IN THE ITAT DELHI BENCH ‘I & SMC’
Mahender Kumar Gupta (HUF)
Assistant Commissioner of Income-tax
IT APPEAL NO. 1827 (DELHI) OF 2012
[ASSESSMENT YEAR 2004-05]
OCTOBER 12, 2012
A.N. Pahuja, Accountant Member
This appeal filed on 19.04.2012 by the assessee against an order dated 25.01.2012 of the ld. CIT(A)-Meerut, raises following grounds :-
“1. That the order of learned Commissioner of Income Tax (Appeals) is bad in law as well as is against the facts and circumstances of the case.
2. That learned Commissioner of Income Tax (Appeals) erred in upholding the addition in the hands of assessee which is a HUF and admittedly not a registered shareholder.
3. That learned Commissioner of Income Tax (Appeals) erred in holding that the amount is received as loan and company was having requisite accumulated income without any material and against the facts on the record, as such transaction entered is not covered under the provisions of section 2(22)(e).
4. That without prejudice to above learned Commissioner of Income Tax (Appeals) failed to consider the plea that without recording any “satisfaction” and without finding any material against the assessee in the search, assessment u/s 153C addition itself is illegal.”
2. Facts, in brief, as per relevant orders are that a search was conducted in the premises of Sh. Mahender Gupta and group companies u/s 132 of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) on 27.10.2006 and concluded on 21.11.2006. During the course of search, certain pay slips relating to the assessee, depositing cash in their bank account were seized. Subsequently, in response to a notice dated 10.11.2008 issued u/s 153C of the Act, the assessee submitted his return declaring income of Rs. 1,12,240/- on 20.11.2008. To a query by the A.O during the course of assessment proceedings, the assessee explained that no books of accounts were maintained nor any cash flow statement ,income-expenditure account or statement of affairs was submitted nor the assessee explained the nature of entries in the bank account. The seized document at page 64 i.e pay-in-slip dated 4.2.2004 revealed that amount of Rs. 2,50,000/- related to some cheque for the profit on sale of shares and the principal amount. Since profit had already been declared while amount of Rs. 2,50,000/- was explained to have been received out of the income of M/s D.N. Kansal & Securities Pvt. Ltd., in which the assessee had 12 % share holding, the Assessing Officer[AO in short] brought to tax profit transferred to the assessee, in terms of provisions of sec.2(22)(e) of the Act.
3. On appeal, the ld. CIT(A) upheld the addition, holding as under :-
“I have carefully considered the facts of the case, AO’s order and the submission of the AR on other issues. I have also gone through the case laws referred to by the AR.
Issue of proper opportunity is decided in the order of date in the appeal of assessee of AY 2002-03 (Appeal No. 383/08-09) and accordingly no relief can be granted on this ground.
It is also argued that as there is no evidence or material during the search or even during assessment and, hence, no addition can be made. However, there was material belonging to assessee, hence, the ground is summarily rejected.
On merits the A.O has invoked provisions of section 2(22)(e) on Rs. 2.50 Lacs, the amount received from M/s D.N. Kansal Securities (P) Ltd. as transfer of income. Though the A.O has not recorded any finding but I hold from the nature of transaction that the amount received is in the nature of loan or advance. Though as per balance sheet, accumulated income of M/s D.N. Kansal Securities (P) Ltd. is less than Rs. 2.50 Lacs but as the said company has declared undisclosed income, hence, its accumulated income is bound to be more than Rs. 2.50 Lacs. Assessee has vehemently argued that provision of 2(22)(e) cannot be applied to him as he is not a registered shareholder or absolute owner. But this is not in dispute that assessee is the beneficial owner of 12% shareholding. Hence, said provisions are fully applicable on him and he cannot be escape the addition of Rs. 2.50 Lacs. Hence, addition of Rs. 2,50,000/- is upheld.”
4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). At the outset, the ld. AR contended that mere transfer of profit by a company could not be treated as loan within the meaning of provisions of sec. 2(22)(e) of the Act, when the assessee was not registered shareholder in the said company. In this connection, the ld. AR relied upon the decisions in CIT v. C. P. Sarathy Mudaliar  83 ITR 170 (SC); CIT v. P.V. John  181 ITR 1; CIT v. Hotel Hilltop,  313 ITR 116, Dy. CIT v. Atul Engineering Udhyog  133 ITD 1, Asstt. CIT Bhaumik Colour (P.) Ltd.  118 ITD 1 (Mum.) (SB), CIT v. Ankitech (P.) Ltd.  340 ITR 14 and argued that the assessee being not a registered shareholder of the company M/s D.N. Kansal & Securities Pvt. Ltd., amount could not be brought to tax by way of deemed dividend.
5. On the other hand, the ld.. DR while carrying us through explanation 3 to sec. 2(22)(e), inserted by the Finance Act, 1987 w.e.f. 1.4.1988 contended that the reliance by the ld. AR on the decisions rendered prior to this date is totally misplaced. While distinguishing the decisions relied upon by the ld. AR, the ld. DR supported the findings of the ld. CIT(A) and further relied upon the decision in CIT v. National Travel Services  202 Taxman 327; Mrs. Kiran Bansal v. Asstt. CIT  131 ITD 575; CIT v. Mukundray K. Shah  290 ITR 433, Rajesh P. Ved v. Asstt. CIT  1 ITR (Trib.) 275 (Mum.); and CIT v. P.K. Abubucker  259 ITR 507.
