TMI Blog2005 (5) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 ("the 1961 Act"), has been preferred against the order dated January 28, 2005, passed by the learned Tribunal in the block assessment against the assessee for the period April 1, 1990 to August 24, 2000. The dispute relates to a few entries for the previous year 1999-2000 in relation to the assessee's investment in 9 per cent. RBI Relief Bonds amounting to Rs. 6,93,00,000 out of total investment of Rs. 26,35,00,000 made in the said previous year. The Assessing Officer had treated these investments as deemed dividend in the hands of the assessee within the meaning of section 2(22)(e) of the 1961 Act. The facts: In order to appreciate the situation, we may briefly refer to those portions of facts, which are relevant for the present purpose. M/s. M.K. Tea Pvt. Ltd. (MKTPL), in which the assessee is one of the shareholders, paid Rs. 69,00,000 on December 7, 1999, and Rs. 25,00,000 on December 22, 1999 to M/s. M.K. Foundation (MKF), a partnership firm, in which the assessee was one of the partners. M/s. Safari Capitals Pvt. Ltd. (SCPL), in which the assessee was a beneficial owner of shares, paid a sum of Rs. 2,04,00,000 on January 11, 2000, and Rs. 75,00,000 on January 28, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits of such company. The scope: The assessee had claimed that he did not have the requisite shareholding in MKTPL during the previous year 1999-2000, namely, he was a beneficial owner of shareholding with 9.3 per cent, of its total voting power. The assessee further claimed that during the said financial year 1999-2000, he had only 0.20 per cent, of shares in SCPL out of its total voting power. The assessee had shareholding having more than 10 per cent, of the voting power in MKSEPL. However, this was disputed by Mr. Shome. In any event it is not necessary for us to adjudicate the said questions within the scope of the present appeal in order to bring the case within the purview of section 2(22)(e), inasmuch as the payment having not been made to the assessee, the present case would not come within the scope of the first category. Mr. Shome in his useful fairness contended that this case does not come within the first category. Admittedly, the amounts were paid by the said three companies, which are such companies contemplated within section 2(22)(e), inasmuch as the said companies were closely held companies of the assessee and in which the public were not substantially i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t contain any incriminating material or information whatsoever. However, in the course of the block assessment proceedings, the Assessing Officer directed the assessee to furnish details as to the source of funds out of which such investment was made. When it was explained to the Assessing Officer that the appellant-assessee made such investments in RBI Relief Bonds out of the monies withdrawn by him from the two partnership firms, viz., M/s. M.K. Foundation and M/s. M.K. Industries, and the regularly maintained books of account of these two firms were produced before the Assessing Officer for his verification, the Assessing Officer directed the authorised representative of Shah group to prepare a statement indicating the source of source, viz., the source from which the monies came in the hands of the said two partnership firms and out of which withdrawals were made by the appellant-assessee in order to make investment in the aforesaid RBI Relief Bonds. The impugned addition on account of deemed dividend under section 2(22)(e) was made by the Assessing Officer with reference to the statement prepared by the authorized representative of the Shah group, Mr. Rohit Shukla, chartered a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that any entry or transaction was not disclosed in those books of account .... In the case of the appellant, all the primary facts relating to receipts from partnership firms and purchase of RBI Relief Bonds were disclosed in the regular books of account ...... The Assessing Officer has mentioned that during the course of proceedings the assessee was asked to explain the source of investment being 9 per cent. Relief Bonds recorded in seized book ML-20 and how it was reflected in the regular books of account maintained by him. The Assessing Officer does not say that purchase and source of purchase of relief bonds was not reflected in the regular books of account." The findings by the learned Tribunal: The learned Tribunal did not hold otherwise as would be apparent from its observation as quoted hereafter: "The learned Commissioner of Income-tax (Appeals) passed the said appellate order in favour of the respondent/assessee both on legal grounds as well as on merits. The learned Commissioner of Income-tax (Appeals), inter alia, held that the impugned block assessment was not based on any 'incriminating evidence' found as a result of the said search nor on any investiga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repayment of loans, is understandable but easily discarded as being made with poor motives. Where, even the nature of incoming funds, i.e., proceeds from export sales, is identified as source for the company for making the payments, any disclaimer now can be discarded for what it is worth ... 