9911796707
TMI Blog2022 (1) TMI 1467X X X X Extracts X X X X X X X X Extracts X X X X ..... .2.2016 were issued under section 148 of the Act. The reasons for reopening of assessments have been similar for all the four assessments and are reproduced as under: - "Return of Income for A Y 2009-10 was e-filed on 24.11.2009 declaring total income of Rs. 1755920/-. Subsequently, the information was received from Singapore Tax Authorities that the assessee has a Bank Account in Singapore which was forwarded to the office of Pr. CIT-20 Mumbai by Pr. Pr. Director of Income tax (Investigation)-1, Mumbai vide letter No. Pr. DIT (Investigation)-1, Mu/Vilas Waman Katre/2015-16/861 dated 4.11.2015. The Pr .CIT - 20 Mumbai vide letter No. Pr. CIT.20/Vilas Waman Katre/2015-16 dated 9.11.2015 forwarded to JCIT-20(3), Mumbai. The JCIT. 20(3) Mumbai vide letter No. Jt. CIT 20(3)/Vilas W. Katre /2015-16 dated 13.11.2015 forwarded the letter along with the enclosure thereat hereto to the undersigned. The information received by the undersigned was carefully perused. This exercise revealed that the following are the documents to show that the assessee has beneficial interest in an offshore entity M/s Eagle Ridge Services and its bank accounts. i. Incorporation cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also has copy of the passport of his son Shri Vikram Vilas Katre with passport no. F 5237722. ix. The assessee has opened the bank account in A Y 2006- 07. The total of transactions / credits and portfolio investment during the previous year relevant to A Y 2009-10 were in US $ the value of which in Indian currency is Rs 671488587/-. However, the assessee has not disclosed these investments and credits made in the assets located outside India in the return of Income including source thereof for the purpose of calculating the taxable income in India. The assessee was a resident in India during the previous year relevant to assessment year under consideration and therefore his global income is taxable in India by virtue of section 5 of the Income tax Act. x. By virtue of the facts narrated in earlier paragraphs I have reason to believe that income chargeable to tax has escaped assessment within the meaning of section 147 of the I T Act." 4. The Assessee thereafter filed objections against the reopening of assessments and after considering various submissions made by the Assessee during the course of assessment proceedings under section 143(3) read with section 147 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited, incorporated in British Virgin Islands, constituted in September 2005 (Trust Vehicle), formed part of the trust structure; C. the Trust was governed under the laws of BVI, and managed out of Singapore; D. the Assessee was neither shareholder, nor director of the Trust Vehicle; E. the Assessee accepted office of trustee in December 2005, without consideration or obligation for contribution; F. beneficial ownership of assets/corpus of the Trust remained exclusively with the beneficiaries, until revocation; G. in consonance with the office of trustee, the Assessee was constituted as one among authorized signatories to the bank account of the non-resident company, which neither conferred exclusive signatory power nor vested beneficial ownership or management over the Trust Vehicle to the Assessee; H. by virtue of the Settlor reserving signatory rights in parallel with directors of the non-resident company no occasion arose for the Assessee to exercise signatory powers in relation to the Trust; I. in exercise of powers of revocation reserved to the Settlor, the corpus of the Trust reverted to the Settlor in 2012 (relevant documents are filed in paper book); J. the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest (IN Rs..) Interest Capital gains Unexplained Investment - 69 Term Deposits u/s 68 2008-19 184784 184784 2009-10 75848581 131484 897566 1125116 56421361 17273054 2010-11 186764 186764 2011-12 3496730 3496730 Total 79716859 3628214 1269114 1125116 56421361 17273054 10. Aggrieved, the Assessee preferred appeal before the Commissioner of Income Tax (Appeals)- 49. Before Ld.CIT (A) assessee submitted the detailed submissions and the relevant summary is given below: A. On Re-opening of assessments i. The notice is issued on the basis of documents belonging to an entity M/s Eagle Ridge Services Limited, a company incorporated outside India and these documents do not belong to the Assessee. The Assessee was only a beneficiary owner of the 1(one)share of face value of $1(one) of that company. Further he had held this ownership in a fiduciary