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TMI Blog2012 (5) TMI 367X X X X Extracts X X X X X X X X Extracts X X X X ..... contribution received from partner companies as deemed dividend U/S 2(22)(e) of the Act though both the issues are highly debatable and two opinions are possible. Thus the order passed U/S 263 on debatable Issues should be quashed. 3. The learned CIT erred in law and on facts in passing order u/s 263 of the Act by holding that the short term capital gain on mutual funds should be assessed as business income in the hands of the assessee, without appreciating the facts of the case that the assessee had not carried on any regular business activity of purchase and sale of mutual funds but had only invested its funds in the mutual funds and by further ignoring that the said amount was declared as investment in the balance sheet of the assessee. Thus this issue cannot be considered for the purpose of section 263 and the order passed U/S 263 should be cancelled. 4. The learned CIT erred in law and on facts in passing order U/S 263 of the Act by holding that the amount contributed by the two partner companies in the assessee firm as capital contribution is liable to tax as deemed dividend under section 2(22)(e) by ignoring that: a) the assessee received the money f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd securities. BY the said activity, it had earned total amount of Rs.4,18,84,950/- which was disclosed as short term capital gains. As per the details available on record, there were huge transactions in mutual funds and securities during the years. The purchase made during the year amounted to Rs.68.18 crores (approximately). All these transactions were through the portfolio Managers to whom Portfolio Management Fees have been paid. In the partnership deed dated 12.7.2005 it was indicated that the business of the firm comprised of investment in stock shares etc. However, this deed was revised on 31st August, 2005 wherein the prefix business was removed. As per the evidence on record Shri Pradeep Wig was the person who was having control over all the affairs of the assessee firm as well as the two companies who are partners in the assessee firm. 5. In the above facts, the ld CIT proposed to revise the assessment order passed u/s 143(3) of the Act for the assessment year 2006-07 mainly on two grounds, namely:- (i) whether the income shown by the assessee was required to be assessed under the head business or profession or under the head capital gains and (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (HUF) (Sic) and Smt. Neera Wig (Sic) (it should be the partner companies) were to have 50% and 20% share of profit respectively, they were not to share losses incurred by the firm. The Ld CIT, therefore, was of the opinion that the assessee firm was created with the sole object of transferring the accumulated profits/funds of the controlled companies through the artifice of the assessee firm. The Ld CIT quoted from the judgment of the Hon'ble Apex Court in the case of CIT v. Mukendrey Kumar Shah v. CIT 290 ITR 433 (SC) which is reproduced hereunder:- " ..... We find merit in this civil appeal. The companies having accumulated profits and the companies in which substantial voting power lies in the hands of the person other than the public (controlled companies) are required to distribute accumulated profits as dividends to the shareholders. In such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits. It is for this group to decide whether the profits should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. Therefore, the Legislature realized that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by the assessee from his capital account, in the books of MKI, during the financial year 1999-2000 led to a debit balance of Rs.8.18 crores as on March 3 ist 2,000. To this extent, the finding given by the Assessing Officer and by the Tribunal remains unchallenged.........." According to the Ld CIT, the present case was squarely covered by the above judgment of the Hon'ble Apex Court. The accumulated profits of the two companies as on 31.3.2006 were as under:- 1) M/s Kwality Ice Cream India Pvt. Ltd. Rs.30,91,28,877/- 2) M/s Kwality Processed Food and Equipments Pvt. Ltd/ Rs.11,48,49,332/- The Ld CIT, therefore, opined that the amounts contributed as partners capital by the two partners companies were to be treated as deemed dividend u/s 2(22)(e) of the Act to the extent of accumulated profits of such companies. 