2023 (8) TMI 1198 - BOMBAY HIGH COURT

Deemed dividend - Apportionment of income between spouses governed by Portuguese Civil Code - Addition of income from transaction amongst companies under which assessees hold shares were deemed dividend in the hands of the assessees and their spouses in terms of Section 2(22)(e) of the Act - Assessee spouse, governed by the Portuguese Civil Code - determination of vesting of ownership rights and beneficial interest - Whether the impugned Judgment and Order of the Tribunal holding that under the provisions of the Portuguese Civil Code, spouse of the Appellant does not acquire beneficial interest in respect of the shares of subject Companies held by the Appellant and that such right of the spouses can only be ascertained on termination of the marriage by divorce, separation or death, is based on complete mis-appreciation and misconstruction of the provisions of Portuguese Civil Code which contemplates vesting of ownership rights and beneficial interest “IN PRESANTI” in Appellant’s wife, as a moiety holder with respect to the immovable and movable assets of Appellant which includes shares of the subject Company ? - HELD THAT:- In the present case, the none of six companies in which the three appellants Kamat Brothers are shareholders were registered under the Commercial Code, but were all registered under the Indian Companies Act, 1956. In these circumstances, we would be called upon to examine the interplay between the provisions of the Civil Code applicable to three sets of spouses, the provisions of the Companies Act, 1956, insofar as it concerns specific rights to a member of a company and its shareholders, and the provisions of Section 5A of the Income Tax Act, 1961 read with Section 2(22)(e) and Section 3(32) of the Income Tax Act, 1961.

In the present case, none of the companies in which the appellants are shareholders were created under the Portuguese Commercial Code but were all brought into existence under the Companies Act 1956, much after the liberation of Goa. Timblo Irmaos Ltd. [1993 (4) TMI 36 - BOMBAY HIGH COURT] in no way supports the argument of the appellants that the provisions of the Companies Act, 1956, insofar as it deals with the beneficial interest of a shareholder under Section 187C are inapplicable to Goan to whom the Portuguese Civil Code would apply.

Under no circumstances would the provisions of the Civil Code confer or create an ownership right in the shares, of a company or give the right of voting, in proportion to the share in the capital of the company, to the other spouse. The provisions of Clause (e) of Section 2(22) of the Income Tax Act, 1961, in the present case would, therefore, fully apply to the husband appellant, who would be the owner of the entire 33% share in each of the concerned companies with the entire voting power (which is more than 20% in such company, to the exclusion of the wife). Consequently, we reject the submission that the wife of the spouse, married under the provisions of Portuguese Civil Code, by operation of law, would be entitled to the beneficial ownership of the shares of the husband/spouse. For reasons stated above, we further reject the submission that the provisions of Section 187C of the Companies Act, 1956, are not applicable to persons governed by the Portuguese Civil Code. Consequently, we answer Substantial Questions of Law (A), (B) and (C) against the appellants.

Assumption of jurisdiction under Section 153A - HELD THAT:- As all that Abhisar Buildwell [2023 (4) TMI 1056 - SUPREME COURT] lays down is that in case incriminating material is unearthed during a search conducted u/s 132, the AO can assume jurisdiction to re-assess the total income taking into consideration the incriminating material, while if no incriminating material is unearthed, no additions can be made by the AO to the income. The judgment, in our view does not lay down what material, could be considered to be incriminating, which is the precise submission made in the present case, that gaining knowledge during the search, of the shareholding pattern of the assesses in various companies, could not constitute incriminating material for the purpose of assuming jurisdiction under Section 153A.

CIT (Appeals), in its order passed in the first round of litigation, had come to a categorical finding of fact on page 73 of its order that it was for the first time during the search in the seizure that intragroup transactions and the fact that individual assessees were the beneficiaries of such transactions came to the knowledge of the year and had no opportunity to examine these transactions during regular assessment since these were not made known prior to the search operations.

CIT (A) has also noted in this order that it was during the course of the search that the facts were collated and statements were recorded, thus coming to a factual finding that the shareholding pattern of the individual assessees of this company was for the first time discovered during the search. Thus, the CIT (A) had clearly arrived at a factual finding in the first order itself that the discovery of the shareholding pattern during the search found the incriminating material for assuming jurisdiction for issuance of notice u/s153A of the Act.

This factual finding was challenged before the ITAT in the first round of litigation, and such ground of challenge to a factual finding was specifically given up. The finding of fact as to what constituted the incriminating material to proceed had become final and could not be re-agitated in subsequent appeals filed by the appellants. In our opinion, therefore, the substantial question of law (D) could not have arisen at all in view of our findings above.