2023 (8) TMI 1198 - HC - Income Tax

Deemed dividend - Apportionment of income between spouses governed by Portuguese Civil Code - Addition of income from transaction amongst companies under which assessees hold shares were deemed dividend in the hands of the assessees and their spouses in terms of Section 2(22)(e) of the Act - Assessee spouse governed by the Portuguese Civil Code - determination of vesting of ownership rights and beneficial interest - Whether the impugned Judgment and Order of the Tribunal holding that under the provisions of the Portuguese Civil Code spouse of the Appellant does not acquire beneficial interest in respect of the shares of subject Companies held by the Appellant and that such right of the spouses can only be ascertained on termination of the marriage by divorce separation or death is based on complete mis-appreciation and misconstruction of the provisions of Portuguese Civil Code which contemplates vesting of ownership rights and beneficial interest IN PRESANTI in Appellant s wife as a moiety holder with respect to the immovable and movable assets of Appellant which includes shares of the subject Company ? - HELD THAT - In the present case the none of six companies in which the three appellants Kamat Brothers are shareholders were registered under the Commercial Code but were all registered under the Indian Companies Act 1956. In these circumstances we would be called upon to examine the interplay between the provisions of the Civil Code applicable to three sets of spouses the provisions of the Companies Act 1956 insofar as it concerns specific rights to a member of a company and its shareholders and the provisions of Section 5A of the Income Tax Act 1961 read with Section 2(22)(e) and Section 3(32) of the Income Tax Act 1961. In the present case none of the companies in which the appellants are shareholders were created under the Portuguese Commercial Code but were all brought into existence under the Companies Act 1956 much after the liberation of Goa. Timblo Irmaos Ltd. 1993 (4) TMI 36 - BOMBAY HIGH COURT in no way supports the argument of the appellants that the provisions of the Companies Act 1956 insofar as it deals with the beneficial interest of a shareholder under Section 187C are inapplicable to Goan to whom the Portuguese Civil Code would apply. Under no circumstances would the provisions of the Civil Code confer or create an ownership right in the shares of a company or give the right of voting in proportion to the share in the capital of the company to the other spouse. The provisions of Clause (e) of Section 2(22) of the Income Tax Act 1961 in the present case would therefore fully apply to the husband appellant who would be the owner of the entire 33% share in each of the concerned companies with the entire voting power (which is more than 20% in such company to the exclusion of the wife). Consequently we reject the submission that the wife of the spouse married under the provisions of Portuguese Civil Code by operation of law would be entitled to the beneficial ownership of the shares of the husband/spouse. For reasons stated above we further reject the submission that the provisions of Section 187C of the Companies Act 1956 are not applicable to persons governed by the Portuguese Civil Code. Consequently we answer Substantial Questions of Law (A) (B) and (C) against the appellants. Assumption of jurisdiction under Section 153A - HELD THAT - As all that Abhisar Buildwell 2023 (4) TMI 1056 - SUPREME COURT lays down is that in case incriminating material is unearthed during a search conducted u/s 132 the AO can assume jurisdiction to re-assess the total income taking into consideration the incriminating material while if no incriminating material is unearthed no additions can be made by the AO to the income. The judgment in our view does not lay down what material could be considered to be incriminating which is the precise submission made in the present case that gaining knowledge during the search of the shareholding pattern of the assesses in various companies could not constitute incriminating material for the purpose of assuming jurisdiction under Section 153A. CIT (Appeals) in its order passed in the first round of litigation had come to a categorical finding of fact on page 73 of its order that it was for the first time during the search in the seizure that intragroup transactions and the fact that individual assessees were the beneficiaries of such transactions came to the knowledge of the year and had no opportunity to examine these transactions during regular assessment since these were not made known prior to the search operations. CIT (A) has also noted in this order that it was during the course of the search that the facts were collated and statements were recorded thus coming to a factual finding that the shareholding pattern of the individual assessees of this company was for the first time discovered during the search. Thus the CIT (A) had clearly arrived at a factual finding in the first order itself that the discovery of the shareholding pattern during the search found the incriminating material for assuming jurisdiction for issuance of notice u/s153A of the Act. This factual finding was challenged before the ITAT in the first round of litigation and such ground of challenge to a factual finding was specifically given up. The finding of fact as to what constituted the incriminating material to proceed had become final and could not be re-agitated in subsequent appeals filed by the appellants. In our opinion therefore the substantial question of law (D) could not have arisen at all in view of our findings above.

Summary

Issues Involved:
1. Whether the spouse of the appellant acquires beneficial interest in shares under the Portuguese Civil Code.
2. Whether each spouse acquires 50% ownership rights in the estate of Communion De Bens.
3. Whether the spouse's beneficial interest in shares can be restricted to 50% for tax purposes.
4. Validity of proceedings under Section 153C of the Income Tax Act.
5. Whether payments received/paid by group companies qualify as loans or advances under Section 2(22)(e).
6. Whether amounts received by KCRPL from KCPL were in the ordinary course of business.

Summary:

Issue 1: Beneficial Interest in Shares Under Portuguese Civil Code
The court examined whether the spouse of the appellant acquires beneficial interest in shares of companies held by the appellant under the Portuguese Civil Code. It was concluded that the wife, by virtue of marriage, automatically becomes the owner of 50% of the shares held by the husband. However, this does not grant her voting rights or make her a registered shareholder under the Companies Act, 1956. The court held that the husband remains the exclusive holder of the shares with full voting power.

Issue 2: Ownership Rights in the Estate of Communion De Bens
The court considered whether each spouse acquires 50% ownership rights in the estate of Communion De Bens. It was determined that while the wife has a notional right to 50% of the value of the shares, she does not have actual ownership or voting rights. The provisions of the Companies Act, 1956, which require registration of beneficial ownership, apply to persons governed by the Portuguese Civil Code.

Issue 3: Beneficial Interest for Tax Purposes
The court addressed whether the spouse's beneficial interest in shares can be restricted to 50% for tax purposes. It was held that the husband is the beneficial owner of the entire 33% of the shares, and the wife's notional ownership does not affect the applicability of Section 2(22)(e) of the Income Tax Act. Thus, the provisions of Section 2(22)(e) apply fully to the husband.

Issue 4: Validity of Proceedings Under Section 153C
The court examined the validity of proceedings under Section 153C of the Income Tax Act. It was found that the shareholding pattern discovered during the search constituted incriminating material, giving the Assessing Officer jurisdiction to proceed under Section 153C. The court upheld the factual finding that the shareholding pattern was discovered during the search and could be used to initiate proceedings.

Issue 5: Payments as Loans or Advances
The court considered whether payments received/paid by group companies qualify as loans or advances under Section 2(22)(e). The court upheld the Assessing Authorities' findings that certain transactions were not bona fide commercial transactions and thus qualified as deemed dividends under Section 2(22)(e). The court found no error in the factual assessment of these transactions.

Issue 6: Amounts Received by KCRPL from KCPL
The court evaluated whether amounts received by KCRPL from KCPL were in the ordinary course of business. It was determined that the transactions were not supported by contemporaneous material and were not bona fide commercial transactions. The court upheld the findings that these transactions did not qualify as loans or advances in the ordinary course of business.

Conclusion:
The court dismissed the appeals, upholding the findings of the Income Tax Appellate Tribunal and confirming that the provisions of Section 2(22)(e) apply to the transactions in question. The court also upheld the validity of proceedings under Section 153C based on the incriminating material discovered during the search.