9. The Ld CIT, therefore, exercised his jurisdiction u/s 263 of the Act and in para 7.6. of the impugned order held as under:- "7.6. In view of the above facts, it is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions entered into by the assessee were only for earning income from investment and therefore the view of the Ld CIT that the transactions were required to be seen with reference to Board's Circular No.4/2007 dated 15.6.2007,which probably the Assessing Officer has failed to do, was incorrect. The Assessing Officer noted the facts submitted by the assessee and came to a conclusion that the income of the assessee was assessable under the head capital gains. If the CIT was of a different view than that taken by the Assessing Officer, merely on that basis he was not justified in invoking the provisions of section 263 of the Act. The issue as to whether income arising from investment from PMS should be assessed as business income or as capital gain is a debatable issue. There are decisions of the honourable tribunal that the same is required to be assessed as capital gain. If the AO has taken one of the possible view, the Ld. CIT could not assume jurisdiction u/s 263 of the Act. In support of the above proposition, the Ld AR for the assessee relied on the following case laws among others:- 1. CIT v. Max India Ltd. 295 ITR 282 (SC) 2. CIT v. Malabar Industries Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital contribution in the assessee firm and the Ld CIT(A) has alleged that deemed dividend was required to be taxed in the hands of the firm in view of the judgment in the case of Mr. Mukendray. The firm is not a substantial shareholder of the partner companies. Thus, the case of Mr. Mukendray did not apply to the facts of the present case. Similarly, by stating the facts in the case of Alagusundaram (supra), the Ld AR for the assessee argued that the above case is also distinguishable on facts. It was further submitted by the Ld AR for the assessee that for subsequent assessment year the contention of the assessee has been accepted by the Department. It was, therefore, submitted by him that the Ld CIT was not justified in assuming jurisdiction u/s 263 of the Act. 16. The Ld DR, on the other hand, submitted that the impugned assessment order was criptic. It is only a one page order accepting the income returned by the assessee. From the said order, it cannot be made out as to whether the issues raised by the Ld CIT were examined by the Assessing Officer or not. Referring to the assessee's paper book page 65, it was contended by him that though the details were called for, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rejoinder, the ld AR for the assessee submitted that it is not disputed that the ld CIT in exercise of his power u/s 263 of the Act can set aside the assessment order and direct the Assessing Officer to make further enquiries. However, in the present case, it is contended by the Ld AR for the assessee that, the Assessing Officer did all necessary enquiries required in the facts of the present case and no further enquiry was required to be done. According to the Ld AR for the assessee the details furnished in the assessee's paper book would show that the Assessing Officer has made requisite enquiry and come to a particular conclusion. If the Ld CIT had a different opinion, it was contended by him,on that basis jurisdiction u/s 263 of the Act could not be validly assumed by him. 20. As regards the applicability of section 2(22)(e) of the Act, it was contended by the Ld AR for the assessee that all relevant facts are on record. The Ld CIT had made all the requisite enquiries in this regard and therefore he should have given a clear cut direction on the same. 21. As regards the applicability of Instruction No.4 of 2007, it was submitted by the Ld AR for the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved on capital account and not as loan or advance. Even otherwise, amounts were received from the said company prior to the date when the firm became the owner of such shares. In such circumstances, it was contended by him that section 2(22)(e) would have no application. Reliance was placed on the following case laws:- 1. CIT v. Late CR Dass 157 DTR 201. 2. CIT v. HK Mittal 219 ITR 420 (Alld.). 3. CIT v. Smt. S. Parvathani Amal 219 ITR 661 (Kerala). 4. DCIT v. Oskar Investment Ltd. 98 ITD 399 (Bom.). 26. The Ld DR, on the other hand, emphasized that the merit of the issues involved, that is as to whether a particular amount was assessable as income or not, is not material for deciding the issue as to whether ld CIT was justified in assuming jurisdiction u/s 263 of the Act. In the present case, the books of accounts of the assessee were not examined by the Assessing Officer. The books of accounts were also not audited. The examination made by the Ld CIT was necessitated because no such examination was made by the Assessing Officer. The Ld CIT has applied his mind to the facts of the case whereas there is no indication that the Assessing Officer has done so. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal paper book page 13-14). As per assessee's paper book page 65, notice u/s 142(1) was issued on 8.9.2008 fixing hearing on 16.9.2008 but there is no order sheet entry to that effect. In the order sheet, there is entry dated 21.11.2008 onwards. iii) On 21.11.2008, the following details were asked for:- Present Mr. Kedar Mishra, AR. Furnished reply, which is put on record. Requested to bring remaining details along with the following details/documents:- If the accounts have been audited or not? provision of audit report. Licence of money lending. POA. Separate books for stock-in-trade and investment assets. If provisions of sec. 94(7)/94(7)/94(8) applicable or not. Dividend details. Expn. Regarding STCG (generated during Fourth quarter Jan- Mar). S.T.G.C. on tax exempted mutual fund. Latest partnership deed. Addition to Capital (source). Loans and advances given. Provisions. iv) First partnership deed as entered into on 12.7.2005. Para 2 of page 1 of the partnership deed reads as under:- "Whereas the first, second, third and the fourth parties aforesaid have decided to form a partnership for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l as at 31st March 2006 (Rs.). Share of profit % Kwality Ice cream(India) Pvt. Ltd. 291,998,70 50 Kwality Processed Food Services and Equipment Pvt. Ltd. 107,299,508 20 Mr. Pradeep Wig (HUF). 9,999.508 20 Mrs. Neera Wig. 5,499.754 10 414,797,540 100 The partnership was formed on 12th July, 2005. ix). Similarly, Note No.2 of Schedule-15 of the audit report of M/s Kwality Processed Food Services and Equipment Pvt. Ltd. reads as under:- Particulars in respect of investment in partnership firm of M/s Wig Investments in which directors are interested/partners. Name of partner Capital as at 31st March 2006 (Rs.). Share of profit % Kwality Ice cream(India) Pvt.Ltd. 291,998,70 50 Kwality Processed Food Services and Equipment Pvt. Ltd. 107,299,508 20 Mr. Pradeep Wig (HUF). 9,999.508 20 Mrs. Neera Wig. 5,499.754 10 414,797,540 100 The partnership was entered into on 12th July, 2005. x) Share of profit/loss of the partners as per Ist and 2nd Partnership Deeds are as under:- Partner Ist Deed 2nd Deed Profit Loss Profit Loss Ist 25% 50% 20% 67% 2nd 25% 50% 10% 33% 3rd 40% Nil 50% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier. 35. The Ld CIT, it appears,was of the prima facie opinion that either the income of the assessee should be assessed under the head business income or if the same is assessed under the head capital gain, the partnership deed entered into by the parties would amount to a device for utilization of the funds of the two partner companies by the share holders who are partners in the assessee firm. The Assessing Officer did not enquire into the above issue and therefore the Ld CIT set aside the impugned order with the direction that the Assessing Officer should make all necessary enquiries and come to a conclusion as per law. The above view of the ld CIT appears to be quite reasonable in the facts narrated by us herein above. It is undisputed proposition of law that no partnership as per the Indian Partnership Act, 1932 can come in to existence for any purpose other than that of carrying on business. If the partnership on the basis of which the assessee came into existence was not carrying on any business such partnership deed would be a invalid deed and in such circumstances, and the facts obtained in the present case, possibly the prima facie opinion of the Ld CIT that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Assessing Officer. The Ld CIT in his order u/s 263 of the Act has directed the Assessing Officer to enquire as to whether the partnership deed by which the assessee came into being was a device or not and if it was a device whether section 2(22)(e) of the Act was attracted in assessee's case. In the facts narrated by us, we are of the considered opinion that the ld CIT was quite justified in giving the above direction. The assumption of jurisdiction u/s 263 of the Act on the above ground by the ld CIT was also justified. 38. We have not discussed the case laws cited by both the parties as factually we are of the opinion that the assessing officer did not make necessary enquiries as were required to be made by him and without application of mind has accepted in toto the submissions of the assessee. However, we find that the Ld. CIT has given specific finding on certain issues even though he has directed the AO to reframe the assessment as per the correct provisions of law and after giving the assessee adequate opportunity of being heard. We are of the considered opinion that he was not justified in giving such specific findings. The impugned order u/s 263 of the Act is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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