TaxTMI 
TaxTMI 
2007 (9) TMI 301
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....was incorporated on 20th Oct., 1989 (during the previous year relevant to the asst. yr. 1990-91) with the object of carrying on business of an investment company. FIPL is an investment company of the Modi Group. 4. Xerox, UK and Modi Group had jointly promoted Modi Xerox Ltd. and Indian Xerographic System Ltd. ("DCS"). DCS had invested in the equity of FIPL. FIPL had taken a loan of Rs. 19,60,000 from IXS during the previous year relevant to asst. yr. 1990-91. 5. FIPL had paid-up share capital of Rs. 24,52,000. The shareholding pattern of FIPL was as follows: -------------------------------------------------------- S. Name of Shareholder Number of Shares Paid-up value No. (Rs.) -------------------------------------------------------- 1. Mr. Ashok Kr. Goel 100 1,000 2. Mr. D....
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....ssed in the hands of DCS on substantive basis in the asst. yrs. 1990-91 to 1996-97. FIPL has been assessed as separate legal entity since asst. yr. 1997-98. 8. Handsome Investments (P) Ltd. ("HIPL") was incorporated on 20th Oct., 1989 (during the previous year relevant to the asst. yr. 1990-91) with the object of carrying on the business of an investment company. HIPL is an investment company of the Modi Group. 9. HIPL had paid-up share capital of Rs. 44.13 lacs held by DCS and four sister concerns of HIPL namely, Attractive Investment (P) Ltd., Better Investment (P) Ltd., Fortunate Holdings (P) Ltd. and FIPL. 10. At the end of the previous year relevant to the asst. yr. 1993-94, HIPL had (a) outstanding loan of Rs. 1,19,86,043 payable to IXS. (b) investment of Rs. 2.15.02.865 which consisted of the following : -------------------------------------------------------- S. Name of Shareholder Number of Shares Paid-up value No.  ....
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....before the Tribunal. 12. The year-wise position of these three companies and the status are as under : Asst. yr. 1990-91 Re : Assessment in the case of FIPL 12.1 In the assessment proceedings for the asst. yr. 1990-91, FIPL was held to be a paper entity of IXS and the income of FIPL was assessed in the hands of FIPL on protective basis. The AO completed assessment for the assessment year under consideration at an income of Rs. 13,710 as against the returned loss of Rs. 4,76,290 after making addition of Rs. 4,90,000 on account of unexplained investment, being amount of contribution to share capital of the appellant received from Better Investments (P) Ltd. The aforesaid addition made by the AO was deleted by CIT(A) in appeal filed by FIPL. However, there was no finding by CIT(A) on the issue relating to paper entity. 12.2 Appeal (ITA No. 3731/Del/1994) filed by the Revenue before the Tribunal against the order of CIT(A) deleting the aforesaid addition was dismissed by the Tribunal, as per pp. 8-12 of the assessee's paper book. 12.3 There is no appeal filed by FIPL for the said assessment year. Re : Assessment in the case of HIPL 12.4 HIPL was assessed as a separate legal ent....
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....ty of IXS and income of FIPL was assessed in the hands of IXS on substantive basis. The details of the disallowance made by the AO in the assessment year under consideration are as follows : ------------------------------------------------------------------- Asst. yr. Returned income Assessed income Addition/Disallowance ------------------------------------------------------------------- 1991-92 (Rs. 5,76,564) Rs. 4,37,416 Disallowance of Rs. 10,13,980 being interest paid to IXS ------------------------------------------------------------------- The appeal fil....
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....ly. 12.18 In the assessee's appeals, the assessee has raised the following grounds: (a) challenge to reassessment-ground Nos. 1 to 2 (b) challenge to the finding that FIPL is paper entity-ground No. 3 In the Department's appeals, the Department has challenged the direction given by CIT(A) to exclude the income by way of interest from FIPL while computing income of IXS Ltd. Asst. yr. 1992-1993 Re : Assessment in the case of FIPL - (ITA No. 1675/Del/2003) 12.19 In the assessment proceedings for the asst. yr. 1992-93 FIPL was held to be a paper entity of IXS and income of FIPL was assessed in the hands of IXS on substantive basis. The details of the additions/disallowances made by the AO in the assessment years under consideration are as follows: ------------------------------------------------------------------- Asst. yr. Returned income Assessed income Addition/Disallowance ------------------------------------------------------------------- 1992-93 (25,68,450) 12,28,090 The AO rejected the (in....
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....bsp; investment as stock-in-trade. (b) disallowed deduction of &....
