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TMI Blog2005 (5) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... e shareholders, paid Rs. 69,00,000 on December 7, 1999, and Rs. 25,00,000 on December 22, 1999 to M/s. M.K. Foundation (MKF), a partnership firm, in which the assessee was one of the partners. M/s. Safari Capitals Pvt. Ltd. (SCPL), in which the assessee was a beneficial owner of shares, paid a sum of Rs. 2,04,00,000 on January 11, 2000, and Rs. 75,00,000 on January 28, 2000 to M/s. M.K. Industries (MKI) in which the assessee is one of the partners. M/s. M.K. Shah Exports Pvt. Ltd. (MKSEPL) paid a sum of Rs. 1,10,00,000 on December 1, 2000, Rs. 1,10,00,000 on December 4, 2000 and Rs. 1,00,00,000 on February 11, 2000 to MKF. Apart from these amounts, various other amounts were also paid by the respective companies to the respective firms out of which the RBI Relief Bonds were purchased by the assessee during the previous year 1999-2000 amounting to Rs. 26,35,00,000. Except the amounts referred to above, the rest payments were held to be disclosed income and were exempted from being taxed under the block assessment. Whereas these seven transactions were held to be deemed dividend received at the hands of the assessee. The argument: Extreme, erudite and elaborate arguments have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst category. Mr. Shome in his useful fairness contended that this case does not come within the first category. Admittedly, the amounts were paid by the said three companies, which are such companies contemplated within section 2(22)(e), inasmuch as the said companies were closely held companies of the assessee and in which the public were not substantially interested. These three companies had made the respective payments to MKF and MKI. Both these concerns arc partnership firms in which the assessee was a partner. The assessee contends that he had 16 per cent, interest in the income of MKF with effect from April 2, 1999. MKTPL holds 0.1 per cent, share in MKF as its partner. On the other hand, MKF did not hold any share in MKSEPL. MKF holds 0.09 per cent. of shares in SCPL. MKSEPL is a partner in the partnership firm, MKI. It is also admitted that these companies and the firms are closely held between the assessee and the members of his family. Whether the respective companies and the firms are closely held, or not, whether the respective companies are the firms or the assessee had shares or interest of 10 per cent, and 20 per cent., respectively, are also not necessary to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and out of which withdrawals were made by the appellant-assessee in order to make investment in the aforesaid RBI Relief Bonds. The impugned addition on account of deemed dividend under section 2(22)(e) was made by the Assessing Officer with reference to the statement prepared by the authorized representative of the Shah group, Mr. Rohit Shukla, chartered accountant, indicating the source at the hands of the two partnership firms. This statement was obviously prepared pursuant to the direction issued by the Assessing Officer and solely with reference to the regularly maintained books of account and records of the said two partnership firms. In other words, no incriminating material whatsoever was found in the course of the said search, which could enable the Assessing Officer to invoke the provisions of section 2(22)(e) of the said Act in the instant case ... 95. The Assessing Officer examined the bank statements so produced by the appellant and, thereafter asked the appellant to arrange for production of books and records of the said two partnership firms styled M/s. M.K. Foundation and M.K. Industries so as to enable him to verify the source of source. The Assessing Officer also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Income-tax (Appeals) passed the said appellate order in favour of the respondent/assessee both on legal grounds as well as on merits. The learned Commissioner of Income-tax (Appeals), inter alia, held that the impugned block assessment was not based on any 'incriminating evidence' found as a result of the said search nor on any investigation made on the basis of such evidence; but only based on the entries made in the regular books of account of the group companies, firms as also the assessee. The learned Commissioner of Income-tax (Appeals) also observed that since the transactions on the basis of which undisclosed income was determined by the learned Assessing Officer in the instant case, had been recorded in the regular books of account and as no evidence was found in the search, from which it could be held that these transactions would not have been disclosed to the Department in the regular assessment proceedings for the relevant period, no addition in respect of any of these three impugned items could be lawfully made in the block assessment proceedings initiated as a result of the impugned search carried out on August 24, 2000. It was further held and observed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of income, cannot entitle the assessee to claim immunity from the block proceedings ... 