6.6. In the present appeal, it is the assessee's case that the seized document ML-20 are regular accounts, the entries represent amounts taken, given inter se between the company, firms and the assessee constituting the source for the purchase of bonds. However, it is the contention of the Assessing Officer that they remain just that a collection of entries. The income arising therefrom in the nature of deemed dividend was NEVER disclosed in returns filed. Hence, stressing ad nauseam on the disclosure of entries only and glossing over the non-disclosure of income, cannot entitle the assessee to claim immunity from the block proceedings ... 6.16 Another central argument was that ML-20 was merely an extract of the ledger accounts, that the payments appearing therein for the purchase of bonds were from disclosed sources, that such payments were by cheque from disclosed bank accounts and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid companies from the said concerns in its regular course of business transactions. Mr. Poddar attempted to contend that these payments must be by way of loan or advance even in respect of all the three categories of cases. We do not think that in order to attract the third category, the payment has to be made by way of loan or advance. The third category includes any payment in whatever manner paid on behalf of or for the benefit of such shareholder. It need not be qualified to be loan or advance. Lifting the veil: The principle: Undisclosed income: Block assessment: The present case: Various cases have been referred to by the respective counsel and were also distinguished by the other. Since we had confined only to the question whether the payment was made in the regular course of transactions between the companies and the firms in order to ascertain whether it was made for the benefit of the assessee, we need not deal with the decisions which dealt with the effect of amalgamation, beneficial owner of shareholding, substantial interest in the firms, etc. We may deal with the decisions, which are relevant for our present purpose. In Bhagwati Prasad Kedia v. CIT [2001] 248 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bservation of Jenkins L.J. in Davies v. Shell Co. of China Ltd. [1952] 22 ITR (Supp) 1, 26 (CA); [1951] 32 TC 133, 157, namely, "As loans it seems to me they must prima facie be loans on capital, not revenue account; which perhaps is only another way of saying that they must prima facie be considered as part of the company's fixed and not of its circulating capital". In Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC) in a case where the assessee, a shareholder and the managing director of a company in which the public were not substantially interested, withdrew cash from time to time, parts of which were adjusted against the outstanding dividend and ultimately a sum remained debited in the account of the assessee in the books of the company, part of which was repaid by the assessee, part remaining outstanding, the apex court had held that the part so remaining to the extent to which the company had accumulated profits was deemed dividend, though the advance ceased to be outstanding of the previous year if other conditions of section 2(6A)(e) of the Indian Income-tax Act, 1922, were satisfied. In the said decision, it was held that once it is shown that the assessee comes within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to perpetrate fraud as was held in Juggilal Kamlapat v. CIT [1969] 73 ITR 702 (SC) at page 710. In LIC v. Escorts Ltd. [1986] 59 Comp Cas 548 (SC); AIR 1986 SC 1370, it was emphasized that regard must be had to the substance and not the form of a transaction. The corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. But this is dependent on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of public interest, the effect on parties who may be affected, etc. The corporate veil in such a case is to be lifted to the extent it is necessary in the context of the given facts and no more. In Miss P. Sarada v. CIT [1998] 229 ITR 444 (SC), it was held that loan to a shareholder having substantial interest without any credit balance, by a company in which the public are not interested, and withdrawal of amounts in the accounting year despite subsequent adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he regular assessment. Therefore, these documents cannot be said to be incriminating materials for holding that the amounts disclosed in those documents were undisclosed income. At the same time, the investment was made out of the funds reflected in the respective accounts of the assessee, the respective firms and the respective companies and the source from which these funds had come to the hands of the respective companies. Unless the amount is found to be an undisclosed income, the income-tax authority cannot exercise its jurisdiction for block assessment. When these documents were disclosed in the regular course of assessment by the assessee and were included in the books of account regularly maintained by him and the balance-sheet was made part of his return in the course of regular assessment, the same could not be treated as undisclosed income until the accounts are held to be false; or until the