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TMI Blog2007 (9) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 1,000 2. Mr. Damodar Pd. Dani 100 1,000 3. Furtunate Holdings 49,000 4,90,000 (P) Ltd. 4. Better Investments 49,000 4,90,000 (P) Ltd. 5. Attractive 49,000 4,90,000 Investments (P) Ltd. 6. Handsome Investments 49,000 4,90,000 (P) Ltd. 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertible debentures of Modi Rubber Ltd. of Rs. 200 each (Quoted) 3. Attractive 4,000 40,000 Investments (P) Ltd. 4. Fine Instalments (P) 4,000 40,000 Ltd. 5. Fortunate Investments 4,000 40,000 (P) Ltd. 6. Better Investments (P) 4,000 40,000 Ltd. ----------- Total 2,15,02,865 -------------------------------------------------------- HIPL was held to be paper entity of IXS in the assessment proceedings for the asst. yrs. 1993-94 to 1996-97 and income of HIPL was assessed in the hands of IXS on substantive basis in the asst. yrs. 1993-94 to 1996-97. HIPL has been assessed as separate legal entity since asst. yr. 1997-98. 11. Appeals 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 assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessment and dismissed the objections raised by the assessee. The CIT(A) also confirmed the stand of the Department that FIPL was paper entity of IXS and, therefore, income of FIPL was to be assessed in the hands of IXS on substantive basis. 12.8 With regard to the quantum of income to be assessed in the hands of IXS, the CIT (A) directed the AO to add the finally assessed income of FIPL in the hands of IXS on substantive basis. 12.9 Against the order of the CIT(A), both, the assessee and the Revenue have filed appeals bearing ITA Nos. 907/2004 and 1205/2004, respectively. 12.10 In the assessee's appeal, the assessee has raised the following grounds : (a) challenge to reassessment ground Nos. 1 to 1.3 (b) challenge to the finding that FIPL is paper entity-ground No. 2 The Department has challenged the directions of the CIT(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IXS and, therefore, income of FIPL was to be assessed in the hands of DCS on substantive basis for the assessment year under consideration. 12.16 With regard to the quantum of income to be assessed in the hands of IXS, the CIT(A) allowed relief by directing that income by way of interest from FIPL amounting to Rs. 10,13,980 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 challenged the reopening of assessment for the asst. yr. 1992-93, 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 initiated merely on change of opinion. On merits, it was argued that FIPL and IXS were distinct and separate legal entities and there was no basis or warrant, both in law and on facts, to treat FIPL as paper entity of IXS. Without prejudice, the assessee also challenged the quantum of income of FIPL added in the hands of IXS. 12.23 The CIT(A) upheld the reopening of assessment for the asst. yr. 1992-9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares and holding the shares held as investment as stock-in-trade. (b) disallowed deduction of administrative expenses of Rs. 9,206 (c) disallowed Rs. 18,80,096 being interest paid to IXS on inter-corporate deposits. ------------------------------------------------------------------- 12.28 The appeal filed by FIPL before CIT(A) against the said assessment order for the asst. yr. 1993-94 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------------------------------------------- 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 procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious 53,798 being interest years) payable on loan taken (Current year from Fortunate loss was Holdings (P) Ltd. Rs. 23,561) alleging that FIPL failed to explain the purpose of loan Disallowance of Rs. 12,838 being interest payable on loan taken from M/s Calcutta Investment (P) Ltd. alleging that the loan has not been utilized for purpose of the business. Disallowance of Rs. 5,625 being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um 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 books of accounts of 'nil' business FIPL and recasted the income and income P L a/c of FIPL: of Rs. 2,85,210 from other (a) treating Vyaj sources) Badla transactions as transactions of purchase and sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the amount claimed as interest payable by the appellant i.e. Rs. 41,397. (f) disallowing expenses of Rs. 4,300 incurred by the appellant on purchase of calculator. (g) disallowing brokerage of Rs. 9,800 paid for purchase of shares alleging that the same has not been incurred for business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,66,247 being year loss of interest paid to IXS. Rs. 86,920) ------------------------------------------------------------------- The appeals filed by FIPL before CIT(A) against the said assessment orders for the asst. yrs. 1995-96 and 1996-97 were dismissed by CIT(A) vide orders dt. 9th Dec, 2002 and 3rd Oct., 2002 respectively. FIPL is in appeal before the Tribunal against the orders 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 12.42 HIPL has been held to be paper entity of IXS and the income of HIPL was assessed in the hands of IXS on substantive basis. The appeals filed by HIPL before CIT(A) against the said assessment orders for the asst. yrs. 1995-96 and 1996-97 were dismissed by CIT(A). HIPL has filed appeals before the Tribunal against the orders of CIT(A), challenging the finding that HIPL is a paper entity of IXS and also the quantum of income assessed. 