2025 (5) TMI 502 - AT - Income Tax

Taxation of income from the overseas sources in terms of the clauses (a) and (b) u/s 4(1) of the BMA - lifting of corporate veil of an overseas company incorporated in the British Virgin Islands (BVI) in which the assessee and family members were shareholders - appellants/assessee were willing to avoid payment of income-tax under Indian Income Tax Act provisions on the said properties thus route of incorporating an overseas company was implemented. Information collected from the competent authorities of BVI and Singapore Shri Pradeep Wig and his other family members were the beneficial owner of the bank accounts held in the name of CCL. Further it was also found that CCL was an investment holding company and was holding flats in London. CCL was also 100% owner of another company Eaton Estates Limited (EEL) incorporated in the UK jurisdiction which had also purchased a flat in London - HELD THAT - Any income included u/s 5(1) of the BMA shall be reduced from the value of undisclosed asset located outside India if the said assets have been acquired from the income which has been assessed or is assessable as the case may be to tax in India under the Income-tax Act 1961. Thus for the purpose of excluding such asset from the rigors of the BMA is that the assessee proves the source of acquisition the foreign asset from a tax paid money. Ld. Counsel has submitted that the said section does not refer at all to the tax paid money in India and if the said income was assessed overseas the benefit of exclusion would be very much available. These provisions when considered in the light of fact of properties being subject to ATED make us hold firmly that while examining the factor of beneficial interest or beneficiary for the purpose of the Act or BMA what should be material is how the country where the impugned property is located abroad treats the property or interests in such property for the purpose of estate and taxation. Thus where the law of UK levies Annual Tax on Enveloped Dwellings (ATED) as an annual charge on UK dwellings held by a Non-Natural Person (NNP) e.g. a company and admittedly such levy was paid for the impugned properties by CCL then there was no legal sanctity with the Indian authorities to hold that assessee had any beneficial interest or were beneficiary for the purposes of aforesaid provision under the Act or BMA. There is no presumption against the assessee which assessee is supposed to rebut by virtue of being a share holder in a company to allege that property held by a company is giving some advantage profit or privilege exclusively to the assessee but the revenue is supposed to establish the beneficial interest of an assessee or assessee being beneficiary by some sort of direct evidences of the advantage profit or privilege derived by the assessee from something often a contract or agreement. Rather it appears that failing to find any incriminating material from books or accounts the AO went to resorting to piercing the veil of company and draw inference of beneficial interest of assessee or assessee being beneficiary. To become an owner of a property a person must hold the legal title of the property in his name. He should be able to exercise the rights of the owner not on behalf of the owner but in his own right. The deeming ownership provision u/s 27 of the Act specifically refer to category of persons to whom deemed rental income can be attributed and by piercing corporate veil deeming ownership could not have been alleged. A deeming income provision needs strict application and by way of adverse presumption or principle of piercing of veil the property of company cannot be held to be lying with the share holders or directors so as to add income in their hands. If the registered owner does not exploit its property then it is its choice and not of the beneficial owner. There is substance also in the contention of appellants/assessee that the Revenue did not find any single amount having being invested in those companies by anyone from undisclosed sources much less by the appellants/assessee. Thus there was no purpose to impugn that the company was incorporated with an intention to avoid assessment of income of the properties overseas in the hands of the appellants/assessee. At the same time there is substance in the contention that the allegation of the Revenue that the company was incorporated only for the purpose of acquiring the properties in UK falls on the face of it as the company CCL was incorporated on 9th March 2005 whereas the first property was acquired in London by the said company on 14/02/2008 and both the properties had been sold on 04/08/2014 before even conceptualization of the BMA or the beneficial ownership provisions in the Income-tax Act w.e.f. AY 2016-17. Thus the Revenue has no case to make any such allegation as at the time of incorporation of the company or acquiring the properties the concept of beneficial holders under the Income-tax Act was absolutely absent rather not concealed of. 3 daughters of the assessee were majors and those shares were registered in their own names only with no beneficial interest of anyone else. No evidence has been brought on record by the AO that the daughters ever tried to exit from their respective interest in their shareholdings in favour of the assessee. It is also seen that Ms. Sonu Wig one of the daughters of the assessee was an NRI rather became British citizen holding a British passport since the year 2013 and was residing in the said property overseas off and on. That only shows natural course of events and nothing incriminating. Thus assessee/appellants were not the beneficial owner of any property or asset of CCL and therefore neither any income arising from the property of the said company as rent nor as capital gains and also the bank interest nor any other income of the company form any source was assessable in the hands of the assessee or any family member who had never had any beneficial ownership or holding any beneficial interest in the assets of the company. Thus the action of the both the authorities in considering the assessee Mr. Neeraj Wig and his spouse as the beneficial owners in equal proportions of the assets of the BVI company CCL and then assessing all income from those assets of the said company from any source is illegal ab initio and is quashed in toto. All the amounts assessed as income under the two respective Acts from any source or under any head