CLEARED IN THE FINANCIAL YEAR RELEVANT TO THE ASSES SMENT YEAR 2005- 06. SINCE NO PAYMENT WAS MADE DURING THE YEAR RELE VANT TO THE ASSESSMENT YEAR 2004-05 THERE IS NO QUESTION OF AN Y DEEMED DIVIDEND. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND CARE FULLY PERUSED THE RECORD. THE HON'BLE DELHI HIGH COURT HAS EXPLAINED THE PROV ISIONS OF SEC. 2(22)(E) IN THE CASE OF CIT VS. RAJKUMAR (318 ITR 462) IN TH E FOLLOWING LINES: SEC. 2 IN THIS ACT UNLESS THE CONTEXT OTHERWISE REQUIRES. (22) DIVIDEND INCLUDES . (E) ANY PAYMENT BY A COMPANY NOT BEIN G A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED OF ANY SUM WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MAD E AFTER THE 31ST DAY OF MAY 1987 BY WAY OF ADVANCE OR LOAN TO A SHARE HOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTIT LED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITH OU T A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS T HAN TEN PER CENT OF THE VOTING POWER OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREINAFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN) OR ANY ITA NO.281 & 282/V/2010 Y.V. RAJASEKHARA BABU & T. NAGA PRASAD VSKP PAGE 5 OF 12 PAYMENT BY ANY SUCH COMPANY ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSE S ACCUMULATED PROFITS. A BARE PERUSAL OF THE AFOREMENTIONED PROVISION WOU LD SHOW THAT A PAYMENT WOULD ACQUIRE THE ATTRIBUTES OF A DI VIDEND WITHIN THE MEANING OF THE SAID PROVISION IF THE FOL LOWING CONDITIONS ARE FULFILLED: (I) THE COMPANY MAKING THE PAYMENT IS ONE IN W HICH PUBLIC ARE NOT SUBSTANTIALLY-INTERESTED. (II) MONEY SHOULD BE PAID BY THE COMPANY TO A SHAREHOLDER HOLDING NOT LESS THAN TEN PER CENT (10% ) OF THE VOTING POWER OF THE SAID COMPANY. IT WOULD MAKE NO DIFFERENCE IF THE PAYMENT WAS OUT OF THE ASSETS OF THE COMPANY OR OTHERWISE. (III) THE MONEY SHOULD BE PAID EITHER BY WAY O F AN ADVANCE OR LOAN OR IT MAY BE ANY PAYMENT WHICH THE COMPANY MAY MAKE ON BEHALF OF OR FOR THE INDIVIDUA L BENEFIT OF ANY SHAREHOLDER OR ALSO TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WH ICH HE IS SUBSTANTIALLY INTERESTED. (IV) AND LASTLY THE LIMITING FACTOR BEING TH AT THESE PAYMENTS MUST BE TO THE EXTENT OF ACCUMULATED PROF ITS POSSESSED BY SUCH A COMPANY . 