Overseas property ownership through BVI company upheld as assessee lacked beneficial interest in assets

ITAT Delhi ruled in favor of assessee regarding overseas property ownership through BVI company. Court held that lifting corporate veil was unjustified as assessee lacked beneficial interest in company assets. Properties were legitimately owned by company, which paid UK's Annual Tax on Enveloped Dwellings. No evidence showed undisclosed investment or tax avoidance intent, particularly since company incorporation predated beneficial ownership provisions. Court deleted all additions under Income Tax Act and Black Money Act, finding no assessable income in assessee's hands from overseas company assets.

---

---

The core legal issues considered in these appeals arising from search and seizure operations under the Income-tax Act, 1961 and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA) involve:

1. Whether the corporate veil of an overseas company incorporated in the British Virgin Islands (BVI), in which the assessee and family members were shareholders, could be lifted to assess the income of the company, including rental income and deemed income from properties held abroad, in the hands of the individual shareholders under the Income-tax Act and BMA.

2. The applicability and interpretation of the concepts of "beneficial owner" and "beneficiary" under section 139(1) of the Income-tax Act and the BMA in relation to foreign assets held through overseas companies.

3. The relevance of the Indo-UK Double Taxation Avoidance Agreement (DTAA) in determining the taxability of income from immovable property situated in the UK.

4. The validity of additions made on account of alleged undisclosed income from foreign bank accounts jointly held by the assessee and family members.

5. Specific issues relating to the treatment of advance received and forfeited on sale of a property, and the application of sections 50C and 51 of the Income-tax Act in relation to capital gains on property transactions.

6. The correctness of disallowance of expenses on estimated basis in the hands of the assessee where such expenses pertain to partnerships or firms.

Issue-wise Detailed Analysis

1. Lifting the Corporate Veil to Assess Income of Overseas Company in Hands of Shareholders

Legal Framework and Precedents: The principle of lifting the corporate veil is a well-established exception to the separate legal entity doctrine enshrined in company law. The Supreme Court in McDowell & Co. Ltd. vs Commercial Tax Officer [1985] held that tax planning is legitimate only within the framework of law and that colourable devices to evade tax can be disregarded by lifting the corporate veil. The Gujarat High Court in Ajay Surendra Patel vs Dy. CIT (2017) elaborated that corporate veil can be pierced where incorporation of a company is a facade to defraud revenue or avoid legal obligations, or where the company acts as an agent or nominee of shareholders.

Court's Reasoning and Findings: The Assessing Officer (AO) relied on seized material including incorporation invoices, calendar events from the assessee's mobile phone evidencing involvement in purchase, sale, renovation, leasing, and management of properties held by the overseas companies Carmichael Capital Limited (CCL) and Eaton Estates Limited (EEL). The AO found that the companies were incorporated primarily to acquire UK properties to avoid tax liability in India. The AO concluded that the assessee and family members were beneficial owners of the properties and lifted the corporate veil to assess income in their hands.

The CIT(A) upheld the AO's findings, holding that the arrangement lacked commercial substance and was a tax avoidance scheme. The Tribunal, however, after detailed analysis, rejected the AO's and CIT(A)'s approach to pierce the corporate veil. It noted that the entire share capital of CCL was invested from declared, assessed, and tax-paid funds remitted under the Liberalized Remittance Scheme (LRS). The properties were acquired by the company from its own capital and bank loans, not directly by the shareholders.

The Tribunal emphasized that the shareholders' rights are limited to their shares and dividends declared by the company. Ownership of shares is distinct from ownership of company assets. The shareholders do not have any direct right over the assets or income of the company unless dividends or distributions are made. The Tribunal distinguished "Ultimate Beneficial Owner" (UBO) of the company from beneficial ownership of the company's assets, noting that the former refers to shareholders, but this does not translate to beneficial ownership of assets for tax purposes.

The Tribunal relied on the principle that the corporate veil can only be lifted where there is clear evidence of fraud, tax evasion, or sham transactions, none of which were established by the AO. The calendar events relied upon were found to be innocuous and did not demonstrate financial transactions or control warranting lifting the veil. The Tribunal also referred to the payment of Annual Tax on Enveloped Dwellings (ATED) in the UK by the companies, which confirmed that the holding of properties through companies was legal and tax compliant under UK law.

Application of Law to Facts: The Tribunal found that the incorporation of CCL predated the acquisition of properties by several years, and the properties were sold before the introduction of beneficial ownership provisions in the Income-tax Act and BMA. The shareholding pattern was transparent, with shares held by the assessee and family members in their own names with no evidence of concealment or benami arrangements. The source of funds was declared and accepted by the revenue. Therefore, the income of the company could not be assessed in the hands of the shareholders.

Treatment of Competing Arguments: The revenue's argument that the company was a facade to evade tax was rejected due to lack of evidence of undisclosed income or tainted money. The assessee's contention that the company was a separate legal entity and the shareholders had no beneficial interest in company assets was accepted. The Tribunal also distinguished the concept of beneficial ownership under the Income-tax Act and BMA from the concept of UBO used for regulatory or compliance purposes.

Conclusion: The Tribunal held that the corporate veil could not be lifted in the absence of evidence of tax evasion or fraud and that the income of CCL and EEL was not assessable in the hands of the individual shareholders. The income from the properties held by the companies was rightly assessed in the hands of the companies.

2. Interpretation of "Beneficial Owner" and "Beneficiary" under Section 139(1) and BMA

Legal Framework: The Finance Act, 2015 introduced explanations 4 and 5 to section 139(1) defining "beneficial owner" as an individual who has provided consideration for an asset for immediate or future benefit of self or others, and "beneficiary" as an individual who derives benefit from an asset for which consideration was provided by another person. The BMA defines undisclosed foreign income and assets in terms of beneficial ownership and beneficiary status, importing definitions from the Income-tax Act.