transactions are held to be sham or a device invented or adopted driven by motive to avoid the effect of section 2(22)(e) backed by sufficient materials found on search and seizure or disclosed on notice in the course of block assessment. The theory of lifting the veil can be appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by various documents. Out of the said statement at page 84, the items Nos. 17, 18, 19, 20, 21 and 22 corresponding to items Nos. 40, 41, 42, 43, 44 and 45 clearly indicate as to how these amounts were received by the respective companies and how it was paid to the respective concerns. Page 76 discloses the details of the investments made through American Express Bank except one made through Canara Bank. The respective ledger accounts of the respective companies with the respective firms are also disclosed. The balance- sheet disclosed by the assessee clearly depicts the respective transactions and the investments made together with the ledger accounts of the assessee with MKF and MKI, respectively, reflecting the respective transaction. The ledger account shows that MKI had regular transactions with SCPL and that MKI, carrying on business of financing, advanced money to SCPL and it was a current account transacting payment and receipt. The statement made therein clearly shows that these amounts were never paid by way of loan or advance by SCPL to MKI. Similarly, between MKF and MKSEPL, there were regular and current transactions. MKF was also transacting financing business and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te satisfying the other qualifications cannot be deemed to have been paid for the benefit of the assessee by the companies by imputing motive or otherwise, particularly, when from the end of the company the payment was neither a loan nor an advance given to the firms but was a repayment of the loans or advances received by the companies from the firms. By no stretch of imagination could these transactions be held to have been made for the benefit of the assessee. The section has to be construed strictly and strict construction does not permit us to hold otherwise. On the other hand, the situation would lead us to hold that this repayment of loan or advance by the company to the firms in the course of regular business transaction from its disclosed sources reflected in the disclosed income would not satisfy the test of section 2(22) (e) even on attempt to or upon lifting the veil. These payments cannot be held to have been made for the benefit of the assessee when such payments were being made to the firms by the companies in the course of its regular transactions in order to repay the advances received by it from such firms still leaving debit balance. If these amounts were not p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,00,000 was assessable to tax as deemed dividend within the meaning of section 2(22)(e) of the Income-tax Act, 1961, in the impugned block assessment proceedings initiated under Chapter XIV-B of the said Act, even when no incriminating material was found in relation thereto in the course of the search and all transactions connected with the said amount had been duly and fully recorded in his books of account and other records maintained in the regular course of his business? III. Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law and it adopted a wholly erroneous approach in holding that the alleged deemed dividend of Rs. 5.99 crores was assessable to tax in the impugned block assessment, even when the respondent-Commissioner of Income-tax in his impugned order dated March 8, 2004, passed under section 263 of the Income-tax Act, 1961, had already held that the alleged deemed dividend income had no connection whatsoever with the search and seizure action conducted at the premises of the appellant/assessee as also the evidence found as a result of the said search? IV. Whether the findings recorded by the Tribunal, in its order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal itself in the light of the submissions made before it on behalf of the Revenue as well as the appellant-assessee?" In view of the discussion made above, we answer all the questions in the affirmative except the first part of question No. 6 which is answered in the negative. Order: In the result, the appeal succeeds and is hereby allowed. The order of the learned Tribunal is hereby set aside. The order passed by the Commissioner of Income-tax (Appeals) is hereby affirmed. There will, however, be no order as to costs. Urgent xerox certified copy of this judgment, if applied for, be given to the parties within 7 (seven) days from the date of such application on usual undertaking. SOUMITRA PAL J.- I agree. May 12, 2005.- After the judgment was delivered, Mr. Nizamuddin prayed for stay of operation of the order. On the other hand, Mr. Podder prayed that his client was unable to furnish the bank guarantee; therefore the bonds have not been released. Therefore, the bonds now be released. In the facts and circumstances of the case, unless these bonds are the subject matters of any attachment in any other proceedings, the bonds be released in view of the decision in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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