9911796707
TMI Blog1993 (6) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... epresenting advances to the two minor sons of the assessee; (iii) Rs.5,90,000 loans to M/s. Sunflower Investment and Textiles Ltd.; and (iv) Rs.69,305 representing cash and bank balance. All these items relate to one company known as 'SIAL' - M/s. Sterling Industrial Agencies Pvt. Ltd., Kathmandu. The feedback of the case along with the reasoning of the Assessing Officer stands reproduced hereunder for ready reference since it is thought expedient:-- "The focal and contentious issue under consideration is the assessee's investment in a Nepal based concern named Sterling Industrial Agencies Pvt. Ltd. The relevant facts are as under:-- The assessee declared wealth of Rs.25.27 lakhs in his return of wealth for asst. year 1974-75, the valuation date being 31-3-1972. This included 27,536 shares of Bombay Dyeing & Mfg. Ltd. (hereinafter referred to as BDMC) valued at 16,79,696. In the next year, i.e., 1975-76, the returned asset of the assessee dwindled down to Rs.11,70,900 on 31-3-1975 relevant to asst. year 1975-76. The reason for the sharp drop is seen to be on account of advance of Rs.22,26,000 made by the assessee to a concern called M/s. Sterling Industrial Agencies Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se funds was transferred by SIAL to Bank account in Grindlays Bank Ltd., Fort, Bombay, where assessee also had an account, as mentioned earlier. It has been found that this bank account of SIAL in Grindlays Bank Ltd., Fort, Bombay was introduced and opened by assessee as Chairman of SIAL. Out of the funds transferred to Grindlays Bank Ltd., Fort, Bombay, SIAL purchased some further shares of BDMC. All these shares of BDMC were purchased in a span of few days in 1975. The total shares of BDMC purchased by SIAL with the above funds were 52,865 worth ft. 35,23,951 in Nepalese currency. As mentioned earlier out of 52,865 shares of BDMC purchased by SIAL, 26,965 shares were sold by assessee himself to SIAL. The total funds placed at the disposal of SIAL was 35,79,250 in Nepalese currency, out of which Rs.35,26,250 in Nepalese currency was contributed by the assessee, which accounted for 98.5% of the total fund available and balance Rs.53,000 in Nepalese currency was contributed by two other persons, viz. Jagdish Upadhyay and Shankar Aryal, which accounted for only 1.5% of the total funds available. The share capital of SIAL which continued till date. was Rs.3,71,000 in Nepalese cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thmandu, Nepal. Its only activity in most of the years was only receiving dividend income out of shares of BDMC, which as mentioned earlier was initially acquired almost with the funds provided by the assessee. SIAL has also advanced money to minor sons of assessee and to concerns In which the relative/associates of assessee are substantially interested. The principal expenditure of SIAL in all the years was payment of salary of Rs.7,000 approx. in Nepalese currency to directors Shri Jagannath Upadhyay and Shankar Aryal. Since the expenditure incurred for the running of the company was extremely small, almost the entire dividend income (and interest Income in some years) has constituted the net income declared by the company. However the company has paid tax at concessional rate of 25% on dividend income, as per the rate applicable to a foreign company. No dividend has been declared by the company in any year, which has resulted in creation of a large amount of reserve and surplus. The surplus funds available with the company were cycled among different concerns in which relatives/associates of the assessee were substantially interested, apart from providing loans to minor son of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led down'. He yet further put a rider that the present order of his has to be read within the above understanding and further that his order is subject to the order which will be passed by the Bombay High Court eventually on the issue of the citizenship. He treated the appellant--assessee--as a non-citizen/resident/individual. 