capacity and that fiduciary role ended in February 2012. ii. The Assessing officer has completely ignored the fact that the fiduciary ownership of One share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions of the said company cannot be taxed in the hands of the Assessee. viii. The Income tax Acts treats companies and shareholders distinctly. The undisclosed income of share holders cannot be treated as the income of the company. The decision of Delhi High Court (which has been confirmed by the Supreme Court by rejecting the SLP) in the case of CIT Vs Lovely Exports (P) Ltd 216 CTR 195 it has been held that: It is evident that even if it be assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee. The above decision is on the principle that shareholders and company are separate entities. The jurisdictional High Court of Bombay in the case of CIT vs M/s Gagandeep Infrastructure Pvt Ltd (supra) and CIT vs Paradise Inland Shipping Pvt Ltd in ITA No. 66 of 2016 dated 10-04-2017, has reiterated the legal position laid down by the Hon'ble Supreme Court in the case of CIT vs Lovely Exports Pvt Ltd. It is well settled law and practice that when one person invests in a duly incorporated company under the law, the following are the ite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be earned abroad." 11. After considering the detailed submissions of the assessee, Ld. CIT (A) sustained the addition made by the assessing officer with the following observations: "8.3 The submissions of the learned counsel have been carefully considered along with the facts discussed by the AO in the assessment order. The undisputed facts are that the assessee opened the bank account of Eagle Ridge Services Ltd in Singapore and is the only authorised signatory of the Bank account. There are a lot of credit entries and investment entries in the said bank account by assessee's own admission he was holding the shares of the said company in fiduciary capacity for one Mr Haji Patel till February 2012. The learned counsel has all along been stating that the AO had not proved that the account belonged to the assessee and that he had made any investments in the company. on the contrary, the assessee, had not discharged the onus cast on him to explain as to how he is not related to the company or the bank account when he himself is the sole authorised signatory to the bank account, He had also not explained how he is related Mr Haji Patel and why he had to be the beneficiary of Eagl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer of re-opening of assessment under section 147 of the Act without appreciating the fact that there was no evidence that the income of the Appellant has escaped assessment and that the Assessing Officer therefore had no reason to believe that income of the Appellant has escaped tax. 1.3 Ground no.3: On the facts and circumstances of the case and in law the Learned Commissioner of Income Tax (Appeals) erred in confirming the following additions made by the Assessing Officer: a) Addition of Rs. 168,12,105 as unexplained cash credit under section 68 of the Income-tax Act. b) Addition of Rs. 5,64,21,361 as unexplained investments under section 69 of the Income-tax Act. c) Addition of Rs. 8,97,566 towards interest and Rs. 1,31,484 towards dividend, as income under section 56 of the Income-tax Act. d) Addition of Rs. 11,25,116 towards Capital Gains under the Income tax Act. 1.4 Ground no.4: On the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) erred in disallowing a loss of Rs. 90,46,609 against capital gains and other income. The Learned Commissioner (Appeals) failed to appreciate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of bank statement of Eagle Ridge Services Limited without following the principles of natural justice. 1.10 Ground no.10: On the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) erred in passing order without giving final notice for hearing to the Appellant and giving real and sufficient opportunity to defend. 