7. THE LEARNED A.R CONTENDED THAT THE IMPUGNED C OMPANY CANNOT BE CALLED TO BE A COMPANY IN WHICH PUBLIC ARE NOT SUBS TANTIALLY INTERESTED. HOWEVER WE NOTICE THAT THE TERM COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED HAS BEEN DEFINED U/S 2(18 ) OF THE ACT. THE COMPANY HEREIN MS VEIL DOES NOT FALL IN ANY OF THE CATEGORIES LISTED OUT IN THAT SECTION. HENCE THE IMPUGNED COMPANY WILL FALL IN THE CATEGORY OF NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIAL LY INTERESTED AND HENCE IT WOULD BE COVERED BY THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT TH E ASSESSEES HEREIN HAVE ITA NO.281 & 282/V/2010 Y.V. RAJASEKHARA BABU & T. NAGA PRASAD VSKP PAGE 6 OF 12 INVESTED A SUM OF RS.70.00 LAKHS EACH IN THE SHARE CAPITAL OF THE COMPANY AND ACCORDINGLY THEIR RESPECTIVE VOTING RIGHTS ARE MORE THAN 10% OF THE TOTAL VOTING POWER. HENCE THE TRANSACTIONS CARRIED OUT BETWEEN THE ASSESSEES HEREIN AND THE IMPUGNED COMPANY WOULD BE HIT BY THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT UNLESS SUCH TRANSACTIONS FALL IN ANY ONE OF THE EXCEPTIONS PROVIDED IN THE SAID SECTION. 8. THE LD A.R HAS CONTENDED THAT THE AMOUNT GIV EN TO THESE ASSESSEES SHOULD NOT BE CONSIDERED AS DEEMED DIVIDEND AT L EAST UP TO THE EXTENT OF THEIR RESPECTIVE SHARE CAPITAL FOR THE REASON T HAT THESE ASSESSEES HAVE CONTRIBUTED IN THE FORM OF SHARE CAPITAL IN ORDER T O STRENGTHEN THE CAPITAL POSITION OF THE COMPANY WHICH HAD ENABLED IT TO OB TAIN LOAN FROM BANKS. HOWEVER WE ARE UNABLE TO AGREE WITH THE SAID VIEW AS IT DOES NOT HAVE LEGAL SANCTION I.E. THE ACT DOES NOT PROVIDE FOR S ETTING OFF OF THE AMOUNT EQUIVALENT TO THE SHARE CAPITAL CONTRIBUTED BY ANY SUCH SHARE HOLDER FOR THE PURPOSE OF ASCERTAINING THE DEEMED DIVIDEND. UNDER THE COMPANIES ACT THERE IS CLEAR DISTINCTION BETWEEN SHARE CAPITAL AND LOAN FUNDS EACH HAVING SEPARATE FEATURES. 9. ALTERNATIVELY THE LEARNED AUTHORISED REPRES ENTATIVE HAS CONTENDED THAT THE TRANSACTIONS CARRIED OUT BETWEEN THE COMPA NY AND THE ASSESSEES HEREIN SHOULD BE TERMED AS THE TRANSACTIONS CARRIED OUT IN THE NORMAL COURSE OF BUSINESS OF THE COMPANY. IT IS NOW A WEL L SETTLED PROPOSITION THAT THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT SHA LL NOT APPLY ONLY IN RESPECT OF THE ADVANCES GIVEN IN THE ORDINARY COURS E OF BUSINESS OR IN RESPECT OF THE LOAN GIVEN BY THE COMPANY IF THE LE NDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY. IN THE INSTANT CASE IT WAS NEITHER SHOWN THAT THE AMOUNT GIVEN TO THESE ASSESS EES ARE IN THE NATURE ITA NO.281 & 282/V/2010 Y.V. RAJASEKHARA BABU & T. NAGA PRASAD VSKP PAGE 7 OF 12 OF ADVANCES GIVEN IN THE ORDINARY COURSE OF BUSINES S NOR LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPAN Y. 10. THE NEXT MAIN CONTENTION OF THE LD A.R WHI CH WAS ALSO ACCEPTED BY LD CIT(A) IS THAT THE BANKER HAS DISBURSED THE LOAN DIRECTLY TO THE CREDITORS OF THE ASSESSEES HEREIN AND HENCE IT CANNOT BE SAID