D.K. Seth, J.
The background :
1. This appeal under Section 260A of the Income-tax Act, 1961 ('the 1961 Act'), has been preferred against the order dated January 28, 2005, passed by the learned Tribunal in the block assessment against the assessee for the period April 1, 1990 to August 24, 2000. The dispute relates to a few entries for the previous year 1999-2000 in relation to the assessee's investment in 9 per cent. RBI Relief Bonds amounting to Rs. 6,93,00,000 out of total investment of Rs. 26,35,00,000 made in the said previous year. The Assessing Officer had treated these investments as deemed dividend in the hands of the assessee within the meaning of Section 2(22)(e) of the 1961 Act.
The facts :
2. In order to appreciate the situation, we may briefly refer to those portions of facts, which are relevant for the present purpose. M/s. M. K. Tea Pvt. Ltd. (MKTPL), in which the assessee is one of the 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 :
3. Extreme, erudite and elaborate arguments have been made by both Mr. N. K. Poddar, learned senior counsel appearing on behalf of the assessee, and Mr. D. K. Shome, learned senior counsel appearing for the Department. Our attention was drawn to various facts, materials, laws and decisions. Various intricacies of fine argument were advanced by both learned counsel.
The confine :
4. Having regard to the facts and circumstances and the issues involved, in our view, the question does not seem to pose any difficulty and can be answered simply on the basis of the admitted facts applying the relevant tests for treating those amounts as deemed dividend. The question is dependent simply on the interpretation of the provisions of Section 2(22)(e) of the 1961 Act and its applicability in the given facts available in this case.
Deemed dividend : Definition : When applies :
5. The definition of 'deemed dividend' defined in Section 2(22)(e) applies to three categories of cases. The first category relates to any payment made by a company, in which public are not substantially interested, by way of loans or advances to a shareholder having not less than 10 per cent. voting power. The second category includes any payment by such a company to any concern in which such shareholder is a member or a partner having substantial interest not less than 20 per cent. of the income of such concern. The third category relates to any payment by any such company on behalf or for the individual benefit of any such shareholder. But in all these three categories the extent of deemed dividend is confined to the available accumulated profits of such company.
The scope :
The assessee had claimed that he did not have the requisite shareholding in MKTPL during the previous year 1999-2000, namely, he was a beneficial owner of shareholding with 9.3 per cent. of its total voting power. The assessee further claimed that during the said financial year 1999-2000, he had only 0.20 per cent. of shares in SCPL out of its total voting power. The assessee had shareholding having more than 10 per cent. of the voting power in MKSEPL. However, this was disputed by Mr. Shome.
7. In any event it is not necessary for us to adjudicate the said questions within the scope of the present appeal in order to bring the case within the purview of Section 2(22)(e), inasmuch as the payment having not been made to the assessee, the present case would not come within the scope of the first category. Mr. Shome in his useful fairness contended that this case does not come within the first category.
8. 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 are 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.
9. 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 gone into for our present purpose. Therefore, we refrain from dealing with those questions.
10. The question of accumulated surplus also becomes irrelevant unless it is shown that these payments are deemed dividend within the meaning of Section 2(22)(e), namely, a payment by way of advance or loan to the shareholder or to the concern of such shareholder or to such concern in which such shareholder is a member or partner having substantial interest. Mr. Shome, however, did not attempt to bring the case within the second category as well. On the other hand, Mr. Shome stressed that such company for the individual benefit of the assessee, who is such a shareholder, made this payment and that such payment was made out of the accumulated profits of such a company.
11. The findings by the Commissioner of Income-tax (Appeals) :
This situation and facts are not in dispute and were so found by the Assessing Officer. This is apparent from page 324, Volume III of the paper book being part of the decision by the Commissioner of Income-tax (Appeals), since not been doubted by the learned Tribunal, wherein it was found :
'78. ...The entire investment of Rs. 26.35 crores, as reflected in the seized document, ML-20 was made by the appellant-assessee out of his fully disclosed funds and through his regularly disclosed bank accounts. This is, in fact, an undisputed position, since no addition is made in the impugned block assessment on account of the investment made by the appellant-assessee in such RBI Relief Bonds. The seized document marked ML-20 does not contain any incriminating material or information whatsoever. However, in the course of the block assessment proceedings, the Assessing Officer directed the assessee to furnish details as to the source of funds out of which such investment was made. When it was explained to the Assessing Officer that the appellant-assessee made such investments in RBI Relief Bonds out of the monies withdrawn by him from the two partnership firms, viz., M/s. M. K. Foundation and M/s. M. K. Industries, and the regularly maintained books of account of these two firms were produced before the Assessing Officer for his verification, the Assessing Officer directed the authorised representative of Shah group to prepare a statement indicating the source of source, viz., the source from which the monies came in the hands of the said two partnership firms 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 authorised 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 (Vol. III, pages 323-324, para. 78) ....