12.43 The appeals filed by HIPL before the Tribunal, for the asst. yrs. 1995-96 and 1996-97 have not been listed for hearing before the Tribunal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng proper books of account as required under the Companies Act and was not maintaining a cash book and the basis of cash balance appearing in books as at the end of the previous year relevant to the assessment years under consideration is not known. 15. Learned counsel or the assessee, Shri Ajay Vohra took us through the facts. He submitted that FIPL was incorporated under the Companies Act and had a separate memorandum and articles of association. FIPL is engaged in investment business which is separate and distinct from the business carried on by DCS i.e., manufacturing, export and leasing of goods. The mere fact that investment in FIPL was made by IXS and other investment companies, who allegedly purchased shares of FIPL out of funds invested by IXS in such companies, cannot lead to the inference that DCS and FIPL is one and the same or that FIPL is a paper entity. It is to be appreciated that a company can be a 100 per cent subsidiary of another company and is still treated as a separate legal entity. 15.1 It is further submitted that the office of FIPL was located in part of premises at A-70, Sector 55, Noida. Such premises were owned by Mrs. Vandana Goyal wife of Mr. Asho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k the cash transactions were recorded in the ledger. Copy of such account was produced before the AO. Further, the books of accounts were properly maintained by FIPL and gave true and fair view of the state of affairs of FIPL having regard to the fact that the same were audited by a firm of chartered accountants who have not commented adversely regarding the same and there was no basis for the AO of FIPL to reject the books of accounts. The audited books of accounts were filed before the AO during the course of assessment proceedings by FIPL. 15.9 It is to be further appreciated that the management of IXS and FIPL was separate inasmuch as none of the directors in the two companies were common. Also the decision to invest in shares of FIPL and place interest-bearing deposit with FIPL was a financial decision taken by the management of IXS independently of FIPL. Also, the shareholders of FIPL including IXS, would have been the beneficiaries in the profit of FIPL and would have shared the prosperity of FIPL and not only IXS alone. Further, IXS has no control over the management of FIPL or vice versa. 15.10 The fact that the deposit made by IXS was utilized inter alia to purchase s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed on substantive basis in its own right from asst. yr. 1997-98 and further that the Revenue has taken no action to tax the income of FIPL in the hands of IXS on substantive basis for asst. yrs. 1994-95 to 1996-97 would also show the inconsistency in the stand of the Revenue. 15.16 The very grounds on which the Department was alleging that FIPL was a paper entity of IXS, in any case, ceased to exist after asst. yr. 1993-94 with the transfer of shares held by IXS in FIPL and repayment of loan to IXS. That apart, if FIPL was indeed a paper entity of IXS, then, there was no requirement for FIPL to repay the loan to IXS - that would have amounted to making payment to self. 15.17 HIPL has also been held to be paper entity of IXS on almost the same grounds, which are non-existent and do not, in any case, constitute adequate bearing to support the allegation of the lower authorities. 15.18 In that view of the matter, the companies should be individually assessed, in their own right and name, in their respective income(s). Independent of the aforesaid, the CIT (A) has not dealt with all grounds on merits. The final income of FIPL and HIPL - whether to be assessed in its own hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvene in such a situation to hold that for such reasons, the companies become mere paper entities. How and in what manner to conduct its business is always left to the discretion of the taxpayer and the AO cannot sit in the arms chair of the assessee to decide as to how the business should be conducted. This view is reaffirmed by Hon'ble Supreme Court in the case of S.A. Builders Ltd. v. CIT [2006] 206 CTR (SC) 631 : [2007] 288 ITR 1 (SC). Investing in the funds of IXS by the investment companies cannot be considered as the ground to hold such investment companies as conduits or paper entities. Even in a case where the corporate veils were proposed to be lifted, the Courts have examined as to whether the same was for the purpose of any tax avoidance or to avoid the welfare legislation enacted under the statute. However, when the AO in the income-tax proceedings is to lift the corporate veil, he should first come to conclusion that these entities were created for the purpose of avoiding tax. In the present cases, we see that for the amount advanced by IXS to these two investment companies, interest is charged at appropriate rate. The income by way of interest is disclosed in the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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