THAT THE FUNDS OF THE COMPANY HAS BEEN UTILIZED FOR MAKING THE IMPUGNED P AYMENTS. IN OUR VIEW THIS CONTENTION IS AGAINST THE FACTS PREVAILI NG ON RECORD IF ONE LOOKS AT THE IMPUGNED TRANSACTIONS FROM THE ACCOUNTING AN GLE. THERE CANNOT BE ANY DISPUTE THAT THE IMPUGNED COMPANY HAS OBTAINED LOAN FROM BANK AND IT HAS ACCEPTED THE LIABILITY TO REPAY THE LOAN. I N THAT CASE THE FUNDS REPRESENTED BY THE SAID LOAN AMOUNT WOULD AUTOMAT ICALLY BECOME THE ASSET OF THE SAID COMPANY. NOW THE BANKER HAS DISB URSED THE LOAN DIRECTLY TO THE CREDITORS OF THE ASSESSEES HEREIN WHICH HAS RESULTED IN NOT FOLLOWING THE NORMAL PROCEDURE THAT IS USUALLY FOLLOWED FOR D ISBURSEMENT OF FUNDS REPRESENTED BY THE LOAN. THE METHODOLOGY NORMALLY ADOPTED IS TO DEPOSIT SAID LOAN FUNDS INITIALLY INTO THE BANK ACCOUNT OF THE COMPANY. THEN THE COMPANY WILL ISSUE CHEQUES TO THE ASSESSEES HEREIN WHICH WILL BE DEPOSITED IN THEIR RESPECTIVE BANK ACCOUNTS. THERE AFTER THEY WILL HAVE TO ISSUE CHEQUES TO THEIR RESPECTIVE CREDITORS FROM OU T OF THEIR RESPECTIVE BANK ACCOUNTS. THE NET EFFECT OF THESE TRANSACTIONS IS THAT THE FUNDS OBTAINED BY THE COMPANY THROUGH THE LOAN ACCOUNT WOULD REACH THE CREDITORS OF THE ASSESSEES HEREIN. HOWEVER IN THE INSTANT CASES T HE ABOVE SAID NET EFFECT HAS BEEN FOLLOWED STRAIGHT AWAY WITHOUT FOLLOWING T HE REGULAR METHODOLOGY DISCUSSED ABOVE I.E. THE BANK HAS ISSUED CHEQUES D IRECTLY TO THE CREDITORS OF THE ASSESSEES HEREIN. HOWEVER IN THE BOOKS OF THE IMPUGNED COMPANY CORRECT JOURNAL ENTRIES HAVE BEEN PASSED I.E. BY CREDITING THE BANK LOAN ACCOUNT AND DEBITING THESE ASSESSEES ACCOUNT WHIC H MEANS THAT THE COMPANY HAS ACCEPTED THE LOAN LIABILITY AND THE IMP UGNED PAYMENTS HAVE ITA NO.281 & 282/V/2010 Y.V. RAJASEKHARA BABU & T. NAGA PRASAD VSKP PAGE 8 OF 12 ALSO BEEN TREATED AS HAVING BEEN PAID TO THE ASSES SEES HEREIN. IN THE SIMILAR MANNER BOTH THE ASSESSEES HAVE ALSO PASSED CORRECT JOURNAL ENTRIES IN THEIR RESPECTIVE PERSONAL BOOKS I.E. THEY HAVE CREDITED THE COMPANYS ACCOUNT AND DEBITED THEIR RESPECTIVE CREDITORS WHI CH MEANS THAT THEY HAVE ACCEPTED THE FACT THAT THEY HAVE TAKEN FUNDS FROM T HE COMPANY AND UTILIZED THE SAME FOR MAKING REPAYMENT OF LOAN TAKE N BY THEM. THUS THE NET EFFECT OF ALL THESE TRANSACTIONS IS THAT THE AS SESSEES HEREIN HAVE BEEN GIVEN FUNDS BY THE COMPANY OUT OF THE CORPORATE LOA N OBTAINED BY IT AND THESE ASSESSEES HAVE UTILIZED THE SAME FOR REPAYING THEIR RESPECTIVE LIABILITIES. IN SO FAR AS SEC. 2(22)(E) IS CONCERN ED THERE IS NO NECESSITY THAT THE MONEY SHOULD GO TO THE SHAREHOLDERS FROM THE BA NK ACCOUNT OF THE