1.11 Ground no.11: Without prejudice to the above grounds, the Learned Commissioner of Income Tax (Appeal), has erred in law as well as on facts, in sustaining amounts added u/s 68 and 69, by the assessing officer, to the income of the Appellant on account of opening balance of fixed deposits / bonds / gold and other investments made by M/s Eagle Ridge Services Ltd. 13. During the hearing before us, Ms. Fereshte Sethna counsel for the Assessee argued the matter in detail and filed written submissions on facts and on law. The relevant submissions from Para 5 to 15 are reproduced below for the sake of convenience: 5. "The impugned reassessment proceedings, initiated vide notice dated 19 February 2016 under section 147/148 of the Act, seek to bring to tax in the hands of a resident individual income of a non-resident Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted by Mr. Haji Dilip Sarabhai, in consonance with the Assessee accepting office of trustee, to constitute the Assessee as authorized signatory of a bank account of the Trust Vehicle established in Deutsche Bank, Singapore, with corollary fiduciary rights in relation to Share Corp Limited, underlying the Trust Vehicle, and it is not axiomatic that the Assessee should by virtue of mere signatory powers be capable of being treated as having beneficial ownership of sums lying to the credit of the bank account or investments made through the bank account; (D) in fact, rights in relation to operation of the bank account were circumscribed by virtue of the Settlor reserving power, as did the directors of the Trust Vehicle acting through Gurker Limited, to direct investments for the benefit of the beneficiaries; (E) as Trustee, the Assessee did not consider it necessary to enquire into the source of the Settlor's funds, and was not required to take any investment decisions for the Trust until revocation in February 2012 by the Settlor whereupon steps for the Assessee's signatory powers were terminated, and the Assessee's office of trustee came to an end; (F) at all material t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rav Haji [Paper Book @ page 253], followed by a Board Resolution dated 13 April 2012 recording the name of Nirav Dilip Haji Sarabhai to be added as co-signatory, with grant of authority to both Mr. Haji Dilip Sarabhai and Mr. Nirav Dilip Haji Sarabhai to operate the bank account of the Trust Vehicle [Paper Book @ page 252], all of which conclusively establish cessation of the Assessee's limited and circumscribed role of trustee of the revocable discretionary oral trust settlement of Mr. Haji Dilip Sarabhai. 7. Cohesive reading of the statutory framework of the Act, with sections 3, 77 & 78 of the Indian Trusts Act, 1882 establishes that: (i) trusts, oral and written, are contemplated in Indian law; (ii) statutory lines of distinction existing among settlor, trustee and beneficiary, are incapable of being blurred- each are distinct offices/capacities, with corollary rights and obligations; (iii) power for revocation of trusts are capable of being reserved at the discretion of the settlor; (iv) a trustee can have, at best, legal ownership, but no beneficial ownership in relation to assets of the trust, unless the trustee were among the nominated class of beneficiaries in a spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 7 July 2021 in BMA No. 01/Del/2020, Para 37 to 41), relying inter alia upon the ruling of the Mumbai Bench of this Hon'ble Tribunal in the matter of Kamal Galani v. ACIT (order dated 10 September 2020 in ITA Nos. 138- 142/Mum/2019, Para 13, 14), have concluded inter alia that bank accounts in foreign jurisdictions pertaining to offshore entities cannot merely because the assessee is declared as 'beneficial owner' for anti-money laundering purposes be treated as bank accounts of the assessee. In fact, in the case of a discretionary trust structure, none other than the trustee is liable to be recognized by the bank, merely for anti-money laundering purposes, as both 'legal owner' and 'beneficial owner' since the discretion remains to be exercised by the trustee in favor of one or more persons among a class of beneficiaries, whether until distribution, or sooner revocation. In any event, requirements of 'beneficial owner' and/or 'beneficiary' under the Act requiring the providing of consideration, directly or indirectly, for the asset, for the immediate or future benefit, direct or indirect, of the assessee or any other person, or deriving benefit from the asset where th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial furnished by the Assessee, and instead based the assessment order on mere conjecture and surmise, along with legally untenable conclusions. Persons in charge of the business and affairs of the Trust Vehicle were best equipped to offer explanations, however none appears to have been sought by the Assessing Officer. If any such explanation had been sought, then the Assessee would have been entitled to be confronted with any such statements or material, with corollary right of cross-examination, in accordance with settled requirements of due process. The complete non-application of mind is also apparent from the order