Decided on February 16,1994



A. Kalyanasundharam, Accountant Member - (1.) THE appellant is an individual, is aggrieved by the order of the CIT (Appeals) in upholding the order of ACIT, Investigation Circle, Muzzafarnagar, has filed this appeal. THE grievance of the appellant is that, the loan received by him from M/s Jagmohan Chemicals Pvt. Ltd. (henceforth referred to as JCPL), should not have been treated as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961, has filed this appeal.
(2.) The appellant, had filed his return showing income from salary, professional income, interest income and agricultural income. The appellant had invested Rs. 1,25,77,800 on 10826 shares of Mercator Lines Ltd. (henceforth referred to as MLL). These shares were acquired between 30-12-1987 and 15-6-1988, from Ram Chandani & Family in lots of 975, 775, 1565, 1640, 3605 & 2265. The last two lots of 3605 and 2265 shares were purchased for a consideration of Rs. 44,16,125 and Rs. 27,74,625 respectively. The sources of acquisition of these two lots were explained by the appellant as from loan of Rs. 45 lakhs and Rs. 25 lakhs taken from JCPL on 6-6-1988 and 15-6-1988 respectively. JCPL had received two loans of Rs. 50 lakhs each on 6-6-1988 and 15-6-1988 respectively from MLL, out of which, JCPL had advanced Rs. 72 lakhs to the appellant and the balance was advanced to the appellant's wife. It was with the help of these loans that, the appellant managed to acquire the shares of MLL. The appellant became a director of MLL on 23-5-1988. The assessee had placed the entire lot of 10826 shares with MLL for transfer in his favour on 24-6-1988 and these shares were registered in favour of the appellant in the Register of Members of MLL on 8-7-1988. The appellant is neither a promoter nor a shareholder of JCPL. JCPL was formed in 1985 by Mr. Jagmohan Seth and Smt. Uma Rani. JCPL from its formation till Sept. 1987 was inactive and on 23-9-1987, Mr. Mohd. Sahid & Mr. Mohd. Sabail were made directors of JCPL. Mr. Mohd. Sahid was a practising Chartered Accountant, and was adviser to the appellant's business interests. The Balance Sheet of MLL showed accumulated profits of Rs. 67,37,712.
(3.) THE Assessing Officer (henceforth referred to as Assessing Officer) connecting all these facts, had concluded that, the loan given to JCPL having been passed over to the assessee on the same day it was received, JCPL was merely used as a front to cover the main aspect, which is loan by a company to its director and shareholder. He noted that, JCPL that was idle till Sept. 1987, became active only thereafter and its only transaction was receipt of these loans and advancing of loans of the like amount to the appellant and his wife. He also concluded that, the assessee had deliberately delayed the registration of the shares, though he could have effectively registered in his name, by virtue of he being a director of that company on 23-5-1988, although, share transfer forms were dated in some cases as March 1988. He held that, the deferment in the actual registration of the shares in favour of the assessee, would not change the fact, which was that, the assessee was the real owner of these shares and the deferment had the clear motive of tax avoidance. He accordingly held that, the appellant is a substantial shareholder of MLL, with all benefits of a shareholder attached to those shares and the loan so given by the company having accumulated profits, clearly attracted the provisions of Section 2(22)(e) of the Income-tax Act, 1961. He referred to the provisions of the Indian Companies Act, 1956 with special reference to the provisions relating to the director's shareholdings. Accordingly he treated the loan equal to the accumulated profits of Rs. 67,37,712 as deemed dividend under Section 2(22)(e) of the Income-tax Act.;

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