TaxTMI 
TaxTMI 
2013 (8) TMI 819
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....07/05 ITA No. 161/Luc/2000 & CO No. 35/Luc/2005 & ITA No. 202/Luc/2002 1998-99 12/07/05 ITA No.733/Alld/2000 1996-97 13/07/05 ITA No. 419/Luc/2000 & CO No. 49/Luc/2005 1997-98 13/07/05 On 06.02.2006, a Coordinate Bench of this Court has admitted the Appeal Nos.59, 57 and 58 of 2006, on the following substantial questions of law:- "1. Whether the Hon'ble ITAT has erred in law and on facts in deleting the addition of Rs.36,57,27,195/- made on account of disallowance of interest accrued on money borrowed from M/s. Sahara India Mutual Benefit Co. Ltd., a company of Sahara Group which was invested by the respondent in purchase of shares of different companies of the same group without any intention of earning any income from such investments. 2.Whether the Hon'ble ITAT has erred in law and on facts in deleting the aforesaid addition, ignoring the fact that the dominant purpose for which investment was made by the respondent in the share capital of the companies of the Sahara Group was not to earn any income and as such the expenditure incurred in this behalf by way of interest on borrowings fell outside the purview of Section 57(iii) of the Income Tax....
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....ming the deletion of the addition made by the Assessing Officer on account of clubbing of income of the spouse of the respondent from the firm in which the respondent had a substantial interest, without appreciating that the spouse of the respondent did not possess any technical or professional qualification as envisaged in Section 64(1)(ii) of the Act and, therefore, the income of the spouse from the said firm was rightly clubbed in the hands of the respondent by the Assessing Officer. 3.Whether the Hon'ble ITAT has erred in law and on facts in holding that there was no outgo of funds from M/s Sahara India Savings & Investment Corporation Ltd. (SISICOL) to the firm M/s Sahara India and therefore the provisions of Section 2(22)(e) of the Act were not attracted, without appreciating that the transactions between M/s Sahara India Savings & Investment Corporation Ltd. (SISICOL) and M/s Sahara India (Firm) were not at arm's length and the amount retained by the firm out of deposits collected which in fact belonged to the company was in the nature of loan/advance given by the company to the firm within the meaning of provisions of Section 2(22)(e) of the Act. 4. Whether the Hon'bl....
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....ources". The Assessing Officer noticed that the assessee had obtained loan from M/s. Sahara India Mutual Benefit Co. Ltd., and the loan amount was invested in purchase of shares of closely held companies of Sahara Group which were incurring heavy losses and there was no possibility to get dividend on share capital of these companies. Further, the assessee was having a substantial interest in the companies of Sahara Group. So, the AO opined that by making investment of "borrowed interest bearing funds" for non productive purpose, the assessee had diverted his income and had adopted a colorable device to reduce tax liability. So, he has disallowed the claim made by the Assessee pertaining to the interest and made the addition in each case, which was deleted by the first appellate authority as well as the Tribunal. Not being satisfied, the Department is before this Court. With this backdrop, Sri D.D. Chopra, learned counsel for the Department, at the strength of written submission, has justified the order passed by the AO. He submits that the Tribunal has wrongly confirmed the deletion of the said addition merely relying on the judgment and order of the Hon'ble Apex Court in the ca....
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....'ble Apex Court in M/s. Mc Dowell & Co. vs. CIT [154 ITR 148 (SC)]. In the said judgment, the Hon'ble Apex Court has reiterated the principle that a taxing authority is not only entitled but bound to determine the true legal relation resulting from a transaction. It was also held that if the parties have chosen to employ concealing devices, it is open to the taxing authorities to unravel the device and determine the true character of the relationship. Therefore, the Assessing Officer has rightly concluded from the undisputed material available on record that the assessee only acted as a conduit in the transfer of funds from one company of the group to the other concerns of the same group and that there was no dominant intention of earning any income from the said transactions, the real purpose being to avoid the incidence of tax. However, in spite of all evidence on record, the CIT(A) and the learned Tribunal have failed to appreciate that the assessee had resorted to mechanisms of tax avoidance which was evident by lifting the corporate veil behind which such transactions were being given effect. Lastly, he made a request that the addition made by the AO may kindly be restor....