of the CIT (A) which records (para 8.3) that the Assessee was acting in fiduciary capacity for Mr. Haji Dilip Sarabhai, but then proceeds on the footing that the Assessee has not explained how he is not related to the Trust Vehicle, despite a detailed written explanation and documentary evidence available on the file of both the Assessing Officer and the CIT (A) conclusively establishing the beneficial ownership of the Trust Vehicle strictly between the Settlor Mr. Haji Dilip Sarabhai and his son Mr. Nirav Haji. In arriving at the ancillary conclusion that the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g taxable income of the Assessee under s. 68. Reliance is placed on rulings in: ITO v. Meghna A. Modi (order dated 31.07.2015 in ITA No. 1611/Ahd/2011) - Para 4 & 5; and Chetan Gupta v. DCIT (order dated 07.06.2018 in ITA No. 1788/Del/2016) - Para 13(7). Under s. 69 of the Act, investments not recorded in the books of accounts of the Assessee, but in relation to which the Assessee has 'beneficial ownership', may be brought to tax, in the hands of the Assessee. The remit of s. 69 cannot extend, however, to bringing to tax investments of a non-resident entity in the hands of a resident individual, more so where the Assessee is a fiduciary, and in the absence of material to support the inference of 'beneficial ownership'. It is axiomatic that there can be no scope for the Assessee to explain the nature or source of income or investments of the Trust Vehicle, which are not matters within the remit of knowledge of the Assessee in the capacity of mere trustee, at all material times. 14. ...... 15. In the fact matrix set forth above, and in light of the legal position, reopening of the Assessee's assessment under section 147 of the Act, is plainly arbitrary and bad in law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Sneh Lata Sawhney v. DCIT Mumbai ITAT order dated 01.06.2021 Para 6.1.12 13. Kamal Galani v. ACIT-23(3), Mumbai (Mumbai ITAT order dated 10.09.2020 in ITA Nos. 138 to 142/Mum/2019) Para 12 & 14 14. DCIT (IT), Mumbai v. Hemant Mansukhlal Pandya [2018] 100 taxmann.com 280 (Mumbai - Trib.) Para 17 WITHOUT PREJUDICE: OPENING BALANCE TO BE IGNORED IN COMPUTING PEAK CREDIT 15. ITO v. Meghna A. Modi (order dated 31.07.2015 in ITA No. 1611/Ahd/2011) Para 4 & 5 16. Chetan Gupta v. DCIT (order dated 07.06.2018 in ITA No. 1788/Del/2016) Para 13(7) DECLARATIONS OF BENEFICIAL OWNERSHIP FOR LIMITED PURPOSES OF COMPLIANCES WITH ANTI-MONEY LAUNDERING LAWS HAVE NO TAX IMPLICATIONS 17. Yashovardhan Birla v. CIT(A)-51, Mumbai (order dated 03.09.2021 in BMA No. 01/Mum/2021) Para 39 18. ACIT v. Shri Jatinder Mehra (order dated 7 July 2021 in BMA No. 01/Del/2020) Para 37 to 41 WHERE NO EVIDENCE IS PRODUCED REGARDING FOREIGN LAW PRESUMPTION IS THAT IT IS SAME AS INDIAN LAW 19. Malaysian International Trading Corpn. vs. Mega Safe Deposit Vaults (P.) Ltd. [2006] 68 SCL 52 (BOM.) Para 23 REASSESSMENT PROCEEDINGS MERELY ON BASIS OF INFORMATION RECEIV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n parallel with directors of the nonresident company, Assessee is one among the other authorised signatories. viii. in exercise of powers of revocation reserved to the Settlor, the corpus of the Trust reverted to the Settlor in 2012 (relevant documents submitted in the paper book); ix. during late 2005, the Assessee was approached by Mr. Haji Dilip Sarabhai, non-resident, residing in Singapore for over 30 (thirty) years (Settlor), with a request to act as trustee, maintaining this fiduciary obligation in strict confidence, in the Settlor's best interests; x. The Assessee being well-acquainted with Mr. Haji Dilip Sarabhai and on being explained that health and family concerns had led Mr. Haji Dilip Sarabhai to consider settling assets into a revocable discretionary trust, which would remain in operation for such duration as the Settlor considered appropriate, the Assessee signified consent to act as trustee, taking into consideration the fact that no restrictions exist under Indian law to a resident individual being nominated as trustee of an offshore trust established by a non-resident; accordingly, in December 2005, Mr. Haji Dilip Sarabhai, in consonance with the Assessee ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat offshore trusts / entities incorporated in offshore jurisdictions are liable to be taxed in their respective offshore jurisdictions. It therefore follows that the Trust Vehicle is liable to tax in the country of its incorporation. The relevant extract is reproduced below: "29. In our considered view, a private discretionary trust