COMPANY. IT WILL BE APPOSITE TO REFER TO THE FOLLO WING OBSERVATIONS MADE BY ITAT DELHI BENCH IN THE CASE OF PRAMOD KUMAR DAN G VS. JCIT (2006)(6 SOT 301): 10. ANOTHER PLEA ADVANCED ON BEHALF OF THE ASSESSE E WAS THAT THE IMPUGNED AMOUNTS HAVE BEEN ADVANCED OUT OF ITS SALE PROCEEDS OF GOODS WHICH WERE PURCHASED ON CRED IT. THE SAID STAND IS NOT JUSTIFIED HAVING REGARD TO THE IM PORT OF S. 2(22)(E). A BARE READING OF THE SECTION REVEALS THAT IT BRINGS WITHIN ITS FOLD ALL PAYMENTS MADE FROM WHATEVER SOURCE . THE ONLY CONDITION BEING THAT THE COMPANY SHOULD HAVE ADEQUATE ACCUMULATED PROFITS ON THE DATE OF SUCH PAYMENT. THE SAID PLEA OF THE APPELLA NT IS ACCORDINGLY REJECTED. 11. DURING THE COURSE OF ARGUMENTS THE LD A.R PLACED RELIANCE ON HOST OF DECISIONS. WE HAVE CAREFULLY CONSIDERED THEM AN D NOTICE THAT THEY HAVE ONLY EXPLAINED THE PROVISIONS OF SEC. 2(22)(E) AND FURTHER THEY HAVE BEEN RENDERED ON DIFFERENT SET OF FACTS. 12. NOW WE SHALL TURN TO THE FACTS OF INSTANT CASES. THE ASSESSEES HEREIN ARE DIRECTORS OF THE COMPANY M/S VEIL AND THE Y HOLD MORE THAN 10% OF VOTING POWER IN IT. THEY HAVE TAKEN ADVANCE/ LOAN FROM THE ITA NO.281 & 282/V/2010 Y.V. RAJASEKHARA BABU & T. NAGA PRASAD VSKP PAGE 9 OF 12 COMPANY I.E. THE AMOUNT DRAWN BY THEM WAS IN EXCES S OF THE LOAN CREDIT BALANCE AVAILABLE IN THEIR RESPECTIVE NAMES WHICH WE EXPLAIN IN THE SUCCEEDING PARAGRAPHS. 13. WE HAVE GONE THROUGH THE LEDGER ACCOUNT COP IES OF THESE ASSESSEES AS AVAILABLE IN THE BOOKS OF THE COMPANY M/S VEIL FO R THE ACCOUNTING YEAR 01.4.2003 TO 31.3.2004 I.E. FOR THE YEAR UNDER CO NSIDERATION. IN THE CASE OF SRI Y.V.RAJASEKHARA BABU THE LEDGER ACCOUNT SHO WS A OPENING CREDIT BALANCE OF ` 33 73 297.50 AS ON 01.4.2003. THERE WAS FURTHER CR EDIT TO THE TUNE OF ` 4 88 576/- DURING THE COURSE OF THE YEAR. THUS THE AGGREGATE OF BOTH THE CREDIT AMOUNTS WORKS OUT TO ` 38 61 873.50. DURING THE COURSE OF THE ACCOUNTING YEAR THE COMPANY HAS DEBITED A SUM OF ` 1 42 58 854/- TO HIS ACCOUNT WHICH HAS RESULTED INTO A NET DEBIT BA LANCE OF ` 1 03 96 980.50 IN THE LEDGER ACCOUNT OF SRI Y.V.RAJASEKHARA BABU A S ON 31.3.2004. THE ASSESSING OFFICER HAS ASSESSED THE NET DEBIT BALANC E CITED ABOVE AS DEEMED DIVIDEND IN HIS HANDS. 