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 asked Mr. Rohit Shukla, chartered accountant, and authorised representative of the appellant as well as of the said two firms, whose block assessment proceedings were simultaneously in progress before the very same Assessing Officer, to prepare another statement indicating not only the source of investment of the appellant in the purchase of the said RBI Relief Bonds to the extent of Rs. 26,35,00,000 but also of the source of source, viz., the source in the hands of the said two firms. Mr. Rohit Shukla produced before the Assessing Officer the books of account of each of the said two firms and the statement prepared by Mr. Shukla indicating the source of source was also filed before the Assessing Officer under cover of the letter dated May 23, 2002, addressed by the appellant to the Assessing Officer. A copy of the said assessee's letter dated May 23, 2002, along with all relevant enclosures thereto were submitted.
96. The Assessing Officer examined the said statement indicating the source of source, as prepared by Mr. Shukla, with reference to the books of account and the bank statements of the said two firms styled M/s. M. K. Foundation and M/s. M. K. Industries (Vol. III, page 333 paras. 95, 96)....
In the case of the appellant, it is undisputed that books of account found and seized were regular books of account which would have been disclosed to the Department in the normal course and even if there had been no search, the material on which the Assessing Officer had based block assessment was already available and the Assessing Officer had not given any finding that any entry or transaction was not disclosed in those books of account (Vol. III, page 414)....
In the case of the appellant, all the primary facts relating to receipts from partnership firms and purchase of RBI Relief Bonds were disclosed in the regular books of account.... (Vol. Ill, page 415)....
The Assessing Officer has mentioned that during the course of proceedings the assessee was asked to explain the source of investment being 9 per cent. Relief Bonds recorded in seized book ML-20 and how it was reflected in the regular books of account maintained by him. The Assessing Officer does not say that purchase and source of purchase of relief bonds was not reflected in the regular books of account.' (Vol. III page 420)
12. The findings by the learned Tribunal :
The learned Tribunal did not hold otherwise as would be apparent from its observation as quoted hereafter :
'The learned Commissioner 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 (pages 146, 254 and 255 of the impugned appellate order) 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 him that the Revenue could have examined these issues on the merits only in the course of the regular assessment proceedings for the relevant years to be completed under Section 143(3) of the said Act. (Vol. V, page 694)....
4.41 If the chart at page 66 (page 84, Vol. I, PB) is carefully perused, it will become immediately apparent that in the fifth column captioned 'Source of source', there are as many as twelve instances where one of the partnership firms (MKI) has already been listed as source of source. Thus, the purchase of bonds amounting to Rs. 23 crores, whenever the source or source of source were the partnership firms, it was specifically declared as such by the assessee. Based on bank and other records whenever the ultimate source was MKI, it was stated to be so. Whenever the ultimate source was MK Tea Pvt. Ltd., it was stated to be so. Whenever the ultimate source was fixed deposit maturity, it was stated to be so. Now, in the entire statement of 22 entries, all are taken as correct. The assessee seeks to backtrack in respect of 5 entries only, i.e., those where the source was attributed to MKSEPL/SCPL. Since, these are the very 5 transactions aggregating to Rs. 5.99 crores that was proposed to be taxed as deemed dividend by the Assessing Officer, the reasons for saying that they are repayment of loans and not sources are obvious and palpably forcible (Vol. V, page 708)...
4.43 Thus, the entire flow of money aggregating to Rs. 5.99 crores from the company to the assessee, via the firms, stands credibly established. The assessee's claim to the contrary that they were repayment of loans, is understandable but easily discarded as being made with poor motives. Where, even the nature of incoming funds, i.e., proceeds from export sales, is identified as source for the company for making the payments, any disclaimer now can be discarded for what it is worth (Vol. V, page 708). . .
6.6. In the present appeal, it is the assessee's case that the seized document ML-20 are regular accounts, the entries represent amounts taken, given inter se between the company, firms and the assessee constituting the source for the purchase of bonds. However, it is the contention of the Assessing Officer that they remain just that a collection of entries. The income arising therefrom in the nature of deemed dividend was NEVER disclosed in returns filed. Hence, stressing ad nauseam on the disclosure of entries only and glossing over the non-disclosure of income, cannot entitle the assessee to claim immunity from the block proceedings (Vol. V, page 719)...
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 68. The existence of unreported deemed dividend income, which is the very subject of this appeal, would have never entered into contention (Vol. V, page 722).'
13. The admitted facts : The principle :
From the above findings of the Commissioner of Income-tax (Appeals) and the learned Tribunal, it appears that these transactions were not undisclosed income ; neither were those based on any incriminating documents for invoking the jurisdiction for block assessment under Chapter XIV-B. These payments were not made by either of the companies by way of loan or advance either to the assessee as such shareholder or to such concern. On the other hand, these were abundantly clear to be repayment of the advances received by the companies from the respective firms. The same cannot be held to have been made for the benefit of the assessee being such shareholder. The said firms could have been said to be conduits and the principles of lifting the veil would have been justified if there were anything to show that this was a device to avoid Section 2(22)(e). On the facts it could not be said so. The learned Tribunal had avoided the issue and sidetracked the same without proper justification and in effect the learned Tribunal had forced itself to a conclusion without any foundation tending to be perverse on the basis of the materials disclosed. Therefore, these transactions cannot come within the third category of deemed dividend since no payment was made for the benefit of the assessee, if the amounts were paid in repayment of the advances received by the said companies from the said concerns in its regular course of business transactions.