is created and few trustees were appointed to look after the trusts property. There is an enabling Clause for continuity of the trustees. In case of incapacity or other exigencies, certain trustees have to be appointed or replaced. For that purpose, generally the power to appoint or reappoint trustees lies with the settlor or vests in the declaration of trust itself. Similarly, in this case, it was given to assessee's father and mother. After their lifetime, it devolved on the assessee. Merely because, it is exercised by the assessee, it does not make the trust to lose its identity. The trust still will continue with the new trustees. The properties attached to the trust will continue to be the properties of the trust. It is wrong to presume that the properties governed by the trustee will be considered as the properties of the individual beneficiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the irrevocable discretionary trusts in which assessee is one of the beneficiaries. As discussed in the earlier para nos. 22 to 35, these bank accounts are running accounts of these entities and can never be the bank accounts belonging to the assessee, even though for the purpose of KYC norms and Anti Money Laundering provisions, the assessee was declared as the beneficiary, it does not take away the ownership of the companies and trusts." 21. Therefore, on the basis of declaration of beneficial ownership in the bank account opening form, it cannot be concluded that the bank account belongs to the Assessee and therefore the credits to the bank account cannot be taxable in the hands of the Assessee. 22. It is not disputed that the Assessee, a resident Indian, who accepted the obligation associated with the office of trustee, arising out of an abiding familial relationship with the Settlor, which was revoked at the discretion of the Settlor six years later in 2012. The Assessing Officer has not brought out any evidence of the Assessee having international transactions relating to the bank account of the Trust Vehicle or having contributed to the corpus/funds in the bank acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of ss. 56(1), 68 and 69 of the Act cannot be resorted to. "28. The decision of this Court in Punjab Land Development and Reclamation Corpn. Ltd. v. Labour Court [Punjab Land Development and Reclamation Corpn. Ltd. v. Labour Court, (1990) 3 SCC 682 :1991 SCC (L&S) 71], made the said distinction, and explained the literal rule: (SCC p. 715, para 67) "67. The literal rules of construction require the wording of the Act to be construed according to its literal and grammatical meaning, whatever the result may be. Unless otherwise provided, the same word must normally be construed throughout the Act in the same sense, and in the case of old statutes regard must be had to its contemporary meaning if there has been no change with the passage of time." That strict interpretation does not encompass strict literalism into its fold. It may be relevant to note that simply juxtaposing "strict interpretation" with "literal rule" would result in ignoring an important aspect that is "apparent legislative intent". We are alive to the fact that there may be overlapping in some cases between the aforesaid two rules. With certainty, we can observe that, "strict interpretation" does not en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer has applied Section 68 to sums lying to the credit of the bank account of a non-resident entity as cash credit in the hands of the Assessee. The Assessee has also pointed out that in any event, without prejudice, the opening balance of sums lying to the credit of the nonresident entity cannot be taken into account for computing taxable income of the Assessee under s. 68 for assessment years 2009-10. Under Section 69 of the Act, investments not recorded in the books of accounts of the Assessee, but in relation to which the Assessee has 'beneficial ownership', has been brought to tax in the hands of the Assessee. Further, the scope of Section 69 cannot be extended to bringing to tax investments of a nonresident entity in the hands of a resident individual, in the absence of material to support the inference of 'beneficial ownership'. 29. The coordinate bench of ITAT in the case of Kamal Galani v. ACIT (ITA Nos. 138 to 142/Mum/2019) order dated 10.09.2020 held as under: "12. .......... Therefore, in order to examine, whether money lying in HSBC bank account in the name of the assessee and his brother is a unexplained money, which can be taxed u/s 69A of the I.T ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