allegedly germinating from any of the properties / bank accounts of and from the company are deleted in the hands of the assessee and his spouse as they are held to be not the beneficial owner of the assets of the company CCL at all. In conclusion this issue no. 1 is decided in favour of appellants/assessee and all the grounds of appeal of the assessee in this regard are allowed and all the grounds of appeal of the Department in this regard are dismissed. Addition made in the AY 2012-13 in the hands of Ms. Neera Wig by the AO claiming that the assessee failed to prove the refund of the advance received besides not able to identify the prospective buyer of the property - We find that the AO himself admitted in the last of para 9 of the assessment order that the said property was subsequently sold on 19/04/2012 which period falls during the AY 2013-14 for Rs 80, 00, 000/- period and therefore if at all the AO wanted to assess the said amount as income u/s 51 of the Act the same could have been done in the period relevant to the AY 2013-14 and where the assessee had herself declared the same and offered capital gains tax as has also been admitted by the AO in the assessment order for the AY 2013-14. Therefore in terms of the facts and the law as above no addition could have been made for any amount in the period relevant to the AY 2012-13 and thus sustaining these grounds addition is deleted. Addition by applying the provisions of the section 50C on the sale of Greenfield plot - Once the assessee made any objection to adoption of the said stamp duty rate as deemed sale consideration u/s 50C of the Act it was obligatory on AO to refer the same to the DVO under the said section as above and could not adopt the stamp duty value as consideration in contradiction to the legislated code. Hence in view of this we deem it fit to restore this issue to file of AO with a direction to refer the matter to DVO and decide in accordance with provisions of section 50C(2) of the Act. This issue is allowed for statistical purposes. Disallowance of the expenses - Revenue has challenged disallowance of 20% on estimated basis of some expenses duly recorded in the books of account of the two firms in CCL and EEL where the assessee Mr. Pradeep Wig was a partner alleging those to be personal expenses - CIT (DR) relied on the assessment order to support the disallowance. However we find that in the assessment proceedings u/s 153A of the Act no addition can be made on estimated basis particularly when 80% of the said amount has been accepted as allowable. Moreover if any disallowance was to be made it could be made in the hands of the firms being LLP. No amount can be assessed in the hands of the assessee as no benefit ever accrued to the assessee from the said amounts. Thus we uphold the deletion made by the CIT(A) by a reasoned order the findings in which we are inclined to follow. Thus relevant ground to this issue have no substance. Since we have decided the grounds which were to challenge the quantum of additions on merits as well as in law all other grounds have become academic and need no separate adjudication. In regard to the BMA appeals as we have already held that there was no reason at all to assess the income of the BVI company in the hands of the individual appellants/assessee in India the grounds of appeal taken by the assessee and the department on the same need no separate adjudication and the directions given in the income-tax appeals will apply in these appeals also. Thus the grounds of appeal taken by the appellants/assessee on the accessibility of the said incomes sourced from the BVI company are allowed by deleting all those additions and the appeals of the department on those issues are dismissed. Addition of USD 50, 000 in the hands of Mr Pradeep Wig in respect of the amount remitted by his late mother from the declared sources and inherited by the assessee the department did not make any new submissions even to contradict the findings of the CIT(A). The assessee relied on the order of the CIT(A) in this regard. Thus the detailed reasoned order on the issue of the CIT(A) is sustained.. Interest received by the overseas company in its bank accounts on the deposits with the banks the ld. Counsel submitted that appellants/assessee those amounts were not considered as income under the Income-tax Act but have been assessed in the assessment order under the BMA and that one of the companies and only the companies could be assessed for the said amounts in UK as per prevalent law. Deeming provisions do not apply in respect of such income as interest income. The sources of deposits in those bank accounts were duly disclosed and therefore para materia the interest income and deposits with the bank also should disclosed there in the hands of the company warranting no addition here in India. The assessee also relies on the submissions made in respect of assessment of rental income on deeming provisions requesting for deletion of the addition. Since we have held hereinabove that no amount of any income of the BVI company CCL can be assessed in the hands of the assessee in any manner the same has to be deleted and accordingly deleted. Assessment of alleged bank balance and interest there on with the Citi Bank Singapore bank account - On perusal of the information on record and admitted facts that the Citi Bank Singapore bank account of the assessee jointly with his family (in all 5 members of the family) were joint holders was not only inoperative but had been closed in October 2011 which is much before even the conceptualisation of the BMA in the year 2015. Infact it was closed even before the introduction of the Foreign Asset Schedule in the return of income to be filed w.e.f. AY 2012-13 though it was not mandatory. The balance therein was also very minimal which could not doubt any bonafide of the family and members in holding the said bank account overseas as such. Thus the said bank account was not existing at any time even at the time of commencement of the BMA and when the mandatory requirement to mention the Foreign Assets in the return of income w.e.f. AY 2015-16 was introduced. Thus there is no reason to presume that the assessee had not disclosed the same in his return of income so as to attract provisions of the BMA. Thus the addition made separately in the hands of each of the three appellants/assessee namely Mr Pradeep Wig Ms Neera Wig and Ms Sonu Wig is deleted. Appeals of the Revenue are dismissed.