6. In his rejoinder, the ld. AR on behalf of the assessee argued that the AO himself accepted in the order that the amount of Rs. 2,50,000/- was not in the nature of loan or advance.
7. We have heard both the parties and gone through the facts of the case. Indisputably, the A.O brought to tax profit of Rs. 2,50,000/- received by the assessee HUF in terms of provisions of section 2(22)(e) of the Act, without recording his specific findings as to whether the conditions stipulated in the said section were fulfilled. The ld. CIT(A) while accepting that the AO did not record any findings regarding the nature of transaction, concluded that the amount was in the nature of loan or advance. Since the company M/s D.N. Kansal Securities (P) Ltd. reflected accumulated profit less than profit of Rs. 2,50,000/-, the ld. CIT(A) while observing that the assessee has declared undisclosed income, uphold the findings of A.O in bringing to tax the amount of Rs. 2,50,000/-. As is apparent from the aforesaid observations in the impugned order, the ld. CIT(A) dismissed the appeal without even analyzing the issues in the light of provisions of sec. 2(22)(e) of the Act, or recording his specific findings on the said issues. In order to bring within the ambit of provisions of sec. 2(22)(e) of the Act, the amount of loan or advance paid by a company should be made to any of the following three persons viz. :
(i) a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power; or
(ii) any concern in which, such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern); or
(iii) a shareholder, for his behalf, or for his individual benefit, to the extent to which the company in either case possesses accumulated profits.
7.1 Sec. 2. (32) defines a ‘Person who has a substantial interest in the company’, in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power. Explanation 3 to the provision of sec. 2(22)(e) of the Act lays down that for the purposes of sec. 2(22)(e)-
(a) “concern” means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company;
(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent. of the income of such concern;
7.2 Though both the sides relied upon a number of decisions, factual matrix in the context of provisions of sec. 2(22)(e) of the Act has not been explained. Even though the assessment order mentions date of receipt of profit on sale of shares as 4.2.2004 and the amount is claimed to have been received from the company M/s DN Kansal & Securities (P) Ltd., the AO or the ld. CIT(A) did not analyse the nature of transaction as to how it is loan or advance nor ascertained accumulated profits of the said company until the date of transaction. Though it is mentioned in the assessment order that the assessee has 12% shareholding in the aforesaid company, the ld. AR argued that the HUF is not the registered shareholder. However, complete details of shareholding in the said company have not been placed before us. The ld. CIT(A) did not consider the impact of relevant provisions of sec. 2(22)(e), amended by the Finance Act, 1987 w.e.f. 1.4 1988 including the explanation 3 referred to by the ld. DR, in the light of various judicial pronouncements nor attempted to ascertain as to whether HUF is the beneficial shareholder or registered shareholder. A mere glance at the impugned order reveals that the order passed by the ld. CIT(A) is cryptic and grossly violative of one of the facets of the rules of natural justice, namely, that every judicial/quasi-judicial body/authority must pass a reasoned order, which should reflect application of mind by the concerned authority to the issues/points raised before it. The application of mind to the material facts and the arguments should manifest itself in the order. Section 250(6) of the Act mandates that the order of the CIT(A) while disposing of the appeal shall be in writing and shall state the points for determination, the decision thereon and the reasons for the decision. The requirement of recording of reasons and communication thereof by the quasi-judicial authorities has been read as an integral part of the concept of fair procedure and is an important safeguard to ensure observance of the rule of law. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and minimizes arbitrariness in the decision-making process. Hon’ble jurisdictional High Court in their decision in Vodafone Essar Ltd. v. DRP  196 Taxman 423 held that when a quasi judicial authority deals with a lis, it is obligatory on its part to ascribe cogent and germane reasons as the same is the heart and soul of the matter and further, the same also facilitates appreciation when the order is called in question before the superior forum. We may point out that a ‘decision’ does not merely mean the ‘conclusion’. It embraces within its fold the reasons forming basis for the conclusion. [Mukhtiar Singh v. State of Punjab  1 SCC 760. As already observed, the impugned order suffers from lack of reasoning and is not a speaking order on any of the issues in relation to provisions of sec. 2(22)(e) of the Act nor the ld. AR placed before us complete facts relating to the actual nature of transaction or shareholding pattern in the aforesaid company and position of accumulated profits up to the date of transaction, especially when the said company declared undisclosed income from accommodation entries . In view of the foregoing, especially when the ld. CIT(A) have not passed a speaking order, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the aforesaid issues, afresh in accordance with law, in the light of various judicial pronouncements, including those referred to by both the sides before us, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the appeal, the ld. CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act. With these observations, ground nos. 2 & 3 in the appeal are disposed of.
8. Ground no. 1 & 4 in the appeal, being general in nature nor any specific submissions having been made before us on these grounds ,do not require any separate adjudication and are, therefore, dismissed.
9. No other plea or argument was made before us.
10. In the result, appeal is partly allowed but for statistical purposes.