3. The assessee is as yet aggrieved and so naturally, hence this appeal and we have heard the learned authorised representatives of the parties at length on three dates, viz., 4th March, 1991, 5th March, 1991 and 6th March, 1991. We have also gone through the bulky paper book placed on file on behalf of the assessee and the department. The learned authorised representative of the assessee has argued that since there was no restriction on remission of Indian currency between India and Nepal and further that there was a specific notification under the Foreign Exchange Regulation Act to that effect, the assessee, a non-resident, could have remitted amounts to Nepal and there is nothing illegal in that. He further contended that the company, which is registered in Nepal, is a separate entity itself and by itself being a company registered in a forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax (Appellate Tribunal) Rules, he wanted the Income-tax Appellate Tribunal to apply the ratio of the McDowell & Co. Ltd.'s case since, according to the learned Standing Counsel, the learned Commissioner of Income-tax (Appeals) has decided this issue in favour of the assessee incorrectly/wrongly. He further contended that the company in Nepal was a puppet company--a sham one--and recent confidential enquiries made by the department prove it to be so. He has also contended that the assessee has been waiting since the year 1975 to pick up from the shelf a device to avoid tax, which, on these facts, amounts to tax evasion inasmuch as the company in Nepal has two local directors who were being paid partly sums of Rs.300 each per month as directors because, in substance and in reality, the assessee is the sole owner of the company. The assessee having remitted amounts from his accounts in India to Nepal and then having brought the same back to India to make investment in Bombay Dyeing and Manufacturing Ltd., the natural inference is that it is a device, a colourable one, and covered by the McDowell & Co. Ltd.'s case decision since bona fides cannot be proved. Pure and simple, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and circumstantial evidence to be read with the fact that the said company in Nepal has had no commercial transaction and the sole investment is in India through the assessee in assessee's company. CIT v. Sri Meenakshi Mats Ltd. [1967] 63 ITR 609 (SC) has been relied upon and the transactions of the Nepal company with the assessee's company BDMC and the sons of the assessee to whom loans have been given. Concludingly he said it is a manipulation, most ingenuine, covered by McDowell & Co. Ltd.'s case since there are circular integrated transactions and to appreciate the facts the circumstantial evidence has to be taken into account along with the normal human conduct while piercing the veil of the corporate. Sri Meenakshi Mills Ltd.'s case is relied upon along with B.R. Bamasi v. CIT [1972] 83 ITR 223 (Bom.) and Workmen of Associated Rubber Industry Ltd. v. Associated RubberIndustry Ltd. [1986] 157 ITR 77 (SC). Of course, McDowell & Co. Ltd's case has been strongly relied upon. Juggilal Kamlapat v. CIT [1969] 73 ITR 702 (SC) at page 704 has also been taken into reliance. Paper book page 2, pages 7 to 11, 21, 25, 28, 46, 47 and 51 have also been relied upon. H.A. Shah & Co. v. CIT [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , not a case of tax planning but a colourable tax avoidance bordered on tax evasion since all the activities are in Bombay and controlled by the assessee and all these features prove that the Nepal company is ingenuine and sham. There are no minutes of the proceedings of any meeting, since nothing has been proved and nothing has been placed on record. There has been no commercial activity and no commercial advantage. Piercing the veil of the corporate entity, the McDowell's ratio applies since entire course of conduct is ordained and controlled by the assessee who is responsible for channelising the investment to his benefit, hence all is mala fide and there are no bona fides. He accordingly wants the ITAT to uphold the impugned orders and hold against the assessee. In reply, on behalf of the assessee, it has been contended that the Nepal company was not at the address located is not an aspect discussed by the CIT (Appeals); the Nepal company is not a sham and ingenuine company because it was incorporated in Nepal as per Nepal's laws; there is no prohibition in law that the Nepal company could not invest as an investment company in the shares of BDMC; suffering of loss as a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that total payment is made to a Chartered Accountant who manages a company on behalf of the shareholders/directors and finally that the revenue has not made enquiries at the correct address because the previous address was changed and it was notified to the Nepal Company Law Authorities. Concludingly, he says that the assessee's case squarely fell within section 6 since he is a non-Indian non-citizen, though resident and the orders of the learned lower authorities are required to be modified in terms of relief prayed for by the assessee. 5. In nutshell, the assessees case is that since the assessee is a non-Indian non-citizen, though resident one, his assets being located in Nepal--out of India--section 6 of the Wealth-tax Act, 1957 applies and the Nepal company being an investment company of the assessee, to reiterate, non-citizen non-resident, the arrangements were perfectly valid in law. The assets as such were not includible under section 6 of the Wealth-tax Act, 1957 for assessment purposes. 