Summary

The core legal issues considered in these appeals arising from search and seizure operations under the Income-tax Act, 1961 and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA) involve:

1. Whether the corporate veil of an overseas company incorporated in the British Virgin Islands (BVI), in which the assessee and family members were shareholders, could be lifted to assess the income of the company, including rental income and deemed income from properties held abroad, in the hands of the individual shareholders under the Income-tax Act and BMA.

2. The applicability and interpretation of the concepts of "beneficial owner" and "beneficiary" under section 139(1) of the Income-tax Act and the BMA in relation to foreign assets held through overseas companies.

3. The relevance of the Indo-UK Double Taxation Avoidance Agreement (DTAA) in determining the taxability of income from immovable property situated in the UK.

4. The validity of additions made on account of alleged undisclosed income from foreign bank accounts jointly held by the assessee and family members.

5. Specific issues relating to the treatment of advance received and forfeited on sale of a property, and the application of sections 50C and 51 of the Income-tax Act in relation to capital gains on property transactions.

6. The correctness of disallowance of expenses on estimated basis in the hands of the assessee where such expenses pertain to partnerships or firms.

Issue-wise Detailed Analysis

1. Lifting the Corporate Veil to Assess Income of Overseas Company in Hands of Shareholders

Legal Framework and Precedents: The principle of lifting the corporate veil is a well-established exception to the separate legal entity doctrine enshrined in company law. The Supreme Court in McDowell & Co. Ltd. vs Commercial Tax Officer [1985] held that tax planning is legitimate only within the framework of law and that colourable devices to evade tax can be disregarded by lifting the corporate veil. The Gujarat High Court in Ajay Surendra Patel vs Dy. CIT (2017) elaborated that corporate veil can be pierced where incorporation of a company is a facade to defraud revenue or avoid legal obligations, or where the company acts as an agent or nominee of shareholders.

Court's Reasoning and Findings: The Assessing Officer (AO) relied on seized material including incorporation invoices, calendar events from the assessee's mobile phone evidencing involvement in purchase, sale, renovation, leasing, and management of properties held by the overseas companies Carmichael Capital Limited (CCL) and Eaton Estates Limited (EEL). The AO found that the companies were incorporated primarily to acquire UK properties to avoid tax liability in India. The AO concluded that the assessee and family members were beneficial owners of the properties and lifted the corporate veil to assess income in their hands.

