Case: Commissioner Of Income Tax, Kolkata Vs. Mukundray K.Shah

Department sought to tax the said amount of Rs.5.99 crores as undisclosed income in the hands of the assessee. On 24.8.2000, the Department searched the premises of the assessee under Section 132 of Income Tax Act, 1961(for short, the Act). During the search apart from cash and jewellery a diary titled "ML-20" was seized. On 16.11.2000, during the search the statement of Kalpesh Shah, son of the assessee, was also recorded under Section 132(4) of the said Act. Statement of the assessee was also recorded on that date. The diary indicated investment of Rs.26.35 crores by the assessee in 9% RBI Relief Bonds during the accounting year ending 31.3.2000. By the Assessment Order dated 29.11.2002, the said amount of Rs.5.99 crores was assessed as a deemed dividend under Section 2(22)(e) of the said Act. The A.O. 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 1.4.90 to 24.8.2000 (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% RBI Relief Bonds during Financial Year 1999-2000. The said Bonds were purchased between 17.11.99 and 11.2.2000. The A.O. found that the said Bonds were purchased from the money received from MKF and MKI (for short, two firms) in which the assessee was the partner. In the books of account the said two firms were shown to have received back the loans and advances from three companies M.K. Tea (P) Ltd. (for short, MKTPL), Safari Capital (P) Ltd. (for short, SCPL) and MKSEPL, which three companies were closely related companies, in which the assessee had controlling interest. All three companies were private limited companies in which the assessee had considerable voting power. However on the basis of the said diary and the cash flow chart, the A.O. concluded that Rs.5.99 crores was paid by MKSEPL (including SCPL) and Rs.94 lakhs by MKTPL in the Accounting Year 1999-2000 to MKF and MKI respectively for the purchase of 9% RBI Relief Bonds by the assessee. In the circumstances, by the Assessment Order, the Department assessed the said sum as deemed dividend in the hands of the assessee under Section 2(22)(e) of the Act. It was held that MKSEPL, SCPL and MKTPL (for short, three companies) were the companies in which the public was not substantially interested; that the assessee was one of the shareholders having more than 10% total voting rights of MKSEPL and SCPL; that in MKTPL the total shareholding of the assessee was 9.3% and, therefore, he was not the beneficial owner of the shares of the said companies. It was further held by the A.O. that SCPL stood merged with MKSEPL with effect from 18.5.98. This was by the Order of the Calcutta High Court datedaccording to the Order of Assessment, the alleged repayments by MKSEPL including SCPL were not repayments but they were payments made by MKSEPL (including SCPL) to MKF and MKI for the individual benefit of the assessee amounting to Rs.5.99 crores which was held to be a deemed dividend under Section 2(22)(e) of the Act. Before the A.O. the assessee contended that during the financial year 1999-2000, his shareholding in MKTPL was only 9.3% and, therefore, he was not having substantial interest in the said company; that similarly he was not having substantial interest in SCPL in which his shareholding in the F.Y 1999-2000 was only 0.2%; that the assessee was one of the partners in MKF and MKI and that the said two firms did not have substantial interest in MKSEPL, SCPL and MKTPL; that reserves and surplus of MKSEPL cannot be taken as reserves and surplus of SCPL which was merged with the company with effect from 18.5.98; 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 A.O. It was held that the assessee had substantial interest in MKSEPL in which SCPL stood merged with effect from 18.5.98; that there was no merit in the contention of the assessee that the two firms, in which he was the partner, were not beneficial owner of shares of MKSEPL and SCPL; that the only relevant criteria was whether payments made to the said two firms was for the individual benefit of the assessee, who was the shareholder in MKSEPL. This point, according to the A.O., 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 A.O., the said two firms - MKI and MKF, were the conduits enabling the assessee to take out the money from the company by using the said two firms as conduits. According to the A.O., payment of Rs.5.99 crores was not made directly to the assessee by MKSEPL but through the above-mentioned two firms - MKF and MKI. At this stage, it needs to be mentioned that there is no dispute that 9% RBI Relief Bonds were purchased by the assessee out of the funds available with MKI and MKF who in turn were funded by MKSEPL including SCPL. It is also not in dispute that the assessee had the majority of the voting power in MKSEPL. It is not in dispute that the said company, MKSEPL, had accumulated profits but according to the A.O. the said company deliberately refused to distribute the said accumulated profits as dividends to its shareholders and instead adopted the device of advancing the said accumulated profits as loan to the assessee who was the shareholder of the said company. According to the A.O., it was a device to evade payment of tax on accumulatedby the Assessment Order dated 29.11.2002, the assessee went in appeal to Commissioner of Income Tax (Appeals) (for short, CIT (A)) under Section 158BC(c) read with Section 143(3) of the Act. By the Order dated 21.2.03, it was held by CIT (A) that the assessee did not possess any substantial interest in MKTPL or in SCPL during F.Y 1999-2000; that MKF and MKI had no substantial interest in MKSEPL, SCPL and MKTPL during F.Y. 1999-2000; that SCPL did not make any loan to MKI during the financial year 1999-2000; that SCPL had borrowed money from MKI and all payments made by SCPL during F.Y. 1999-2000 were repayments of loans advanced by MKI; that the assessee had 16% share in MKF; that MKSEPL had a current account in the books of MKF and that in most cases MKF had advanced loans