6. The case of the revenue is that in view of the ratio of the decision of the Hon'ble Supreme Court in McDowell & Co. Ltd.'s case, the assessee has devised a systematic transaction--a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a' and as a natural consequences thereto, foreign assets of the assessee are not includible in the hands of the assessee for assessment purposes since section 6 of the Wealth-tax Act, 1957 specifically provides for, 'exclusion of assets and debts outside India'. The said section reads as under:-- 'In computing the net wealth of an individual who is not a citizen of India or of an individual or a Hindu undivided family not resident in India or resident but not ordinarily resident in India, or of a company not resident in India during the year ending on the valuation date-- (i) the value of the assets and debts located outside India; and (ii) the value of the assets in India represented by any loans or debts owing to the assessee in any case where the interest, if any, payable on such loans or debts is not to be Included in the total income of the assessee under section 10 of the Income-tax Act; shall not be taken into account. Explanation 1: An individual or a Hindu undivided family shall be deemed to be not resident in India or resident but not ordinarily resident in India during the year ending on the valuation date if in respect of that year the individual or the Hindu und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80 and 81 of assessee's paper book (Vol. I), which, in terms, is a Photostat copy of the notification taken from Foreign Exchange Regulation Act, 1973. Reference is to section 9 of the said enactment. 9. The Nepal company, hereinafter to be called 'SIAL' (the Sterling Industrial Agencies Pvt. Ltd.), on 7-3-1975, purchased 5000 equity shares of BDMC from the open market at the then prevailing market rate. Again 5000 more shares were purchased on 10-3-1975. 12,000 + 16,965 on 12-3-1975. 1100 on 25-3-1975, 800 on 11-4-1975, 12,000 on 29-4-1975. These were purchased after taking permission of the Reserve Bank of India. On its part, BDMC (Bombay Dyeing & Manufacturing Co. Ltd.) had also obtained permission of the Reserve Bank of India for issuing bonus shares to its non-resident shareholders. The said Nepal company, SIAL, had two other shareholders who were holding 53,000 ordinary shares of Rs.10 each out of which Re.1 each share was paid up. These two were directors of the SIAL - the Nepal company. SIAL is a regular income-tax assessee in India and has been assessed under the provisions of the Income-tax Act, 1961 since the assessment year 1976-77. Assessments stand completed from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1977 vide Notification No. FERA 42/77-RB dated 24-2-1977. As your company had purchased the above shares of BDMC in 1975, the same was covered by the above notification of 17-8-1951 and as such there is no question of issuing any holding licence to you for your shareholding mentioned above. Yours faithfully, Sd/- for Controller.' The assessee has been placing on the file of the Income-tax Department analysis of his bank account right from the assessment year 1975-76, he has also placed information on the file of the department about his shareholding-sales and purchases. Pages 240 to 249 of assessee's paper book are copies of the assessment orders of SIAL under the provisions of the Income-tax Act, 1961 and these relate to assessment years 1978-79 onward up to 1983-84. Copies of assessment orders of the Nepal company for the assessment years 1984-85 to 1987-88 have also been placed on our file as assessee's paper book pages 252 to 258 and 261 to 264. The Nepal company, as mentioned earlier, is a company incorporated in Nepal in the Ministry of Industries and Commerce and the Certificate of Incorporation has been placed on our file as assessee's paper book page 293. It be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned earlier in the returns and as given to the Income-tax Department either by the assessee or, else, by the Nepal company during assessment proceedings. The revenue also wants the ITAT to pierce the veil, i.e., to lift the veil of the Nepal company and to hold the transactions to be individual transactions of the assessee but, in our considered opinion, it is too late in the day inasmuch as the Nepal company has since been assessed on its income under the provisions of the Income-tax Act, 1961 since assessment year 1976-77 and that income was income from dividend earned on shares held by the Nepal