TaxTMI 
TaxTMI 
2007 (9) TMI 301
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.... 3. Fine Investments (P) Ltd. ("FIPL") 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 &nbs....
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....e assessment proceedings for the asst. yrs. 1990-91 to 1996-97 and income of FIPL was assessed 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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....ppeals filled by (a) HIPL for the asst. yrs. 1995-96 and 1996-97 and IXS for the asst. yrs. 1994-95, 1995-96 and 1996-97 have not come up for hearing 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....
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....IT(A) on merits. Asst. yr. 1991-1992 Re : Assessment in the case of FIPL - ITA No. 1674/Del/2003 12.11 In the assessment proceedings for the asst. yr. 1991-92, 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 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 &....
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....,13,980 be excluded from computation of income of IXS Ltd. 12.17 Against the aforesaid orders of the CIT(A) for the asst. yr. 1991-92, both, the assessee and the Revenue have filed appeals bearing ITA Nos. 908/2004 and 1206/2004, respectively. 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 -----------------....
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....bsp; the shares held as investment as stock-in-trade. (b) disallowed ....
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....p; deposits. ------------------------------------------------------------------- The appeal filed by FIPL before CIT(A) against the said assessment order for the asst. yr. 1992-93 was dismissed by CIT(A) vide order dt. 9th Dec, 2002. FIPL is in appeal 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 challen....
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....essed income Addition/Disallowance ------------------------------------------------------------------- 1993-94 (30,68,750) 36,51,360 The AO rejected the (including b/f books of accounts of loss of previous FIPL and recasted the years) P&L a/c of FIPL: (Current year loss was  ....
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....bsp; deduction of administrative expenses of Rs. 9,206 &n....
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....nbsp; 60,48,995 The AO rejected the (including b/f 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. 90,515)  ....
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....; Rs. 1,00,770 being general expenses alleging that no business was &....
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....---------------------------------------- 12.30 The appeal filed by HIPL before CIT(A) against the said assessment order for the asst. yr. 1993-91 was dismissed by CIT(A) vide order dt. 16th Jan., 2003. 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 - ITA No. 910/Del/2004 (assessee's appeal) & ITA No. 1208/Del/2004 (Department'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 ....
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.... Disallowance of (including b/f interest of Rs. loss of previous 53,798 being interest years) payable on loan taken (Current year from Fortunate loss was Holdings (P) Ltd. &nbs....
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....; alleging that the loan has not been utilized for purpose of the business.  ....
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....; for the purpose of the appellant's business. Disallowance of ....
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.... travelling expenses alleging the same to have not been incurred for business purposes.  ....
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....against the said assessment order for the asst. yr. 1994-95 was dismissed by CIT(A) vide order dt. 9th Dec., 2002. FIPL is in appeal 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 - (ITA No. 535/Del/'2004) 12.39 In the assessment proceedings for the asst. yr. 1994-95 HIPL was held to be a paper entity of IXS and income of HIPL 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 ------------------------------------------------------------------- 1994-95 (2,85,210) 12,28,090 The AO rejected the (consisting of &nb....
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....nbsp; investment as stock-in-trade. (b) disallowing general expenses of &nb....
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....bsp; (d) disallowing interest of Rs. 5,15,714 payable to M/s Diamond Stone ....
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....bsp; Rs. 1,948 payable to Attractive Investments (P) Ltd. being the difference &n....
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....; by the appellant i.e. Rs. 41,397. (f) disallowing expenses of Rs. &....
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....p; that the same has not been incurred for business purposes. ------------------------------------------------------------------- The appe....
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....aid to IXS. Disallowance of expenses of Rs. 84,073 holding the same to be &nb....
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....tive basis for asst. yrs. 1995-96 and 1996-97. The CIT(A) upheld the stand of the Department that FIPL and HIPL were paper entities of IXS and, therefore, income of FIPL and HIPL was to be assessed in the hands of IXS on substantive basis for the assessment years under consideration. Against the aforesaid orders of the CIT(A) for the assessment year under consideration, IXS has filed appeals before the Tribunal, which are yet to come up for hearing before the Tribunal. 13. In view of the above factual position, the question before us is whether FIPL and HIPL are paper entities or conduits of IXS? The case of the AO is that corporate veil has to be lifted and if seen behind the curtain of corporate entity, these companies, namely, FIPL and HIPL are dummies of IXS. 14. FIPL has been held to be a paper entity of the 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 FIP....
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....oyal for residential purposes. 15.2 The directors of FIPL are highly qualified persons and took all the decisions including those relating to financial affairs of the company. Since, FIPL is engaged in the investment business and the directors were capable of taking all the business decisions there was no need to employ any personnel. 15.3 FIPL had employed one Mr. Hari Om on part-time basis to look after accounts and other miscellaneous office work under the supervision of Mr. Ashok Goyal. 15.4 One of the directors of FIPL namely, Mr. Ashok Goyal, was also employee of Modi Xerox Ltd. a sister concern of DCS. Since, the office of Modi Xerox Ltd. was situated at Nehru Place, it was decided for administrative convenience to have the bank account of FIPL at Nehru Place instead of Noida, where the office of FIPL was situated. 15.5 The bank account 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 direct....
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....uch shares being a prudent decision in view of rising prices of shares of such company and taken independently of DCS - is of no consequence and by no stretch of imagination lead to inference that FIPL was merely a conduit for investing moneys of IXS in Modi Xerox Ltd. 15.11 The Vyaj Badla transactions were carried out by a firm of chartered accountants at Bombay on behalf of FIPL and it is not that IXS was carrying out such transaction for FIPL as inferred by the AO in assessment of FIPL. 15.12 FIPL and IXS are distinct and separate legal entities. Whereas FIPL is an investment company headquartered at Noida, UP and IXS is an operating company engaged in manufacturing, export and leasing business at Mumbai. The only relation between the two companies is that IXS has invested in the share capital of FIPL and has advanced interest- bearing loans to FIPL at market 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 asse....
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....be set aside to the file of the AO to recompute the income of FIPL and HIPL afresh, in accordance with law after affording adequate opportunity of hearing to the appellant. 16. Learned Departmental Representative submitted that appeals of Revenue in the case of IXS be considered in the light of the answer to the question as to whether FIPL and HIPL are to be considered as dummy or paper entities. If so, appeals of Revenue in case of DCS do not survive. As regards reopening of assessment in the case of IXS, he submitted that the same was in consequence to the finding given in the assessment of FIPL and HIPL. Thus, reopening is to be treated as valid as only after the assessment of FIPL and HIPL, the AO could form an opinion that income chargeable to tax in the case of IXS has escaped assessment. 17. We have carefully considered the relevant facts, arguments advanced and also 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 invest....
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....ly those expenses are claimed which are expenses allowable as such. Thus, the formation of investment companies is tax neutral. If that be the case, even after lifting the corporate veil no purpose will be achieved in the sense that if these companies are held as conduits and if conduits are ignored, the ultimate tax liability of IXS will not alter. Having found that the investment companies, namely, FIPL and HIPL were functioning as separate legal and entities in its own name and carried out its objects in terms of its memorandum of association and having found that the transactions between these investment companies and IXS were at arm's length, we are unable to agree with the finding of the AO that these entities are mere paper or dummy entities. Thus, the respective income shall be assessable in the respective hands in accordance with provisions of law as if all these entities are separate legal entities and not conduits. 18. Having held that the assessments are to be framed in each cases of FIPL and HIPL as if they are separate legal entities, we restore the matter back to the file of the AO to recompute the income in accordance with provisions of law after affording reason....