6.16 Another central argument was that ML-20 was merely an extract of the ledger accounts, that the payments appearing therein for the purchase of bonds were from disclosed sources, that such payments were by cheque from disclosed bank accounts and that the accounts were available to the Assessing Officer in the normal course. In other words, ML-20 was sought to be trivialized. 6.17 This is easily countered. It is not disputed that the sources of investment made in bonds were disclosed in the regular books. Had this been false, the addition would have been under section 68 or section 69 of the Act. THIS IS NOT THE CASE HERE. In the impugned proceedings, the addition is not under section 68/69 but under section 2(22)(e). This distinction is crucial to appeal and attempts to confuse must be repelled. It is further claimed that the Assessing Officer never proved the 'falsity' of entries found in ML-20. Here again it must be noted that had the Assessing Officer proved that the entries in ML-20 as false in regular assessment, there would be no addition under section 2(22)(e) but under section 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ascertain whether it was made for the benefit of the assessee, we need not deal with the decisions which dealt with the effect of amalgamation, beneficial owner of shareholding, substantial interest in the firms, etc. We may deal with the decisions, which are relevant for our present purpose. In Bhagwati Prasad Kedia v. CIT [2001] 248 ITR 562 (Cal) a Division Bench of this High Court had taken the view that the block assessment can proceed in respect of undisclosed income, which is distinct from income offered for taxation and deductions wrongly claimed out of the income shown, ultimately holding that an income featuring in the regular books of account cannot be taxed in the block assessment. In Deputy CIT v. Shaw Wallace and Co. Ltd. [2001] 248 ITR 81 (Cal), it was held that both regular assessment and block assessment could proceed together. Chapter XIV-B relates to undisclosed income of the block period making a distinction between the kind of income, namely, (1) income offered for taxation; (2) income disclosed but exemption or deduction is claimed from being taxed; and (3) undisclosed income. In CIT v. Ashim Krishna Mondal [2004] 270 ITR 160 (Cal) in which one of us (D.K. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t so remaining to the extent to which the company had accumulated profits was deemed dividend, though the advance ceased to be outstanding of the previous year if other conditions of section 2(6A)(e) of the Indian Income-tax Act, 1922, were satisfied. In the said decision, it was held that once it is shown that the assessee comes within the letter of the law, he must be taxed howsoever the hardship might appear to the judicial mind. Even if the loan or advance ceases to be outstanding at the end of the previous year, it can still be deemed as dividend if the other four conditions factually exist, to the extent of the accumulated profits possessed by the company. In CIT v. L. Alagusundaram Chettiar [1977] 109 ITR 508 (Mad), it was held that the amount borrowed by one of the employees from the company without security, admittedly, advanced to the assessee by such employee, a karta of the Hindu undivided family only having two shares, was held to be deemed dividend at the hands of the assessee holding substantial share in and a managing director of the company. This decision was affirmed by the Supreme Court in L. Alagnsun- Daram Chettiar v. CIT [2001] 252 ITR 893. CIT v. Durga Pras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is necessary in the context of the given facts and no more. In Miss P. Sarada v. CIT [1998] 229 ITR 444 (SC), it was held that loan to a shareholder having substantial interest without any credit balance, by a company in which the public are not interested, and withdrawal of amounts in the accounting year despite subsequent adjustment against credit balance, amounts to receipt of notional dividend. The status of the transaction: In the present case, the admitted position is that all the transactions were reflected in the balance-sheet of the respective companies being part of the return submitted by the respective companies in the course of regular assessment. These were similarly reflected in the entries in the books of account maintained in the regular course of business and were included in the balance-sheet of the respective firms/concerns as part of the return of income for regular assessment. Admittedly, the assessee had withdrawn out of his capital accounts of those concerns, various sums, which were invested in 9 per cent. RBI Relief Bonds since shown/reflected in the regular books of account of those concerns and included in the balance-sheet/profits and loss