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TMI Blog2013 (8) TMI 819X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 - Loans were taken by the assessee on interest and invested in other loss making companies of the same Group. 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 past also, the assessee might have invested some amounts without any financial benefit. In these circumstances, fresh investment made by the assessee cannot be considered for business purposes specially when the assessee is running a financial entity. The assessee is Managing Director in M/s. Sahara India Financial Corporation Ltd. (SIFCOL) and was aware about the financial health of all the companies of the group - Firm M/s. Sahara India had received money in the form of loan/advance from public and SIMBCL; SIFCOL; and Sahara India Housing Corporation Ltd. (SIHCL) and had retained it for a considerable period, before investing in loss making companies of the group - It appears that the interest paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a India (Firm) and remaining major share was holding by other partners including his wife – Held that:- The amount collected by the firm belongs to the company concerned. This amount is to be sent by the firm to the company promptly along with statement of account but the same was not done properly - Assessee deliberately retained or allowed to be retained the funds in the firm - The firm was supposed to send the money to the company promptly. Moreover, the Firm has shown the loan/advances from the company on its liability side in the balance-sheet, therefore, it is a loan for the firm. In the instant case, no circumstances were explained by the assessee for what reason the heavy deposits made by the investors were retained by the assessee in the Firm for a longer period. For this reason alone, it is a case of deemed income as the assessee is a shareholder in all the companies – Decided in favor of Revenue. Section 64(1)(ii) of the Income Tax Act - Spouse of individual is in receipt by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest - Smt. Swapna Roy, the spouse of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 erred in law in confirming the deletion of the addition on account of perquisite value of various items, without appreciating that the provisions of Section 28(iv) of the Act were applicable in the case of the respondent as he was provided with rent free accommodation, domestic servants, telephone, car with driver, free electricity, water, gas reimbursement of club expenses from the various companies and firms in which he as a director/partner and the additions made by the Assessing Officer on this account were fully supported by the ratio of the decisions reported in 181 ITR 303 (MP) and CIT vs. R.L. Kasliwal, reported in 207 ITR 208 (Raj.). 4. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 were not attracted in this case without appreciating that this was a fit case where the veil of corporate identity had to be lifted for the purpose of understanding the real nature of the transactions and to show that the apparent was not real. On 06.02.2006, a Coordinate Bench of this Court has admitted the Appeal No.61 of 2006 on the following substantial question of law:- "Whether on the facts and circumstances of the case, the Hon'ble ITAT has erred in law in deleting the addition on account of perquisite value of various items, without appreciating that the provisions of Section 28(iv) of the Act were applicable in the case of the respondent, as he was provided with rent free accommodation, domestic servants, telephone, car with driver, furniture fixtures, free electricity, etc. from the various companies and firms in which he was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Section 57(iii) even in cases where no income had accrued on investment, if the said expenses towards interest were incurred wholly and exclusively for the purpose of earning income from other sources. The facts of the aforesaid decision of the Hon'ble Apex Court are clearly distinguishable from the facts of the present cases. The Hon'ble Apex Court in the aforesaid case has emphasized on the language of Section 57(iii) and in particular, on the words "expended wholly and exclusively for the purpose of making or earning such income". The facts of these cases clearly show that, the purpose of making or earning income from the said investments in shares was grossly lacking. The Hon'ble Madras High Court in the case of CIT vs. Sujani Textile (P) Ltd., 151 ITR 653 has also taken the view that for the assessee to take the benefit of al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 that it is the duty of the Court to expose avoidance device adopted by the assessee. On the other hand, Sri Wasqudeen Ahmad, learned counsel for the assessee has justified the impugned order passed by the Tribunal. He submits that the whole approach of the AO is incorrect as the AO has accepted that the loans taken by the assessee were invested and purchased in the share. The entire observations of the AO are based only on surmises and conjectures and hypothesis and on the basis of the imaginary and illusionary, which cannot be found as basis for rejecting the assessee's claim for payment of interest. The case of the assessee is fully covered by the judgment of the Hon'ble Apex Court in the Moody's case (supra). He mentioned on 02.01.2000, an advertisement was published in the "Times of India, by Sahara India Parivar, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 past also, the assessee might have invested some amounts without any financial benefit. In these circumstances, fresh investment made by the assessee cannot be considered for business purposes specially when the assessee is running a financial entity. The assessee is Managing Director in M/s. Sahara India Financial Corporation Ltd. (SIFCOL) and was aware about the financial health of all the companies of the