company of BDMC. That apart, the assessee has all along been placing on the file of the department bank analysis of his vis-a-vis his shareholding with the Nepal company and the remittances. Yet that apart, the sale and purchase of the shares of the Nepal company are perfectly legal in law and the bonus shares etc. issued to the Nepal company by BDMC were in accordance with the approval of the Reserve Bank of India. Remittance from India to Nepal is also permissible and is in accordance with the Indian laws as per notification issued under Foreign Exchange Regulation Act, which notifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o cash and bank balances of the said company could not have been assessed in the hands of the assessee. 15. In the net result, the assessee's appeal stands allowed in the above terms and to the above extent. Per Accountant Member: 16. My learned brother has very concisely condensed and capsulised very complex and complicated issues in this order. One cannot but appreciate the deep and penetrating yet simple and clear exposition of law in so far as it relates to matters of Indian citizenship and incorporation of companies and its effects on taxation matters. 17. The only point which I intend to put forward is in regard to the question of exclusion of movable assets located outside India as per the provisions of section 6(i) of the WT Act which reads as follows:-- "Section 6. In computing the wealth of an individual who is not a citizen of India or of an individual or a Hindu undivided family not resident in India or resident but not ordinarily resident in India, or of a company not resident in India during the year ending on the valuation date-- (i) the value of the assets and debts located outside India." 18. The WT Act and the Gift-tax Act do not contain specific prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stocks under the WT Act by simply stating that they are located at the place where the company is incorporated. 21. M/s. Sterling Industrial Agencies (P.) Ltd. was incorporated some time in 1970 with its registered office at Kamalpokhari, Kathmandu, Nepal. The real activities of the company commenced around the year 1975 when the assessee entered into certain transactions with it. The registered office by that time was changed to 6/94, Dharampath, Kathmandu, Nepal. According to the assessee the registered office shifted again to 20/103, Gyaneswar, Kathmandu with effect from 7-4-1989. 22. The apparent is normally presumed to be the real unless otherwise proved. The status of the company and its credentials as also the shares held by the assessee should have been accepted as such as apparent from the record. But that presumption cannot be easily drawn in this case. As pointed out earlier by my learned brother, the Revenue have tendered before us some evidence which are absolutely fresh. Even so, having accepted the same, they cannot be easily brushed aside unless the same are disproved or totally overturned. This obligation is all the more pronounced in our case as we are fact fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned CIT (Appeals) and restoring the case back to the Assessing Officer for fresh decision after giving full opportunity to the assessee to substantiate its claim. It is also necessary to bring on record and examine the provisions of the Companies Act, 2021 (1964) of Nepal in the context of the assessee-company and see how the company operates and conducts its business within the perimetre of this Act. These relevant and full facts are necessary to decide the location of the shares hold by the assessee in terms of the provisions of the said Act and such finding should be based on material facts placed on the record. 25. The facts to be brought on record and the finding to be recorded had special significance in the present case as the Hon'ble Bombay High Court, we are informed, is awaiting the order of the Tribunal and its finding for deciding the case of the assessee for the earlier assessment years pending before it. Only when relevant and full facts are brought on record, their Lordships can adjudicate and decide the issue. It is, therefore, paramount that the full facts be placed on the record. We accordingly set aside the order of the learned CIT (Appeals) and restore the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had transferred a sum of Rs.22,26,000 to the above named Nepal Co. Sterling Industrial Agencies Pvt. Ltd. (SIAL for short). As a consequence the wealth declared came down to Rs.11,70,900. This advance of Rs.22,26,000 made to SIAL was financed out of the sale proceeds of Rs.26,965 shares of Bombay Dyeing & Mfg. Ltd. to SIAL itself. The conclusion to be drawn was that the said SIAL purchased the shares of Bombay