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....peal against the aforesaid order of CIT(A), challenging the finding that FIPL is a paper entity of IXS and also the quantum of income assessed. Re : Assessment in the case of HIPL 12.20 HIPL was assessed as a separate legal entity in the assessment under consideration. There is no appeal filed by HIPL for the said assessment year. Re : Assessment in the case of IXS- (ITA No. 909/Del/'2004 (assessee's appeal) & ITA No. 1207/Del/2004 (Department's appeal) 12.21 The original assessment in the case of IXS Ltd. for the asst. yr. 1992-93 was completed under s. 143(3) of the Act. The same was reopened vide issue of notice dt. 9th March, 2000 under s. 148 of the Act. The income of FIPL as assessed by the AO during the asst. yr. 1992-93 amounting to Rs. 12,28,090 was added in the hands of the IXS on substantive basis. 12.22 Before the CIT(A), the assessee challenged the reopening of assessment for the asst. yr. 1992-93, inter alia, on the following grounds : (a) reassessment being beyond period of 4 years was barred by limitation in terms of proviso to section 147 of the Act. (b) the reassessment proceedings were initiated merely on change of opinion. On merits, it was argued that....
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.... books of accounts of loss of previous FIPL and recasted the years) P&L a/c of FIPL: (Current year loss was (a) treating Vyaj Rs. 23,561) Badla transactions ....
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....p; administrative expenses of Rs. 9,206 (c) disallowed &nbs....
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....; FIPL and recasted the years) P&L a/c of FIPL: (Current year loss was (a) treating Vyaj Rs. 90,515) Badla transactions as transactions of ....
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.... alleging that no business was carried on by HIPL. (c) disallowed &nbs....
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....nt's appeal) 12.31 The original assessment in the case of IXS Ltd. for the asst. yr. 1993-94 was completed under section 143(3) of the Act. The same was reopened vide issue of notices dt. 9th March, 2000 under section 148 of the Act. The incomes of FIPL and HIPL as assessed by the AO during the asst. yr. 1993-94 amounting to Rs. 36,51,368 and Rs. 60,48,995, respectively were added in the hands of the IXS on substantive basis. 12.32 Before the CIT(A), the assessee challenged the reopening of assessment, inter alia, on the following grounds : (a) reassessment being beyond period of 4 years was barred by limitation in terms of proviso to section 147 of the Act. (b) the reassessment proceedings were initiated merely on change of opinion. On merits, it was argued that FIPL and HIPL were distinct and separate legal entities from IXS Ltd. and there was no basis to warrant in law and on facts to treat FIPL and HIPL as paper entities of IXS. Without prejudice, the assessee also challenged the quantum of income of FIPL and HIPL added in the hands of DCS. The CIT (A) upheld the reopening of assessment for the asst. yr. 1993-94 and dismissed the objections raised by the assessee. 12.33 T....
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....bsp; payable on loan taken (Current year from Fortunate loss was Holdings (P) Ltd. Rs. 23,561) alleging that FIPL failed to explain the &nbs....
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....sp; utilized for purpose of the business. Disallowance of Rs. 5,625 being &nb....
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....p; business. Disallowance of Rs. 9,800 being the amount of brokerage &n....
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....nbsp; have not been incurred for business purposes. Disallowance of Rs. 7,680 being  ....
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....ollows: ------------------------------------------------------------------- Asst. yr. Returned income Assessed income Addition/Disallowance ------------------------------------------------------------------- 1994-95 (2,85,210) 12,28,090 The AO rejected the (consisting of books of accounts of 'nil' business FIPL and recasted the income and income P&L a/c of FIPL: of Rs. 2,85,210 from other &nb....
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....sallowing general expenses of Rs. 49,925 incurred by the HIPL on the ground that the &n....
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.... Rs. 5,15,714 payable to M/s Diamond Stone (India) (P) Ltd. on the ground that the ....
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....bsp; Investments (P) Ltd. being the difference between the amount of interest shown as &n....
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....sp; expenses of Rs. 4,300 incurred by the appellant on purchase of &nbs....
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....bsp; for business purposes. ------------------------------------------------------------------- The appeal filed by HIPL before CIT(A) against the said assessment order for the asst. yr. 1994-95 was dismissed by CIT(A) vide order dt. 29th Sept., 2004. HIPL is in appeal against the aforesaid order of CIT(A), challenging the finding that HIPL is a paper entity of IXS and also the quantum of income assessed. Re : Assessment in the case of IXS 12.40 Income of HIPL and FIPL was assessed in the hands of DCS on substantive basis for assessment year under consideration. The CIT(A) upheld the stand of the Department that FIPL and HIPL were paper entities of DCS and, therefore, income of FIPL and HIPL was to be assessed in the hands of IXS on substantive basis for the assessment year under consideration. Against the aforesaid orders of the CIT(A) for the assessment ye....