account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounts are held to be false; or until the transactions are held to be sham or a device invented or adopted driven by motive to avoid the effect of section 2(22)(e) backed by sufficient materials found on search and seizure or disclosed on notice in the course of block assessment. The theory of lifting the veil can be applied in cases where there are materials to support such action. It has to be a rational conclusion without being arbitrary, irrational, unreasonable, capricious or whimsical. There must be sufficiently strong material to conclude that the apparent is not the real. It is dependant not on the whims or caprice, discretion or apprehension, surmise or conjecture, but on the wisdom. It is dependant on the appreciation of the materials available supported by a rational approach with a kind of systematic reasoning. The assessee had explained together with various documents that these amounts were not loans and advances made to the partnership firms nor these payments were made to the assessee as such shareholder nor these payments were made for the benefit of the assessee being such shareholder. Admittedly, these were not paid on behalf of the assessee being such s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced money to SCPL and it was a current account transacting payment and receipt. The statement made therein clearly shows that these amounts were never paid by way of loan or advance by SCPL to MKI. Similarly, between MKF and MKSEPL, there were regular and current transactions. MKF was also transacting financing business and had been advancing various sums to MKSEPL. Thus, the said transaction was in the regular course of payment and receipt on account of repayment of loan taken by MKSEPL to MKF. These very figures have since been cross checked from the balance-sheet of the respective companies, firms and the assessee before us by Mr. Poddar. Conclusion: As discussed above, it is a settled proposition that in deserving cases the veil is to be lifted for identifying the nature of the transaction. Disclosed income can also be included within the block assessment provided the assessee fails to explain the entries found on search and seizure. The principle of lifting the veil empowers the court with a very wide discretion liable to be exercised judicially. It must be based on sound principles as enunciated in diverse decisions including those cited above. The context in which the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifting the veil. These payments cannot be held to have been made for the benefit of the assessee when such payments were being made to the firms by the companies in the course of its regular transactions in order to repay the advances received by it from such firms still leaving debit balance. If these amounts were not paid, in that event, it would have been shown as a liability, at the hands of the respective companies and could not be treated as accumulated profits in order to attract any of the three categories. In order to be a deemed dividend within the meaning of section 2(22)(e) in any of the three categories, all the ingredients are to be satisfied, namely, (a) that the company must qualify; (b) that the payment must qualify; (c) that the person, to whom the payment is made, is also to qualify; and (d) then the payment is to be made out of the accumulated profits of the company. All these four ingredients in relation to the qualification of the company, the shareholder, the concern and the payment by way of loan or advance in respect of the first two categories and any kind of payment in respect of the third category out of accumulated profits, are required to be establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act, 1961, had already held that the alleged deemed dividend income had no connection whatsoever with the search and seizure action conducted at the premises of the appellant/assessee as also the evidence found as a result of the said search? IV. Whether the findings recorded by the Tribunal, in its order dated January 28, 2005, more particularly in paragraphs 37 and 38 thereof, in regard to the alleged deemed dividend in the sum of Rs. 5,99,00,000 are contrary to the facts and evidences on record, based on mere suspicion, surmises, conjectures as also on irrelevant considerations, unreasonable and/or otherwise perverse, and whether such findings had been recorded by the Tribunal without any material and/or in disregard of the undisputed material facts including the relevant and vital evidences on record? V. Whether the findings recorded by the Tribunal to the effect that the two partnership firms styled, M.K. Industries and M.K. Foundation, were used by the appellant as conduits to utilise the accumulated profits in the form of reserves and surplus of M.K. Shah Exports Ltd., through a device of commercial transactions in acquiring RBI Relief Bonds to the extent of Rs. 5.99 c ..... 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