Income Tax Appellate Tribunal - Mumbai
Jaikishan Dadlani vs Ito, Ward 1(5) on 30 May, 2005
Equivalent citations: [2005]4SOT138(MUM)
ORDER
Pramod Kumar, A.M. This is an appeal filed by the assessee and is directed against the order dated 2-5-2001 in the matter of assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), for the assessment year 1998-99.
2. The grievances raised by the assessee are as follows :
The learned CIT(A) erred in confirming the addition of Rs. 9,75,000 from Cyberspace Films Private Limited as unexplained.
The learned CIT(A) further travelled beyond his jurisdiction and treated the loan of Rs. 9,75,000 from Cyberspace Films Private Limited to be deemed dividend under section 2(22)(e) of the Income Tax Act, 1961 even when the same was treated as unexplained cash credit by the assessing officer and the same is confirmed by the CIT(A).
The learned CIT(A) erred in confirming loan of Mrs. Prity Dadlani for Rs. 1,20,000 as unexplained and further erred in directing the assessing officer to assess the same in current year under section 68.
The other grounds of appeal raised in the memorandum of appeal were not pressed before us.
3. To adjudicate on the controversy requiring our adjudication in this appeal, only a minimal reference to some undisputed facts is required. In the relevant previous year, the assessee received a sum of Rs. 9,75,000 from Cyberspace Films Private Limited and Rs. 1,20,000 from his mother Mrs. Prity Dadlani. There is no dispute that these amounts are received by the account payee cheques, there is no dispute these lenders actually exist, but yet the assessing officer added back these loans as assessee's unexplained cash credits. In his brief order on this issue, he only referred to the deficiencies in balance confirmations issued by these parties. Aggrieved assessee carried the matter in appeal before the CIT(A) who not only confirmed, but also fortified, the additions made by the assessing officer. The CIT(A) noted that the assessee and his mother Mrs. Prity Dadlani are shareholders and directors of Cyberspace Films Private Limited, and requisitioned the details of source of source i.e., as to from where did this Cyberspace Films Private Limited got the funds. Not satisfied with the assessee's explanations about the sources of funds of the shareholders who invested money in Cyberspace Filing Private Limited, the CIT(A) questioned as to "why a person should invest such a huge amount in an unknown private limited company where mother and son are the main shareholders" and as to "why a company should advance a loan to an individual shareholder without any interest". According to the CIT(A), these questions remained unanswered. He, therefore, confirmed the addition of Rs. 9,75,000, i.e., sum received from Cyber, Films Private Limited. As for loan from Mrs. Dadlani, mother of, it was observed that on one hand the assessee is claiming on under section 80DDB in respect of this dependent person, and she is also director in the company, and, on the other hand, he claims to have received loan from him. It was also noted that no interest is paid to Mrs. Dadlani. With these observations, the unexplained cash credit in respect of Rs. 1,20,000 received from Mrs. Dadlani was also confirmed. The CIT(A) went on to add that so far as receipt of Rs. 9,75,000 from Cyberspace Films Private Limited is concerned, it is also taxable as a deemed dividend under section 2(22)(e) of the Act. The assessee's plea that, in any event, Cyberspace Films Private Limited did not have any distributable profits and the reserves were capital in nature did not impress the CIT(A) either. He was of the view that the expression 'profit' as an advantage or benefit and, therefore, irrespective of the fact that such profit constitute of share forfeiture account which cannot be distributed to shareholders as dividend, any loan to the shareholders to the extent of accumulated profits is taxable as a deemed dividend under section 2(22)(e) of the Act. Aggrieved by the order of the CIT(A), the assessee is in appeal before us.
4. We have heard the learned Departmental Representative but none appeared for the assessee. We have also perused material on record and duly considered factual matrix of the case as also the applicable legal position.
5. As far as addition in respect of the receipt of Rs. 9,75,000 from Cyberspace Films Private Limited is concerned, there are two aspects of the matter - first, from the point of view of addition under section 68 of the Act, and, second, from the point of view of addition of deemed dividend under section 2(22)(e) of the Act. The addition under section 68 has been confirmed on the ground that the source of source is not properly explained. That cannot meet our approval. The assessee's explanation that the money has come from Cyberspace Films Private Ltd. has not been rejected. It is also not in dispute that Cyberspace Films had this money is also not in dispute what is doubted is the rationale of investments by persons who invested in the share capital of Cyberspace Films Private Limited and that those persons were mere name lenders. It is difficult to understand as to how is this relevant for examining explanation of a credit in the case of this assessee. The law is very well settled that while examining applicability of section 68, source of source cannot be investigated, but then this is precisely what the CIT(A) ended up doing. The factum of borrowing can also not be in dispute as the assessee has borrowed the money by way of an account payee cheque. The identity can not be said to be in doubt either. The means of the lender have been proved inasmuch as he was clearly in possession of this fund received from the shareholders. The CIT(A) was, therefore, clearly in error in confirming the addition under section 68 on account of money received from Cyberspace Films Private Limited. The next issue is applicability of section 2(22)(e) of the Act. There is no, and there cannot be any, dispute about the position that the share capital forfeiture receipts are in the nature of capital receipts. The CIT(A)'s case is that these receipts, though capital receipts, are in the nature of profit, and should form part of the accumulated profits for the purposes of section 2(22)(e) of the Act, but then a Co-ordinate Bench of this Tribunal, in the case of Assistant Commissioner v. Gautam Sarabhai Trust No. 23 (2002) 81 ITD 677 (Ahd) does not approve this line of reasoning. The view of the Tribunal, in this case, is that capital receipt, other than those chargeable to tax under section 45, do not form part of the accumulated profits. In any event, the purpose of section 2(22)(e) is to tax the receipts from the company which are out of the accumulated profits available for distribution of dividends. The share forfeiture amount is not available for distribution of dividend, and, therefore, a borrowing from the company, when such a company has no amount available for distribution of dividend, cannot be treated as deemed dividend either. The addition of Rs. 9,75,000 fails on this test as well. Coming to the addition of Rs. 1,20,000, we have noticed that not only the source of this amount is free from doubt, even the source of source is clearly established. As evident from the paper book filed before us, the source of money was withdrawal from the saving bank account and maturity of fixed deposit. The copies of bank accounts and copies of accounts have also been filed before, and perused by us. The income-tax return and the certification regarding her earnings is also placed in paper book before us. The identity of lender and the means of lender are, in our humble understanding, beyond any doubt. The factum is not in dispute either. In these circumstances, CIT(A) was also in error in confirming the addition of Rs. 1,20,000 under section 68 in respect of money received from Mrs. Prity Dadlani. We cannot approve this action either.
6. For the reasons set out above, we deem it fit and proper to direct the assessing officer to delete the impugned additions of Rs. 9,75,000 and Rs. 1,20,000. The assessee gets the relief accordingly.
7. In the result, the appeal is allowed in the terms indicated above.