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TMI Blog2007 (4) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 crores in purchase of 9 per cent. RBI Relief Bonds during the financial year 1999-2000. The said Bonds were purchased between November 17, 1999 and February 11, 2000. The Assessing Officer found that the said Bonds were purchased from the money received from MKF and MKI (for short, "two firms") in which the assessee was a partner. In the books of account the said two firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny 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 firms were for the individual benefit of the assessee, who was the shareholder in MKSEPL. This point, according to the Assessing Officer, became relevant since the only issue which arose for determination in this case was the issue of deemed dividend under section 2(22)(e) of the Act. According to the Assessing Officer, the said two firms MKI and MKF, were the conduit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 were partly utilised by the said two firms in making payments to the assessee who bought 9 per cent. RBI Relief Bonds therefrom, did not necessarily mean that the assessee had routed the funds of MKSEPL through MKF and MKI for his individual benefit. According to the Commissioner of Income-tax (Appeals), MKF and MKI were two separate entities; that there was no material t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dend. 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 dividend amount to Rs. 5.99 crores since known company sources had to be eliminated. According to the Tribunal, the Assessing Officer was right in identifying MKSEPL as the originating company, the identity of the ultimate beneficiary, the amount to be taxed, that is, Rs. 5.99 crores and the sufficiency of accumulated profits of MKSEPL in which the assessee had more than 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 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 crores relates to transactions recorded and reflected in the regular books and tax records ever before the search; that no incriminating document or evidence was found by the Department during the search which falsified such transactions entered into by the assessee in the normal course; that the expression "undisclosed income" has been defined in section 158B(b) of the said A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 had a running current account with MKI in the usual course of business, was irrelevant. Learned counsel submitted that SCPL had borrowed substantial amounts from MKI and in January 2000 SCPL repaid Rs. 2.79 crores to MKI which was not on behalf of or for the benefit of the assessee. It was urged that MKI had never borrowed money from SCPL at any time. Learned counsel urged tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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 it could have done so only to the extent of accumulated profits in its own hands and since SCPL on the above two dates could not have declared dividends in excess of its accumulated profits, the Department was wrong in treating the accumulated profits of MKSEPL as accumulated profits of SCPL merely because the merger became effective retrospectively with effect from May 18, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 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 31, 2000. To this extent, the finding given by the Assessing Officer and by the Tribunal remains unchallenged. Lastly, on the maintainability of the block assessment, we are of the view that the Department was right in assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 fact, namely, the factum of payment by the company and the motive or intention of the company making such payment, namely, a benefit accruing to the assessee. These are essentially findings of fact and have not been challenged by the assessee by an appropriate question." We also quote hereinbelow paragraph 19 and paragraph 21 of the judgment of the Bombay High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciple 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 such payment." The above two judgments indicate that the question as to whether payment made by the company is for the benefit of the assessee is a question of fact. In this case, the Tribunal has concluded that the payment routed through MKF and MKI was for the benefit of the assessee. This was a finding of fact. It was not perverse. Therefore, the High Court should not have interfer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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