The CIT(A) upheld the AO's findings, holding that the arrangement lacked commercial substance and was a tax avoidance scheme. The Tribunal, however, after detailed analysis, rejected the AO's and CIT(A)'s approach to pierce the corporate veil. It noted that the entire share capital of CCL was invested from declared, assessed, and tax-paid funds remitted under the Liberalized Remittance Scheme (LRS). The properties were acquired by the company from its own capital and bank loans, not directly by the shareholders.

The Tribunal emphasized that the shareholders' rights are limited to their shares and dividends declared by the company. Ownership of shares is distinct from ownership of company assets. The shareholders do not have any direct right over the assets or income of the company unless dividends or distributions are made. The Tribunal distinguished "Ultimate Beneficial Owner" (UBO) of the company from beneficial ownership of the company's assets, noting that the former refers to shareholders, but this does not translate to beneficial ownership of assets for tax purposes.

The Tribunal relied on the principle that the corporate veil can only be lifted where there is clear evidence of fraud, tax evasion, or sham transactions, none of which were established by the AO. The calendar events relied upon were found to be innocuous and did not demonstrate financial transactions or control warranting lifting the veil. The Tribunal also referred to the payment of Annual Tax on Enveloped Dwellings (ATED) in the UK by the companies, which confirmed that the holding of properties through companies was legal and tax compliant under UK law.

Application of Law to Facts: The Tribunal found that the incorporation of CCL predated the acquisition of properties by several years, and the properties were sold before the introduction of beneficial ownership provisions in the Income-tax Act and BMA. The shareholding pattern was transparent, with shares held by the assessee and family members in their own names with no evidence of concealment or benami arrangements. The source of funds was declared and accepted by the revenue. Therefore, the income of the company could not be assessed in the hands of the shareholders.

Treatment of Competing Arguments: The revenue's argument that the company was a facade to evade tax was rejected due to lack of evidence of undisclosed income or tainted money. The assessee's contention that the company was a separate legal entity and the shareholders had no beneficial interest in company assets was accepted. The Tribunal also distinguished the concept of beneficial ownership under the Income-tax Act and BMA from the concept of UBO used for regulatory or compliance purposes.

Conclusion: The Tribunal held that the corporate veil could not be lifted in the absence of evidence of tax evasion or fraud and that the income of CCL and EEL was not assessable in the hands of the individual shareholders. The income from the properties held by the companies was rightly assessed in the hands of the companies.

2. Interpretation of "Beneficial Owner" and "Beneficiary" under Section 139(1) and BMA

Legal Framework: The Finance Act, 2015 introduced explanations 4 and 5 to section 139(1) defining "beneficial owner" as an individual who has provided consideration for an asset for immediate or future benefit of self or others, and "beneficiary" as an individual who derives benefit from an asset for which consideration was provided by another person. The BMA defines undisclosed foreign income and assets in terms of beneficial ownership and beneficiary status, importing definitions from the Income-tax Act.

Court's Interpretation: The Tribunal held that the assessee, having provided the consideration for shares in CCL from declared funds, was the beneficial owner of the shares but not of the company's assets. The assessee did not receive any dividends or other income from the company and thus could not be considered a beneficiary of the company's assets. The distinction between ownership of shares and ownership of company assets was emphasized.

Application to Facts: Since the assessee was the registered shareholder and had invested declared funds, he was beneficial owner of shares but not of company assets. The properties and bank accounts belonged to the company, and the assessee's rights were limited to dividends or distributions, which were not received.

Conclusion: The Tribunal concluded that the income and assets of the company could not be attributed to the shareholders as beneficial owners or beneficiaries under the Income-tax Act or BMA.

3. Applicability of Indo-UK DTAA

Legal Framework: Article 6 of the Indo-UK DTAA provides that income from immovable property may be taxed in the country where the property is situated. Article 14 allows capital gains to be taxed according to domestic law of contracting states. Section 90(3) of the Income-tax Act mandates that terms not defined in the Act or DTAA shall have meaning as per government notifications.

Court's Reasoning: The Tribunal noted that the DTAA provisions are property-based and do not specify the person in whose hands the income is taxable. The revenue's reliance on the word "may" in the DTAA to tax income in India was countered by the Tribunal's reference to a coordinate bench decision which held that the resident country's right to tax income is not taken away unless expressly stated.