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.... a partner in the firm, known as M/s. Sahara India (Firm), where he is holding 62% shares and remaining shares are lying with other partners including Smt. Swapna Roy, the wife of the assessee. Thus, for all the purposes, the firm has become propriety concerned. This firm has collected the money from the public, on behalf of various companies of Sahara Groups. For this purpose, the expenditure about 4.5% was charged by the firm. In addition, the firm has retained the money for a longer period without transmitted to the concerned companies. The firm has also borrowed the funds on interest from SIMBCL; a company of the group. The assessee has invested this amount in a few companies of Sahara Groups, which were suffering heavy losses. In another words, the loans were taken by the assessee on interest and invested in other loss making companies of the same Group. Thus, the assessee has set off the payment of interest against his income. The payment of interest was higher, so, the assessee has filed the loss return. Thus, this abnormal method was adopted for diversion of the fund and reducing the tax liability. It was a poor tax planning. In the instant case, the assessee has investe....
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.... be determined in accordance with such method, as may be prescribed. Pursuant to above provision made in the Act, Rule 8D of the Income Tax Rules was notified by the Government on 25.03.2008, as per the ratio laid down by the High Court of Bombay in the case of Godrej & Boyce Mfg. Co. Ltd. vs. Dy. CIT; [2010] ITR (328) 81 (Bom); and High Court of Delhi in the case of Maxopp Investment Ltd. vs. CIT; [2012] ITR (347) 272 (Del). The admitted position is that upto the assessment year 2007-08, the disallowance has to be made only on the basis of sub-section (1) of Section 14A of the Income-tax Act, which provides for disallowance of an expenditure incurred in relation to exempt income and, accordingly, disallowance has to be determined keeping in view the direct nexus between the exempt income and the expenditure incurred. In the instant case, the assessee has shown no income from the company, where interest bearing borrowed funds were invested. Thus, the transactions were not exclusively and wholly for the purpose of business. In fact, it was colourable devices for tax evasion. In fact, it is an attempt of the assessee to divest the funds to avoid tax liability. In the case of Mc....
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....nce drawn are factually correct and the payment is unwarranted. Learned counsel further submits that official work was being carried out from the premises owned by the firm. He further submits that the addition pertaining to the furniture was made without any evidence on record. Regarding the salary to the servants, it was submitted that all the servants were engaged for the purpose of keeping of the property pertaining to the firm, which was used for official purposes. On similar grounds, the perquisite value on account of car, telephones, electricity, etc., were challenged. On specific inquiry made by the Bench, learned counsel admits that the property was inspected by the Inspector, who reported that the residence of the assessee was a composite property in which apparently there was no office. The report was confronted with the assessee on 10.03.1999. Regarding the foreign travel, it is stated that the journey was performed by the assessee. This addition was restored by the CIT(A) to the file of the AO, vide order dated 05.05.2000. None of the party is able to tell the present status of this addition. However, we are of the view that the valuation of the perquisite is ....
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....an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-clause;] x x x x x x x x x It may be mentioned that the perquisite denotes to a benefit amounts or advantage mostly in kind and enjoyed by the employee at the cost of employer, generally in addition to the salary or wages to which he is entitled. Perquisite, are in many cases, in nature of voluntary payment attached to an office and employment. Section 17(2) of the Act includes the value of rent free accommodation provided to the assessee by his employer; the value of any concession in the matter of rent in respect of any accommodation provided to the assessee by his employer. In the instant case, as per the Inspector Report, the AO mentioned that the Inspector also submits a report that the residence of the assessee was a composite propriety, in which apparently there was no office. The assessee's report was confronted on 10.03.1999 with the assessee. Needless to mention that carrying of off....
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....e beneficial owner of the shares of M/s. Sahara India Financial Corporation Ltd. (SIFCOL); M/s. Sahara India Airlines Ltd.; M/s. Sahara India International Corporation Ltd.; as also a partner holding substantial interest in M/s. Sahara India (Firm). The assessee was having 62% share as partner in M/s. Sahara India (Firm) and remaining major share was holding by other partners including his wife. After discussing the issue at length, the AO made the addition on account of deemed dividend under Section 2(22)(e) of the Act, which was deleted by the first appellate authority as well as by the Tribunal. Being aggrieved, the Department has filed the present appeals. Learned counsel for the Department submits that the assessee is the Managing Director of M/s. Sahara India Financial Corporation Ltd., which is a Residuary Non-Banking Company collecting deposits from the public. The assessee was also a partner in M/s. Sahara India (Firm) which was acting as an agent of the said company for mobilizing the deposits. The assessee was the beneficial owner of the shares in varous companies of the group. Learned counsel for the Department read out Section 2(22)(e) of the Act. On reproduction....
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....rough his current account with M/s. Sahara India during the year; (f) SISICOL had also offered Rs.21,70,79,103/- to M/s. Sahara India indirectly, by the action of the latter not to transfer the said sum of moneys with SISICOL when the same had already been collected from the depositors for investment; (g) The firm M/s. Sahara India has shown the loan/advances from SISICOL on its liability side, thereby affirming that the action of retaining the deposit collected has created a loan transaction between SISICOL and M/s. Sahara India. Therefore, since all conditions mentioned in Section 2(22)(e) are present in the case, so, the Assessing Officer rightly made an addition of deemed dividend of Rs.15,13,93,117/- to the income of the respondent. It is also a submission of the learned counsel for the Department that the firm and the company SISICOL are nothing but one man show. In fact, if corporate veil is lifted by a Taxman, it is revealed that assessee was controlling the firm as well as the company, SISICOL. Assessee allowed huge interest bearing sums of money of SISICOl to remain with the firm and never charged any interest thereon. Lastly, he made a request to restore the ....
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....ility amount is shown in the balance-sheet as a liability then it is nothing except a loan. It may be mentioned that, the word "Dividend" in its ordinary meaning, is a distributive share of the profits or income of a company given to its shareholders. It is a sum of money or portion of divisible thing to be distributed according to a fixed scheme being what the shareholder earns as return on his investment; it is his share of corporate earnings credited to his account. The characteristic feature of 'dividend' is that it is declared and paid wholly from the net profits or undivided earnings leaving intact the shareholder's fractional interest represented by his holding in the capital stock. A 'dividend' is not capital but the produce of capital. Subject to well recognised limitations, 'dividend' is a word of general and indefinite meaning without any narrow, technical or rigid significance. As explained above, the term 'dividend' is applied to a distributive sum, share or percentage arising from some joint venture as profits of a corporation. In the second sense, it is proportionate amount paid on liquidation of a company. In this context, 'dividend' is referred to as corporate p....
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....he company. (iii) the money must form a part of the assets of the company. (iv) it may be paid either by way of advance or loan or it may be "any payment". (v) (a) the payee must be a shareholder of the company having substantial interest in the company, or (b) the payee must be a person who is acting on behalf of or for the individual benefit of such shareholder. The expression "person who has a substantial interest in the company" is defined in section 2(32) as meaning "a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty percent of the voting power." If these conditions are fulfilled, then a dividend would arise to the extent to which the company possesses accumulated profits. Further, from the Assessment Year 1988-89 (onwards) the provisions of Section 2(22)(e) have undergone modification by the Finance Act, 1987. Accordingly, it also includes advances or loans made to any concern in which such shareholder is a member or partner and in which he has a substantial interest. In the latter case, the advance or loan will logic....
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....on 2(22)(e) will not apply as observed in the case of CIT vs. Mittal (HK) (1996) 219 ITR 420 (All). Thus, any payment by any company of any sum representing a part of the assets by way of advance would come within the mischief of the section. It would seem that deposits made by a closely-held company would also be covered by the expressions advance or loan. Advances given by a company to its shareholders should be treated as payment out of accumulated profits of the company, whether capitalised or not, and must be treated as dividend and would go to reduce the tax liability, whenever such tax liability is required to be determined as observed in the case of CIT vs. Narasimhan (G) (1999) 236 ITR 327 (SC). Advance given to the managing director, who had also substantial interest in the company for meeting cost for construction of building to be taken on lease by the company and the advance is to be adjusted with the lease rent, will be treated as deemed dividend for the purpose of section 2(22)(b) as observed in the case of CIT vs. Abubucker (PK) (2003) 259 ITR 507 (Mad). Even if the loan is not granted directly to a shareholder who has a substantial interest as aforesaid....