2007 (4) TMI 201 - SC - Income Tax

Payment made by a company to two firms i.e. MKF and MKI - whether payment made by the company is for the benefit of the assessee is a question of fact. In this case, the Tribunal has concluded that the payment routed through MKF and MKI was for the benefit of the assessee. This was a finding of fact. It was not perverse. Therefore, the High Court should not have interfered with the said finding

Summary

Issues Involved:
1. Whether the payments made by MKSEPL during the accounting year ending March 31, 2000, amounting to Rs. 5.99 crores to MKF and MKI for the benefit of the respondent-assessee, Mukundrai K. Shah, should be taxed as undisclosed income under section 2(22)(e) of the Income-tax Act, 1961.
2. The applicability of Chapter XIV-B of the Income-tax Act for block assessment in this case.
3. Whether the High Court was correct in interfering with the findings of fact recorded by the Tribunal.

Detailed Analysis:

1. Taxation of Payments as Undisclosed Income:
The Department sought to tax Rs. 5.99 crores as undisclosed income in the hands of the assessee. During a search on August 24, 2000, a diary titled "ML-20" was seized, indicating investments of Rs. 26.35 crores in RBI Relief Bonds. The Assessing Officer assessed Rs. 5.99 crores as deemed dividend under section 2(22)(e) of the Act, concluding that the payments were made by MKSEPL and related companies to MKF and MKI for the individual benefit of the assessee. The Tribunal upheld this view, stating that MKSEPL made payments through MKF and MKI to benefit the assessee, who used the funds to purchase RBI Relief Bonds, thus these payments were not repayments of loans but for the purchase of bonds.

2. Applicability of Chapter XIV-B for Block Assessment:
The High Court held that the case did not fall under Chapter XIV-B, stating it was a matter of regular assessment and not undisclosed income. The High Court noted that the transactions were disclosed in the returns and books of account, and no fictitious entries were found. However, the Supreme Court disagreed, stating that the block assessment under Chapter XIV-B was appropriate as the undisclosed income was detected during the search, and the entries in the diary "ML-20" led to further enquiries revealing the undisclosed income.

3. High Court's Interference with Tribunal's Findings:
The High Court set aside the Tribunal's judgment, stating there was no evidence that MKF and MKI were conduits for routing money from MKSEPL to the assessee. The Supreme Court found merit in the Department's appeal, emphasizing that the Tribunal's findings were based on the cash flow statement, which showed that MKSEPL made payments to MKF and MKI for the benefit of the assessee. The Supreme Court held that the High Court should not have interfered with the Tribunal's findings of fact, as they were not perverse.

Conclusion:
The Supreme Court set aside the High Court's judgment and upheld the Tribunal's decision, confirming that the payments made by MKSEPL to MKF and MKI were for the benefit of the assessee and were rightly assessed as deemed dividend under section 2(22)(e) of the Income-tax Act. The block assessment under Chapter XIV-B was deemed appropriate as the undisclosed income was detected during the search.