Application: The income from UK properties held by the overseas companies was taxable in the UK as per DTAA and domestic laws. The properties were not owned by the assessee individually, and thus income could not be assessed in India in their hands.

Conclusion: The Tribunal held that the income from immovable property situated in the UK was taxable in the UK and not assessable in the hands of the Indian resident shareholders under the DTAA.

4. Assessment of Income from Foreign Bank Accounts

Facts and Findings: The bank account with Citi Bank Singapore was jointly held by five family members and was closed in October 2011, before the introduction of BMA and mandatory foreign asset disclosure requirements. The AO made additions of the entire amount in the hands of the assessee, which was challenged.

Court's Reasoning: The Tribunal restricted the addition to the assessee's share (one-fifth) of the bank balance and interest. Further, since the account was closed before the BMA came into force and the foreign asset schedule was introduced, there was no reason to presume non-disclosure. The minimal balance and closure of the account supported the assessee's bona fides.

Conclusion: The Tribunal deleted the additions made on account of the bank account balances and interest in excess of the assessee's share.

5. Treatment of Advance Received and Forfeited on Sale of Property and Application of Sections 50C and 51

Legal Framework: Section 51 of the Income-tax Act provides that any advance money received and retained in respect of negotiations for transfer of capital asset is to be deducted from the cost of acquisition in the year of actual sale. Section 50C mandates that if the sale consideration is less than stamp duty value, the latter is deemed to be the sale consideration, with an obligation on AO to refer the matter to the DVO for valuation if the assessee objects.

Court's Findings: The Tribunal held that the AO erred in making addition of advance received as income in the year of receipt instead of adjusting it against cost of acquisition in the year of actual sale. The addition was deleted for AY 2012-13. Regarding the application of section 50C, the Tribunal held that the AO was obliged to refer the valuation dispute to the DVO upon objection by the assessee and could not unilaterally adopt the stamp duty value. The matter was restored to the AO with directions to refer to the DVO.

6. Disallowance of Estimated Expenses in Hands of Assessee

Facts and Findings: The AO disallowed 20% of certain expenses claimed by the assessee on estimated basis alleging personal nature. The Tribunal held that no addition can be made on estimated basis in assessment proceedings under section 153A, especially when 80% of expenses were accepted. Further, any disallowance should be made in the hands of the firms or LLPs and not the individual assessee where no benefit accrued to the individual.

Conclusion: The Tribunal upheld the deletion of disallowance of expenses in the hands of the assessee.

Significant Holdings and Core Principles Established

"Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges." (McDowell & Co. Ltd. v. Commercial Tax Officer)

"The shareholders of a company do not at all have any right in the income of the company but their right in the income of the company is only limited to the extent of the dividend or payouts given by the company as per the law. Ownership of shares in and ownership of the assets of the company are two different connotations and are not synonymous at all."

"The concept of lifting or piercing the corporate veil is applied sparingly and only where incorporation is a facade to defraud revenue or avoid legal obligations, or the company acts as an agent of shareholders."

"Income from immovable property situated in a foreign country may be taxed in that country and the DTAA provisions are property-based and do not confer personal taxability in the resident country unless expressly stated."

"The AO cannot make additions on estimated basis in assessment proceedings under section 153A without concrete evidence and any disallowance of expenses should be in the hands of the entity that incurred them."

Final determinations on issues:

• The corporate veil of the overseas company cannot be pierced to attribute income of the company to the shareholders in the absence of evidence of tax evasion or fraud.
• The assessee and family members were beneficial owners of shares but not beneficial owners or beneficiaries of the company's assets; thus, income of the company is not assessable in their hands.
• Income from UK properties is taxable in the UK under the Indo-UK DTAA and not in India in the hands of the shareholders.
• Additions made on account of foreign bank accounts jointly held were reduced to the assessee's share and deleted where accounts were closed before BMA applicability.
• Additions of advance money received on property sale were deleted for the year of receipt and directions issued for proper valuation under section 50C.
• Disallowance of expenses on estimated basis in the hands of the assessee was deleted.