14. SIMILARLY IN THE CASE OF SRI T.NAGA PRASAD THE LEDGER ACCOUNT SHOWS A OPENING CREDIT BALANCE OF ` 46 52 296.80 AS ON 1.4.2003. DURING THE COURSE OF THE YEAR THERE WAS FURTHER CREDIT OF ` 10 64 135.00. THUS THE AGGREGATE OF BOTH THE CREDIT AMOUNTS WORKS OUT TO ` 57 16 431.80. DURING THE COURSE OF THE ACCOUNTING YEAR THE COMPANY HAS DEBITED A SUM OF ` 1 68 19 813/- WHICH HAS RESULTED INTO A NET DEBIT BALANCE OF ` 1 11 03 381.20 IN THE ACCOUNT OF SHRI T.NAGA PRASAD AS ON 31.3.2004. HOWEVER THE ANNUAL REPORT OF THE COMPANY SHOWS A D EBIT BALANCE OF ` 1 01 83 381.20 IN THE NAME OF SHRI T.NAGA PRASAD AS ON 31.3.2004 AND ACCORDINGLY THE SAID AMOUNT WAS ASSESSED AS THE DEE MED DIVIDEND IN HIS HANDS. ITA NO.281 & 282/V/2010 Y.V. RAJASEKHARA BABU & T. NAGA PRASAD VSKP PAGE 10 OF 12 15. THUS IN THE HANDS OF BOTH THE ASSESSEES THE REPAYMENT OF OUTSTANDING CREDIT BALANCES WAS NOT ASSESSED AS DEE MED DIVIDEND. IT IS ONLY THE FURTHER PAYMENTS MADE OVER AND ABOVE THE S AID CREDIT BALANCES WERE ASSESSED AS DEEMED DIVIDEND. MOST OF THE PAYM ENTS HAVE BEEN MADE IN AN EQUAL AMOUNT OF ` 9 90 000/- EACH WITH THE NARRATION BEING THE AMOUNT PAID TO CREDITOR FROM ANDHRA BANK VIDE D.D. NO.. DATED 31.3.2004 AS PER CONTRA. 16. UNDER SEC. 2(22)(E) OF THE ACT THE PAYMEN T MADE BY THE COMPANY ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHARE HOLDER IS ALSO ASSESSED AS DEEMED DIVIDEND. IN THE INSTANT CASES IT IS CLAIMED THAT THE PAYMENTS WERE MADE BY THE COMPANY DIRECTED TO THE C REDITORS OF THE ASSESSEES HEREIN. SUCH PAYMENTS FALL IN THE CATEGO RY OF PAYMENTS MADE BY THE COMPANY ON BEHALF OF AND FOR THE INDIVIDUAL BENEFIT OF THESE ASSESSEES SINCE THE SAID PAYMENTS HAVE CLEARED THE LIABILITIES OF THE ASSESSEES HEREIN. IN ANY CASE THE ASSESSEES HEREI N HAVE NOT SHOWN TO US THAT THE IMPUGNED EXCESS PAYMENTS FALL IN THE CATEG ORY OF EXCEPTIONS PROVIDED UNDER SECTION 2(22)(E) OF THE ACT WHICH W ERE DISCUSSED EARLIER. IN THESE CIRCUMSTANCES IN OUR VIEW THE PROVISIONS OF SEC. 2(22)(E) ARE CLEARLY ATTRACTED TO THE EXCESS AMOUNT DRAWN BY THESE TWO A SSESSEES FROM THE SAID COMPANY. IN OUR VIEW THE ENCASHMENT OF DEMA ND DRAFTS IN THE SUBSEQUENT YEAR WOULD ALSO NOT MAKE ANY DIFFERENCE. 17. HOWEVER AS PER THE PROVISIONS OF SEC. 2(22 )(E) OF THE ACT SUCH PAYMENTS CAN BE TREATED AS DEEMED DIVIDEND ONLY TO THE EXTENT TO WHICH THE COMPANY POSSESSES ACCUMULATED PROFITS. WE NOTI CE THAT THE ASSESSING OFFICER HAS MADE A REFERENCE TO THE ASSESSED INCOME IN THE HANDS OF BOTH THE ASSESSEES TO DETERMINE THE AMOUNT OF ACCUMULAT ED PROFITS. IT IS PERTINENT TO NOTE THAT THE HON'BLE SUPREME COURT IN THE CASES OF CIT VS. ITA NO.281 & 282/V/2010 Y.V. RAJASEKHARA BABU & T. NAGA PRASAD VSKP PAGE 11 OF 12 URMILA RAMESH (230 ITR 422) AND BADIANI VS. CIT (10 5 ITR 642) HAS HELD THAT THE PROFITS MENTIONED IN SEC. 2(22)(E) IS TH E ACTUAL PROFITS CALCULATED ON COMMERCIAL PRINCIPLES. FURTHER IT IS WELL SETTL ED THAT THE ACCUMULATED PROFITS ARE REFERABLE TO THE PROFITS AVAILABLE ON T HE DATE OF PAYMENT. 