to MKSEPL. According to CIT (A), MKSEPL have repaid those loans to MKF in which the assessee had substantial interest. According to CIT (A), the nature of transactions between MKF and MKSEPL consisted of a running account; it consisted of giving of loans and repayments thereof. According to CIT (A), none of the two firms had any substantial interest in MKSEPL, SCPL and MKTPL. According to CIT (A), all withdrawals made by the assessee from MKF and MKI including the impugned sum were debited to the assessees capital account in the books of MKF and MKI. According to CIT (A), 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 CIT (A), merely because repayments were made by MKSEPL and SCPL through MKF and MKI in January/February 2000 and merely because the said amounts were partly utilized by the said two firms in making payments to the assessee who bought 9% 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 CIT (A), MKF and MKI were two separate entities; that there was no material to show that MKF and MKI were used as conduits for routing the money from MKSEPL to the assessee. According to CIT (A), while the total investment made by the assessee in purchase of Bonds during F.Y. 1999-2000 was Rs.26.35 crores, the Department has sought to assess only Rs.5.99 crores as deemed dividend and, therefore, according to CIT, the allegation made by the A.O. was baseless. According to CIT (A) there was no material to show that MKSEPL and SCPL had made payments to the said two firms for the benefit of the assessee enabling him to purchase the said Bonds in F.Y. 1999-2000. According to CIT (A), MKSEPL and SCPL were the debtors of MKF and MKI in the regular course of business and, therefore, payments made by MKSEPL to MKF and MKI were repayments of loans and that the said payments were not for purchase of Bonds by the assessee. Accordingly, the appeal was allowed by CITby the decision dated 21.2.03, the matter was carried in appeal by the Department to the Tribunal. By the judgment dated 28.1.05, the Tribunal held that in this case Section 2(22)(e) was attracted since disbursement was made by MKSEPL (company); that SCPL had no independent existence in law in January/February 2000 when payments were made by MKI and MKF to the assessee who bought the said Bonds; that SCPL disbursed Rs.2.04 crores and Rs.75 lakhs in January 2000; that SCPL stood merged in MKSEPL vide Order of the High Court dated 5.7.2001 with retrospective effect, i.e. 18.5.98; that in January 2000 SCPL had no legal existence since the merger had taken place with effect from 18.5.98; that merger had taken place under a voluntary scheme in which every shareholder of the two companies agreed; that, therefore, there was no merit in the contention of the assessee that his shareholding in SCPL and the accumulated profits of SCPL were not liable to be taken into account; according to the Tribunal, in the aforestated circumstances, all payments should be taken to have originated from MKSEPL; the Tribunal further found that the accumulated reserves of MKSEPL was Rs.55 crores, nearly ten times in excess of Rs.5.99 crores taxed as deemed dividend. It is not in dispute that the assessee had more than 10% of the total voting power inthe 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 A.O. 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 payment has to originate from a company. After excluding known company sources, according to the Tribunal, the A.O. 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 A.O. 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 10% voting power. Accordingly the Tribunal allowed the Departmentsby the decision of the Tribunal dated 28.1.05, the assessee carried the matter in appeal to the High Court under Section 260A of the said Act. By the impugned judgment the High Court held in favour of the assessee on two counts. According to the High Court, the assessee had declared the primary facts in the Returns. According to the High Court, the present case did not fall under Chapter XIV-B of the saidto the High Court, this was not the case of undisclosed income. According to the High Court, this was a matter of regular assessment. According to the High Court, none of the Authorities below have held that the entries in the books of accounts wereto the High Court, full details were disclosed during the block period in the Returns filed by the assessee. According to the High Court, all payments were made by cheque. According to the High Court, moneys were lent and advanced by MKSEPL to MKF and MKI in normal course ofto the High Court, the Tribunal had erred in holding that MKF and MKI were conduits for routing the money from MKSEPL through the two firms to the assessee; that there was no evidence in that regard; that the two firms did not have substantial interest in MKSEPL; that there was no evidence to show that payments were made by MKSEPL for the individual benefit of the assessee and to enable him to purchase 9% RBI Relief Bonds; that CIT(A) was right in holding that when Rs.26.35 crores was invested in the above financial year then A.O. had no reason to treat Rs.5.99 crores as deemed dividend under Section 2(22)(e) and for the above reasons the High Court set aside the judgment of the Tribunal dated 28.1.05. Hence this civil appeal.

Court's reasoning:
In this case, the Tribunal has concluded that the payment routed through MKF and MKI was for the benefit of thewas a finding ofthe High Court should not have interfered with the saidthe above two judgments lay down that the concept of deemed dividend under Section 2(22)(e) of the Act postulates two factors, namely, whether payment is a loan and whether on the date of payment there existed "accumulatedtwo factors have to be correlated. This correlation has been done by the Tribunal coupled with the fact that all withdrawals were debited in the capital account of the firm leading to the debit balance of Rs.8.18High Court has erred in disturbing the findings ofaside the impugned judgment of the High Court.