Court's Interpretation: The Tribunal held that the assessee, having provided the consideration for shares in CCL from declared funds, was the beneficial owner of the shares but not of the company's assets. The assessee did not receive any dividends or other income from the company and thus could not be considered a beneficiary of the company's assets. The distinction between ownership of shares and ownership of company assets was emphasized.

Application to Facts: Since the assessee was the registered shareholder and had invested declared funds, he was beneficial owner of shares but not of company assets. The properties and bank accounts belonged to the company, and the assessee's rights were limited to dividends or distributions, which were not received.

Conclusion: The Tribunal concluded that the income and assets of the company could not be attributed to the shareholders as beneficial owners or beneficiaries under the Income-tax Act or BMA.

3. Applicability of Indo-UK DTAA

Legal Framework: Article 6 of the Indo-UK DTAA provides that income from immovable property may be taxed in the country where the property is situated. Article 14 allows capital gains to be taxed according to domestic law of contracting states. Section 90(3) of the Income-tax Act mandates that terms not defined in the Act or DTAA shall have meaning as per government notifications.

Court's Reasoning: The Tribunal noted that the DTAA provisions are property-based and do not specify the person in whose hands the income is taxable. The revenue's reliance on the word "may" in the DTAA to tax income in India was countered by the Tribunal's reference to a coordinate bench decision which held that the resident country's right to tax income is not taken away unless expressly stated.

Application: The income from UK properties held by the overseas companies was taxable in the UK as per DTAA and domestic laws. The properties were not owned by the assessee individually, and thus income could not be assessed in India in their hands.

Conclusion: The Tribunal held that the income from immovable property situated in the UK was taxable in the UK and not assessable in the hands of the Indian resident shareholders under the DTAA.

4. Assessment of Income from Foreign Bank Accounts

Facts and Findings: The bank account with Citi Bank Singapore was jointly held by five family members and was closed in October 2011, before the introduction of BMA and mandatory foreign asset disclosure requirements. The AO made additions of the entire amount in the hands of the assessee, which was challenged.

Court's Reasoning: The Tribunal restricted the addition to the assessee's share (one-fifth) of the bank balance and interest. Further, since the account was closed before the BMA came into force and the foreign asset schedule was introduced, there was no reason to presume non-disclosure. The minimal balance and closure of the account supported the assessee's bona fides.

Conclusion: The Tribunal deleted the additions made on account of the bank account balances and interest in excess of the assessee's share.

5. Treatment of Advance Received and Forfeited on Sale of Property and Application of Sections 50C and 51

Legal Framework: Section 51 of the Income-tax Act provides that any advance money received and retained in respect of negotiations for transfer of capital asset is to be deducted from the cost of acquisition in the year of actual sale. Section 50C mandates that if the sale consideration is less than stamp duty value, the latter is deemed to be the sale consideration, with an obligation on AO to refer the matter to the DVO for valuation if the assessee objects.

Court's Findings: The Tribunal held that the AO erred in making addition of advance received as income in the year of receipt instead of adjusting it against cost of acquisition in the year of actual sale. The addition was deleted for AY 2012-13. Regarding the application of section 50C, the Tribunal held that the AO was obliged to refer the valuation dispute to the DVO upon objection by the assessee and could not unilaterally adopt the stamp duty value. The matter was restored to the AO with directions to refer to the DVO.

6. Disallowance of Estimated Expenses in Hands of Assessee

Facts and Findings: The AO disallowed 20% of certain expenses claimed by the assessee on estimated basis alleging personal nature. The Tribunal held that no addition can be made on estimated basis in assessment proceedings under section 153A, especially when 80% of expenses were accepted. Further, any disallowance should be made in the hands of the firms or LLPs and not the individual assessee where no benefit accrued to the individual.

Conclusion: The Tribunal upheld the deletion of disallowance of expenses in the hands of the assessee.

Significant Holdings and Core Principles Established

"Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges." (McDowell & Co. Ltd. v. Commercial Tax Officer)

"The shareholders of a company do not at all have any right in the income of the company but their right in the income of the company is only limited to the extent of the dividend or payouts given by the company as per the law. Ownership of shares in and ownership of the assets of the company are two different connotations and are not synonymous at all."

"The concept of lifting or piercing the corporate veil is applied sparingly and only where incorporation is a facade to defraud revenue or avoid legal obligations, or the company acts as an agent of shareholders."

"Income from immovable property situated in a foreign country may be taxed in that country and the DTAA provisions are property-based and do not confer personal taxability in the resident country unless expressly stated."

"The AO cannot make additions on estimated basis in assessment proceedings under section 153A without concrete evidence and any disallowance of expenses should be in the hands of the entity that incurred them."

Final determinations on issues:

• The corporate veil of the overseas company cannot be pierced to attribute income of the company to the shareholders in the absence of evidence of tax evasion or fraud.
• The assessee and family members were beneficial owners of shares but not beneficial owners or beneficiaries of the company's assets; thus, income of the company is not assessable in their hands.
• Income from UK properties is taxable in the UK under the Indo-UK DTAA and not in India in the hands of the shareholders.
• Additions made on account of foreign bank accounts jointly held were reduced to the assessee's share and deleted where accounts were closed before BMA applicability.
• Additions of advance money received on property sale were deleted for the year of receipt and directions issued for proper valuation under section 50C.
• Disallowance of expenses on estimated basis in the hands of the assessee was deleted.

---