TMI Blog2007 (4) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of Rs. 5.99 crores as undisclosed income in the hands of the assessee. On August 24, 2000, the Department searched the premises of the assessee under section 132 of Income-tax Act, 1961 (for short, "the Act"). During the search apart from cash and jewellery a diary titled "ML-20" was seized. On November 16, 2000, during the search the statement of Kalpesh Shah, son of the assessee, was also recorded under section 132(4) of the said Act. The statement of the assessee was also recorded on that date. The diary indicated investment of Rs. 26.35 crores by the assessee in 9 per cent. RBI Relief Bonds during the accounting year ending March 31, 2000. By the assessment order dated November 29, 2002, the said amount of Rs. 5.99 crores was assessed as a deemed dividend under section 2(22)(e) of the said Act. The Assessing Officer took into consideration the income of the assessee for the block period, under Chapter XIV-B at Rs. 65.77 crores. This was for the block period April 1, 1990 to August 24, 2000 (for short, "block period"). The diary was seized from the premises of MKSEPL. It belonged to the assessee. The assessee was asked to explain the sources of investment of Rs. 26.35 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstantial interest in SCPL in which his shareholding in the financial year 1999-2000 was only 0.2 per cent.; that the assessee was one of the partners in MKF and MKI and that the said two firms did not have substantial interest in MKSEPL, SCPL and MKTPL; that reserves and surplus of MKSEPL cannot be taken as reserves and surplus of SCPL which was merged with the company with effect from May 18,1998; that MKI had advanced loan to SCPL which was repaid; that payment made by MKSEPL to MKF was through the current account and that the withdrawal made by the assessee from the two firms were debited to his capital account in the books of MKF and MKI and, therefore, the assessee contended that the said payments were not made to the said two firms for his individual benefit. These arguments were rejected by the Assessing Officer. It was held that the assessee had substantial interest in MKSEPL in which SCPL stood merged with effect from May 18, 1998; that there was no merit in the contention of the assessee that the two firms, in which he was a partner, were not the beneficial owners of the shares of MKSEPL and SCPL; that the only relevant criteria was whether payments made to the said two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PL have repaid those loans to MKF in which the assessee had substantial interest. According to the Commissioner of Income-tax (Appeals), the nature of transactions between MKF and MKSEPL consisted of a running account; it consisted of giving of loans and repayments thereof. According to the Commissioner of Income-tax (Appeals), none of the two firms had any substantial interest in MKSEPL, SCPL and MKTPL. According to the Commissioner of Income-tax (Appeals), all withdrawals made by the assessee from MKF and MKI including the impugned sum were debited to the assessee's capital account in the books of MKF and MKI. According to the Commissioner of Income-tax (Appeals), MKSEPL and SCPL had a regular account in MKF and MKI even before the purchase of the said Bonds and that the said two firms had advanced loans to MKSEPL and SCPL even in the earlier years as well as in the financial year 1999-2000 and, therefore, there was no motive in the debtor companies repaying their debts to MKF and MKI. According to the Commissioner of Income-tax (Appeals), merely because the repayments were made by MKSEPL and SCPL through MKF and MKI in January/February 2000 and merely because the said amounts we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholding in SCPL and the accumulated profits of SCPL were not liable to be taken into account; according to the Tribunal, in the aforestated circumstances, all payments should be taken to have originated from MKSEPL; the Tribunal further found that the accumulated reserves of MKSEPL was Rs. 55 crores, nearly ten times in excess of Rs. 5.99 crores taxed as deemed dividend. It is not in dispute that the assessee had more than 10 per cent. of the total voting power in MKSEPL. In the circumstances, the Tribunal took the view that MKSEPL made payment to the said two firms for the benefit of the assessee who thereafter bought the said Bonds. According to the Tribunal, MKSEPL was the only company which made the disbursement through MKF and MKI. According to the Tribunal, it is true that the assessee bought the said Bonds for Rs. 26.35 crores but the Assessing Officer had taxed only a fraction of Rs. 5.99 crores. However, according to the Tribunal, for the purposes of applicability of section 2(22)(e) of the said Act the payment has to originate from a company. After excluding known company sources, according to the Tribunal, the Assessing Officer was right in restricting the deemed di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt should not have interfered with the findings of fact recorded by the Tribunal; that there was no substantial question of law; that no perversity in the findings recorded by the Tribunal SO as to warrant interference under section 260A of the Act; that the Department had searched the premises, it had seized the diary "ML-20" which contained entries subsequently corroborated by cash flow chart which indicated that money had originated from MKSEPL to the two firms through which it had gone to the assessee and, therefore, the Department was right in assessing Rs. 5.99 crores as deemed dividend in the hands of the assessee under section 2(22)(e). Learned counsel urged that the five entries discovered in the search represented five transactions/payments for purchase of 9 per cent. RBI Relief Bonds. These, according to the learned counsel, were not repayment of loans, they were payments for purchase of the said bonds during the financial year 1999-2000: On behalf of the assessee (respondent), Mr. N.K. Poddar, learned senior counsel, submitted that the. impugned block assessment was wholly without jurisdiction having regard to the fact that the alleged deemed dividend of Rs. 5.99 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee to make investment in the 9 per cent. RBI Relief Bonds, therefore, according to the learned counsel, no incriminating material whatsoever was found in the course of the search which could enable the Assessing Officer to invoke section 2(22)(e) of the Act. According to the learned counsel, in the above circumstance, Chapter XIV-B dealing with block assessment was wrongly invoked by the Assessing Officer. On the nature of the transactions, learned counsel urged that during the financial year 1999-2000, the assessee had invested Rs. 26.35 crores in the purchase of bonds; that the said investment was made out of the disclosed sources through cheques and that the said investment was mentioned in the bank accounts and in the tax records of the assessee long before the search. Learned counsel urged that the immediate source of investment was the withdrawal of Rs. 26.35 crores from the partners' capital account with MKF and MKI. It was urged that the cash flow statement was not an admission on the part of the assessee and, therefore, it was not open to the Department to invoke Chapter XIV -B. Learned counsel submitted that the Tribunal had erred in holding that the fact that SCPL ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, he did not have any interest in SCPL on the dates when Rs. 2.79 crores were repaid by SCPL to MKI. Learned counsel contended that the accumulated profits of MKSEPL could not be treated in law as the accumulated profits of SCPL in spite of the order dated July 5, 2001, passed by the High Court approving the merger of SCPL with MKSEPL, even when such merger was made effective from May 18, 1998. Learned counsel submitted that the Tribunal had failed to appreciate that MKSEPL had not merged with SCPL but it is SCPL which had merged with MKSEPL. As a result of the said merger the accumulated profits of MKSEPL did not vest in SCPL. Learned counsel, therefore, submitted that the subsequent event of the court's order dated July 5, 2001, approving the merger of SCPL with MKSEPL cannot enable the Revenue to treat the accumulated profits of MKSEPL as part of the accumulated profits of SCPL. Learned counsel further submitted that MKF never held any shares in MKSEPL. Learned counsel urged that Rs. 2.04 crores were paid on January 11,2000 and Rs. 75lakhs were paid on January 28, 2000, by SCPL to MKI. Therefore, according to the learned counsel, if SCPL wanted to declare dividends i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he financial year 1999-2000. It is in this sense that the Tribunal was right in holding that the two firms were used as conduits by the assessee. It is not in dispute that the assessee had more than 10 per cent. of voting power in MKSEPL during the block period. It is not in dispute that the assessee had substantial interest of about 16 per cent. in MKF. It is not in dispute that the three companies were controlled companies. There is one more point which needs to be mentioned. The timing of the so-called repayments by the company to MKF and MKI and the immediate withdrawal of the funds by the assessee-cum-director-cum-shareholder-cum-partner and the timing of investment in purchase of Bonds were around the same time. Moreover, in MKSEPL the assessee is not only a shareholder having more than 10 per cent. of total voting power, he is also a director of that company. The said company is also a partner in MKF and MKI which explains why the amount of Rs. 5.99 crores was routed by splitting the said amount into two parts of Rs. 2.79 crores and Rs. 3.20 crores. In the present case, the most important aspect, which has not been considered by the High Court, was that withdrawal of money b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 98, we agree with the view expressed by the Assessing Officer that on merger the accounts of the two companies had merged and, therefore, the reserves had to be taken on the basis of the merged account. Moreover, the assessee had substantial interest in MKSEPL right from the inception. Lastly, in the present case, we are concerned with the block assessment which covers the period April 1, 1990, to August 24, 2000. Before concluding, we quote hereinbelow the relevant paragraph from the judgment of the Calcutta High Court in the case of Nandlal Kanoria v. CIT reported in [1980] 122 ITR 405 at page 415: "The only question which remains to be considered is that whether the said company made the payments of the said sum of Rs. 75,000 and Rs. 4,80,000 to Indira and Co. for the benefit of the assessee. So far as Rs. 75,000 is concerned it is found by the Tribunal, though not very clearly, that this amount was received by Indira and Co. from the said company and the same amount was given to the assessee by Indira and Co. The Tribunal inferred from the said facts that this was a payment by the said company meant for the benefit of the assessee. This conclusion involves two findings of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be considered to be a loan, though the facts show that he did borrow a loan. Such a contradiction of the real fact would result if Mr. Rajgopal's contention were to be accepted. Mr. Rajgopal further contended that in any event the highest amount to the assessee's debit on any day of the year should be the amount to be deemed to be dividend. This argument, again, ignores the principle laid down by us, that the position at the date of each payment must be considered. Moreover, there is another reason and that is that if it were to be so done, it would not enable the position of the balance of the 'accumulated profits' being taken into account, as more than one shareholder may have borrowed loans from the company in an account similar to that of the assessee. All these contentions of Mr. Rajgopal ignore the basic fact that section 2(6A)(e) uses the words 'any payment' which means, every payment, and section 2(6A)(e) requires the determination of two factors, viz., whether the payment is a loan and whether at the date when the payment is made there were 'accumulated profits' and that these two factors are to be correlated and the result must be ascertained at the date of each su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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