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.... Rs. 84,073 holding the same to be related to earlier years. 1996-97 (24,38,786) 79,324 Disallowance of (including current &n....
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....he appellant for the following reasons : (i) The investment in FIPL is held partly by IXS and partly by a few other investment companies funded by IXS. (ii) The funds invested by FIPL for purchase of shares have been introduced by IXS. (iii) The directors of FIPL are senior employees of sister concern of IXS. (iv) FIPL is not having a separate office and FIPL is being run from the residence of Mr. Ashok Goyal, a director of FIPL at Noida. (v) FIPL is not having any employee or staff for its functioning. (vi) FIPL's bank is situated at Nehru Place which is 20 kms. away from the office of the FIPL at Noida. U.P. and is being operated by Mr. Ashok Goyal and the other director Mr. D.P. Dani who are also operating the account of IXS. (vii) FIPL does not have a separate management but is being managed by the directors who are employees of other company and looking after interest of such company. (viii) The ultimate beneficiary of the activities of the FIPL is IXS since it is receiving huge interest on deposits made with the FIPL for purchase of shares of Modi Xerox Ltd. by the FIPL. (ix) The Vyaj Badla transactions have been carried out at Bombay by FIPL where FIPL does not have....
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....count of DCS was not being operated by the director of FIPL namely Mr. D. P. Dani as alleged by the AO of FIPL and therefore, no adverse inference can, therefore, be drawn from the observation made by the AO in this regard. 15.6 There is no bar in employees of a company being directors of another company and merely because the directors of a company are employees of another, it does not follow that such directors are not interested in proper management of the company of which they are the directors and are looking after the interest of the company of which they are the employees. In fact, a contrary view would be more acceptable. 15.7 Further, Modi Xerox Ltd., a sister concern of DCS, was in no way interested in FIPL or vice versa and there is no question of the director of FIPL looking after the interest of Modi Xerox in FIPL as alleged by the AO. Also neither Mr. Ashok Goyal nor Mr. D.P. Dani, directors of FIPL has any interest leave alone substantial interest in Modi Xerox Ltd. as alleged by the AO. The only connection Mr. Ashok Goyal had with Modi Xerox Ltd. was that he was an employee of such company. The other director, i.e. Mr. D.P. Dani was not even an employee of Modi Xe....
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....rket rate of interest. Shares of Modi Xerox Ltd. and Modi Rubber Ltd. purchased by FIPL from market have been sold to IXS, again, at market rate. The transactions between the two companies are at arm's length. 15.13 FIPL and IXS are companies assessed to the same rate of tax. There is no tax advantage either to the assessee or to the Revenue, if FIPL and IXS were to be assessed independently individually or the income of FIPL was to be clubbed with the income of IXS. The respective stands of the assessee and the AO are revenue neutral. 15.14 Merely because IXS has invested in the share capital of FIPL or advanced loans to FIPL or the employees of Modi Xerox Ltd. (sister- concern of IXS) are directors of FIPL cannot be considered adequate ground(s) to hold FIPL as paper entity of IXS. The income and assets of FIPL belong to FIPL in its own right and are enjoyed by the shareholders of FIPL. If the allegation that FIPL was a paper entity of IXS were to be true then, the income of FIPL should have been beneficially enjoyed by IXS, which is not the case. No evidence has been led by the Revenue to show that any part of the income or assets of FIPL enured for the benefit of IXS before h....
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.... considered the paper book to which our attention was drawn. We find that in some of the years, FIPL and HIPL are treated as mere paper entities and income in this regard will have to be held in the case of IXS. We do not find that the reason is correct. It is a settled industrial practice to have an investment arm of each industrial group. Thus, for the purpose of achieving the object of investment, investments companies are incorporated which are always treated as separate and distinct entities independent of its promoters. What is to be found is whether the transactions between the two companies are at arm's length and if so found, the primary purpose for lifting the corporate veil no more subsists. To the extent the amount was advanced as loan by IXS to HIPL and FIPL, interest at market rate was charged, no more no less. Thus, the transaction is at arm's length. The investment companies do not carry on business so vigorously which requires them to occupy larger premises or even many employees. In a way, directors are also employees of the company whether remunerated or not. Thus, so long as the companies function through the directors such companies cannot be treated as paper e....