group. In these circumstances, the AO has rightly observed that during the assessment year under consideration, the firm M/s. Sahara India had received money in the form of loan/advance from public and SIMBCL; SIFCOL; and Sahara India Housing Corporation Ltd. (SIHCL) and had retained it for a considerable period, before investing in loss making companies of the group, as submitted by the learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the corporate veil. In view of above and by considering the totality of the facts and circumstances, we set aside the impugned order passed by the appellate authorities and restored the orders passed by the AO pertaining to the disallowance of the interest on borrowed funds in the relevant appeals. II. PERQUISITE VALUE: Further, the assessee has claimed perquisite. But the AO has disallowed the same and made an addition of perquisite value of various items. However, the same was restricted by the first appellate authority and the Tribunal has deleted the same. Learned counsel for the Department submits that the assessee is a partner in M/s. Sahara India (Firm); and Director in various other Group Companies. One of the Company is M/s. Sahara India Financial Corporation Ltd., from where the assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 receiving the salary income from M/s. Sahara India Financial Corporation Ltd. The assessee was enjoying the facilities of the free accommodation, furniture and fixtures, facility of servants, chauffeur driven car, telephone facility, facility of free water, electricity and foreign travel etc. For the assessment year 1997-98, the AO took the value of perquisite and made an addition of Rs.10,33,835/-, but the CIT(A) has restricted the same on estimate basis, as per details given in the order. Needless to mention that Section 17(2) of the Income-tax Act, provides that :- "Section 17(2) "perquisite" includes- (i) the value of rent-free accommodation provided to the assessee by his employer; (ii) the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 benefits were taxed. So, the value of the perquisite is to be separately taxed. This provision cannot be treated as share income from the firm, the same is not exempted under the provisions of Section 17(2) of the Act. In the light of above discussion, it appears that perquisite is a part of salary and taxable. So, the perquisite will have to come under the clutches of the Income-tax. Being the salaried person, the assessee is entitled for the standard deduction on the salary. The remaining perquisite is taxable. For the purpose of the valuation of the perquisite, Section 295(2)(c) of the Act provides that CBDT may make rules for the determination of the value of any perquisite chargeab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being 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) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 relationship between the firm which was acting as an agent and the principals i.e. the Companies. The AO failed to appreciate that the amounts which were collected by the firm in carrying on of the business activities for and on behalf of the principals were during the course of business and by no stretch of imagination it can be termed as loan by the company to the firm. So, Section 2(22)(e) of the Act is not applicable in the instant case. It is also a submission of the learned counsel that if the firm and company of the assessee is only one man show and everything belongs to the assessee, then there is no question of giving any loan by somebody to anybody becaus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m, 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 to the concerning companies after deducting the services charges. But the firm has retained the amount for a longer period. The assessee is a shareholder in all the companies. The amount collected was the fresh deposit (loan) and the same was not old loan. The AO has observed that the retained amounts by M/s. Sahara India on behalf of SIFCOL were to the tune of Rs.9,28,320,075/- and on behalf of M/s. Sahara India Airlines Ltd., a sum of Rs.55,46,77,466/-; and Rs.92,679,162/- from M/s. Sahara India International Corporation Ltd. The AO treated the said amounts as a loans as the said amount was not transmitted to the concerned company and was shown in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly, 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 has a substantial interest in the concern. It would, therefore, be more logical to tax the concern which enjoys benefit from the advance or loan though it has directly nothing to do with the closely-held company. It is also conceivable that payments made to a concern in which the shareholder has no interest or even less than substantial interest if they can be shown to have been made on behalf of or for the individual benefit of such shareholder so as to attract the second part of the sub-clause. This sub-clause of Section 2(22)(e) treats loans granted by 'closely-held' company to any of its shareholders in the same manner as it treats divide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose 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 company advanced moneys out of accumulated profits to a low-paid employee and it was found that he was, in turn, advancing huge sums by way of advances to the Managing Director of the company. It was held that the Managing Director was assessable under this sub-clause. Advances received by an assessee from a company in which he has no substantial interest but the company advances the sums out of sums borrowed by it on the very same date from another company in which the assessee has substantial interest can be said to be payments by the latter for the benefit of the assessee and so taxable under the sub-clause. But if there is no such correlat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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