Dyeing Mfg. Co. Ltd. from out of the finances provided by the assessee himself. The amount advanced to the said Nepal Co. SIAL was not disclosed by the assessee in his wealth-tax returns thereafter because the status of the assessee has then become a non-citizen and for the purpose of Wealth-tax Act a non-citizen is not obliged to disclose and pay wealth-tax on the assets located outside India. A significant observation made by the W.T.O. was. no indication about this investment to Nepal concern was made by the assessee either in the course of income-tax or wealth-tax proceedings of any year. It was then pointed out that with the money available in Nepal, the assessee was bringing the same back to India and was purchasing shares of the Bombay Dyeing Mfg. Co. and was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the income-tax return file the Indian address was given as that of the assessee. Other than the dividend received from Bombay Dyeing Mfg. Co., there was no other income in the hands of SIAL shown for purpose of income-tax, except some marginal income by way of interest on investments made that too with Bombay Dyeing Mfg. Co. and its sister concerns. These investments also were traced to the dividend income generated from the shares held in Bombay Dyeing Mfg. Co. Gradually by July 1979 the initial share holding of SIAL from 52,865 shares grew up to 1.26,876 shares. The subsequent increase was on account of two bonus issues declared by Bombay Dyeing Mfg. Co. once in October 1976 and secondly in July 1979. In April 1983, SIAL purchased 5075 convertible debentures of Bombay Dyeing Mfg. Co. with the funds generated out of dividend income. These debentures were later converted into shares in October 1983 so that the total share holding increased to 1,31,951 shares as on 31-3-1984 which is the valuation date of the assessee for the present assessment under dispute. 8. From the above mentioned facts, gathered by the W.T.O. it was concluded by the department that the entire activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her fact or material coming into existence other than the change in opinion again based upon suspicion. Reliance was placed by the assessee upon a series of decisions to show that the ratio of the decision of Mcdowell & Co Ltd.'s case does not apply but those decisions were all distinguished by the revenue officers by giving their own reasons which are to be found well discussed in the assessment order passed by the W.T.O. The argument that these transactions were done with the approval of the Reserve Bank of India, at prevailing market rate did not find favour with the revenue an for the reason that the mere grant of approval by the Reserve Bank of India which was required in connection with the different provisions of Foreign Exchange Regulations could not have any decisive bearing in these matters. 10. For these reasons, the value of 1,31,951 shares of Bombay Dyeing Mfg. Co. held by the SIAL as on 31-3-1984 valued at the market value of Rs.93,02,545 was brought to tax in the hands of the assessee as his own wealth. That was how the addition of the first item mentioned above came to be made. 11. Then there was also advances made to the minor sons of the assessee amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and directed their exclusion in entirety. In other words, the Judicial Member believed the assessee's version that the Nepalese company was a genuine company and the assessee and the Nepalese Co. were two distinct and different entities and the assets belonging to Nepalese Co. which were exempt from tax by reason of the exclusion provided by section 6 of the W.T. Act could not be brought to tax. Whereas the learned Accountant Member felt that to arrive at the conclusion that the learned Judicial Member had arrived at, some more enquiry was necessary into certain aspects which he listed in his order and, therefore, for that purpose the matter should be set aside and should be sent back to the Assessing Officer for fresh decision after examining into those aspects. The aspects which be adverted to for purpose of fresh enquiry was a 'note' sent by the departmental officers to the Departmental Representative to be placed before the Bench in which it was said that on enquiry by the department into the affairs of SIAL with Nepal firm, it found certain glaring discrepancies which led to believe an draw a certain conclusion that such a company did not exist or could not have existed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ished, only a further enquiry is necessary. A further enquiry can be made at the level of the Tribunal either by the Tribunal itself by remanding the case to the Departmental Officers by giving proper and definite directions and guidelines in which the enquiry is required to be made, or by setting aside the assessment directing the Department to make further enquiries setting out the direction in which further enquiry is to be made. In fact during the course of the hearing of this matter. the learned counsel for the assessee Shri Harish submitted that the Tribunal could have opted for the first course i.e. remand rather than opting for the second course namely set aside. In my view it is purely a discretion with the Bench as to whether in a particular given state of facts, the matter should be remanded or set aside. In either case, the purpose is to enquire into the evidence brought on record and to examine in the light of that evidence whether the claim of the contesting party is established or not. When the learned counsel for the assessee suggested remand as a better and proper course, it follows that some more enquiry was necessary and the final conclusion of the Tribunal could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings for the other years are dependent on this. Sd/- (V.B. Srinivasan) C.I.T. Central-I." This letter was placed by the Sr. D.R. before the Bench. The Bench gave opportunity to the assessee to submit its reply which is as under:-- "In the Income-tax Appellate Tribunal, Bombay Bench 'E' Bombay, Shri Nusli N. Wadia, W.T.A. No. 409/B/90 Relating to Assessment year 1984-85. Rejoinder to the letter No. L/J/I/29-9/87-88 dated 4th March, 1991 from the C.I.T. (Central-I), Bombay to Sh. Ashok Mansukhani, Sr. A.R. ITAT, Bombay. A copy of the abovementioned letter was given to the appellant's representative in the course of hearing on 4th March, 1991 with directions to file a rejoinder by 5th March, 1991. The rejoinder on behalf of the appellant is furnished hereunder: 1. The address of the registered office of the company known as Sterling Industrial Agencies Pvt. Ltd. (hereinafter referred to as SIAL) was originally 6/94, Dharampath, Kathmandu. Subsequently, the registered office has been shifted to 20/103, Gyaneswar, Kathmandu from 7th April, 1989. Annexed hereto and marked annexure A1 is a Fax copy of a letter addressed by SIAL to the Director General. His Majesty's Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the real state of affairs be brought on record and proved beyond any shadow of doubt by placing all relevant evidence on record and since the learned counsel also cannot be expected to produce anything and everything instantly, it is only meet and proper that more opportunity be given to the assessee by setting aside the order of the learned CIT (A) and restoring the case back to the Assessing Officer for fresh decision after giving full opportunity to the assessee to substantiate its claim. It is also necessary to bring on record and examine the provisions of the Companies Act, 2021 (1964) of Nepal in the context of the assessee-company and see how the company operates and conducts its business within the perimetre of this Act. These relevant and full facts are necessary to decide the location of the shares held by the assessee in terms of the provisions of the said Act and such finding should be based on material facts placed on the record." If I say that no further enquiry is needed that amounts to saying that the doubts expressed by the learned Accountant Member are not real doubts and they were mere fishing and roving enquiries without any significance or relevance. In oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to arrive at the truth nor should be used as a hand-maid to scuttle a genuine enquiry. What was in the mind of the Accountant Member can be said to be a doubt but having sat on the seat ofjustice of a final fact finding body, no fact can be taken to have been established or proved without, making enquiries into all the facts and without getting all the doubts cleared, provided the doubts are genuine and are not in the nature of roving or fishing enquiries. In this case, the facts presented by the Departmental Representative to Bench and the justification provided by the assessee do need enquiry and it cannot be said that they be taken as proved. I am, therefore, of the opinion that in a case of this nature when fresh material has come to light throwing doubts as to the real state of affairs, the enquiry should not be stopped. Therefore, setting aside of the assessment is the only way by which the assessee can be asked to establish the facts it mentioned in its letter. I may also state here that the learned counsel for the assessee Sh. Harish had not objected to the power of the department to pierce the corporate veil except to state that there was no case for such an unholy pierc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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