18. THE ASSESSEE HAS ALSO RAISED DETAILED CONTENT IONS ABOUT THE ACCUMULATED PROFITS THAT IS AVAILABLE IN THE HAND S OF THE IMPUGNED COMPANY. ACCORDING TO THE ASSESSEE THE IMPUGNED CO MPANY DOES NOT POSSESS ACCUMULATED PROFITS ON THE DATE OF MAKING I MPUGNED PAYMENTS. THE LEARNED A.R HAS ALSO CONTENDED THAT THE ASSESSE D INCOME SURRENDERED DURING THE COURSE OF SEARCH AND SURVEY SHOULD NOT B E CONSIDERED FOR THE PURPOSE OF DETERMINING THE AMOUNT OF ACCUMULATED PR OFITS FOR THE REASON THAT THEY WERE QUANTIFIED SUBSEQUENT TO 31.3.2004. WE HAVE ALREADY NOTED THAT THE ASSESSING OFFICER HAS MADE A REFEREN CE TO THE ASSESSED PROFITS VIS--VIS ACCUMULATED PROFITS. THE CONTENT IONS OF THE LEARNED A.R ALSO NEED TO BE EXAMINED AT THE END OF THE ASSESSIN G OFFICER. HENCE IN OUR VIEW THE QUESTION OF DETERMINATION OF THE QUANTUM OF ACCUMULATED PROFITS THAT WERE AVAILABLE IN THE HANDS OF THE COMPANY ON THE DATE OF ENTERING INTO THE IMPUGNED TRANSACTIONS REQUIRES TO BE EXAMI NED AFRESH. 19. THE LEARNED CIT(A) HAS GIVEN RELIEF TO THE A SSESSEES HEREIN ON THE GROUND THAT THERE IS NO PAYMENT MADE BY THE COMPANY TO THE ASSESSEES HEREIN SINCE THE IMPUGNED PAYMENTS WERE MADE BY TH E BANK DIRECTLY TO THE CREDITORS. HOWEVER OUR DISCUSSIONS WOULD SHOW THAT THE SAID VIEW OF THE LEARNED CIT(A) IS NOT SUSTAINABLE. ACCORDINGLY WE SET ASIDE THE IMPUGNED ORDERS OF LEARNED CIT(A). SINCE THE ISSUE OF DETERMINATION OF ACCUMULATED PROFITS NEEDS TO BE REEXAMINED WE REST ORE THE SAID ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR THE PURPOSE O F DETERMINATION OF ACCUMULATED PROFITS IN ACCORDANCE WITH THE LAW. ACCORDINGLY THE ITA NO.281 & 282/V/2010 Y.V. RAJASEKHARA BABU & T. NAGA PRASAD VSKP PAGE 12 OF 12 ASSESSING OFFICER SHALL DECIDE THE QUANTUM OF DEEM ED DIVIDEND AS ON THE DATE OF MAKING IMPUGNED PAYMENTS TO THE ASSESSEES H EREIN. NEEDLESS TO MENTION THE ASSESSEES SHOULD BE GIVEN NECESSARY OP PORTUNITY OF BEING HEARD. THE ASSESSEES ARE ALSO DIRECTED TO EXTEND FULL CO-OPERATION TO THE ASSESSING OFFICER. 20. IN THE RESULT BOTH THE APPEALS OF THE REVENUE ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 6 TH SEPTEMBER 2011. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM DATE: 06-09-2011 COPY TO 1 THE ACIT CIRCLE-4(1) VISAKHAPATNAM 2 SHRI Y.V. RAJASEKHARA BABU 9-20-1/A ASILMETTA VISAKHAPATNAM 3 SHRI T. NAGA PRASAD D.NO.10 - 1 - 28 ASILMETTA VISAKHAPATNAM 4 5 THE CIT VISAKHAPATNAM THE CIT(A) VISAKHAPATNAM 6 THE DR ITAT VISAKHAPATNAM. 7 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM