TaxTMI 
TaxTMI 
2013 (8) TMI 819
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....uc/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 Act, 1961. 3.Whether on the facts and circumstances of the case, the Hon'ble ITAT has ....
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....f 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'ble ITAT has erred in law and on facts in holding that the provisions of Section 2(22)(e) of the Act wer....
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....td., 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 case of Rajinder Pd. Moodi, 115 ITR 519, where it was observed that interest on borrowed capital has to be allowed under S....
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....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 restored by keeping in mind the ratio laid down in the case of McDowell & Co. Ltd. vs. C.T.O., (1985) 154 ITR 148 (SC), where it was observed ....
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....ding 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 invested the amount in the companies, which were already suffering heavy losses. So, there was no chance to receive any pecuniary benefits. Perhaps in the ....
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....y 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 McDowell & Co. Ltd. vs. C.T.O., (1985) 154 ITR 148 (SC), the Hon'ble Apex Court observed that it is the duty of the Court to expose of colourable device by uplifting ....
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.... 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 taxable. After hearing both the parties and on perusal of record, it appears that the assessee is a partner in M/s. Sahara India (Firm) and a Director in various group companies. The assessee was also receiv....
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....essional 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 official work from the residence; and maintaining the office are two difference aspects. When there is no office, then the residence cannot be considered to be used for official purposes. Section 28(iv) is independent section, whereby such indirect be....
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....ee 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, it reads as under:- "Section 2(22)-dividend includes- (a) * * * (b) * * * (c) * * * (d) * * * (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of th....
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....stment; (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 order passed by the AO. On the other hand, learned counsel for the assessee submits that the whole approach of the AO is incorrect. The observations and the inferences drawn by the Assessing Officer are ill-founded and against the facts and circumstances. The Assessing Officer has lost sight of relatio....
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....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 profits set apart for rateable division amongst the shareholders being surplus assets obtained in excess of capital. As stated earlier, M/s. Sahara India (Firm) has collected the deposits from the public on behalf of the various companies. The money was retained by the firm, which was supposed to be transmitted....
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....or 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 logically have to be treated as dividend in the hands of the shareholder concerned and not the concern because the scope of the sub-clause is only to rope in benefits given by a closely-held company to certain shareholders, directly or indirectly. This construction, however, will create difficulties in a case where more than one shareholder ....
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....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, if a payment be made to a third person on behalf of or for the individual benefit of such a shareholder, the amount granted as loan would be treated as dividend as observed in the case of Ravindra D Amin vs. CIT (1994) 208 ITR 815 (Guj). In another case as observed in the case of CIT vs. Alagusundaram Chettiar (L) (1977) 109 ITR 508 (Mad), a compan....