14. Mr. Poddar attempted to contend that these payments must be by way of loan or advance even in respect of all the three categories of cases. We do not think that in order to attract the third category, the payment has to be made by way of loan or advance. The third category includes any payment in whatever manner paid on behalf of or for the benefit of such shareholder. It need not be qualified to be loan or advance.
15. Lifting the veil : The principle : Undisclosed income : Block assessment : The present case :
Various cases have been referred to by the respective counsel and were also distinguished by the other. Since we had confined only to the question whether the payment was made in the regular course of transactions between the companies and the firms in order 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.
16. In Bhagwati Prasad Kedia v. CIT : [2001]248ITR562(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]248ITR81(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]270ITR160(Cal) in which one of us (D. K. Seth J.) was a party, it was held that in the income for block assessment under search and seizure procedure is to be computed strictly on the basis of the documents seized ; and it cannot proceed on conjectures and/or surmises and arrive at estimation instead of computation. In this decision, reliance was placed on Sunder Agencies v. Deputy CIT [1997] 63 ITD 245 (Mum) ; T.S. Kumarasamy v. Asst. CIT [1998] 65 ITD 188 (Mad] and Indore Construction (P) Ltd. v. Asst. CIT [1999] 71 ITD 128 (Indore). In CIT v. Elegant Homes P. Ltd. , it was held that an income even though disclosed in the books of account can still be undisclosed income when the assessee fails to prove the genuineness of the credits in response to notice after search.
17. In Nandlal Kanoria v. CIT : [1980]122ITR405(Cal) , it was held that in order to attract the mischief of Section 2(22)(e) the conclusion involves two findings of facts, namely, the factum of payment by the company and the motive or intention of the company making such payment, namely, a benefit accruing to the assessee. A loan creates a legal relationship between the two parties, namely, the lender and borrower. On facts in the said decision, it was found that no such relationship was established that the company could in law recover the alleged loan or advance from the assessee. It was further held that the section has to be construed strictly. In Sutlej Cotton Mills Ltd. v. CIT : [1979]116ITR1(SC) , 10 in which the apex court quoted with approval the observation of Jenkins L. J. in Davies v. Shell Co. of China Ltd. [1952] 22 ITR (Supp) 1 ; [1951] 32 TC 133namely,. 'As loans it seems to me they must prima facie be loans on capital, not revenue account; which perhaps is only another way of saying that they must prima facie be considered as part of the company's fixed and not of its circulating capital'. In Smt. Tarulata Shyam v. CIT : [1977]108ITR345(SC) in a case where the assessee, a shareholder and the managing director of a company in which the public were not substantially interested, withdrew cash from time to time, parts of which were adjusted against the outstanding dividend and ultimately a sum remained debited in the account of the assessee in the books of the company, part of which was repaid by the assessee, part remaining outstanding, the apex court had held that the part 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]109ITR508(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. Alagusundaram Chettiar v. CIT : [2001]252ITR893(SC) .
18. CIT v. Durga Prasad More : [1971]82ITR540(SC) reiterated the principle of lifting the veil in the following words (page 545) : 'A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents'. In M. D. Jindal v. CIT : [1987]164ITR28(Cal) , it was held on the facts established that the assessee and his wife controlled the company and with a view to circumventing the provisions of Section 2(22)(e) by an agreement with the company, the company was made a debtor to the assessee and his wife in the matter of advancing certain materials, the value whereof was held to be deemed dividend. Section 2(22)(e) creates a legal fiction. Legal fictions are created only for a definite purpose. They are limited to the purpose for which they are created and should not be extended beyond their legitimate field. But the legal fiction has to be carried to its logical conclusion within the framework of the purpose for which it is created. In the said case, the court had come to a finding that the agreement was an arranged one and in such circumstances the court was entitled to lift the veil of corporate identity and to pay regard to the economic realities behind the legal facade. The court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation or to perpetrate fraud as was held in Juggilal Kamlapat v. CIT : [1969]73ITR702(SC) .
19. In LIC v. Escorts Ltd. : 1986(8)ECC189 , it was emphasized that regard must be had to the substance and not the form of a transaction. The corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. But this is dependent on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of public interest, the effect on parties who may be affected, etc. The corporate veil in such a case is to be lifted to the extent it is necessary in the context of the given facts and no more. In Miss P. Sarada v. CIT : [1998]229ITR444(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.
20. 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 of the assessee in his return in the regular course of assessment. However, these were not offered for taxation on the ground that these receipts by the assessee were not incomes in the financial year 1999-2000.
21. The learned Tribunal attempted to conclude that the facts apparently disclose that these amounts were paid by such company to such firms/concerns for the benefit of the assessee being such shareholder out of the accumulated profits of the respective companies, particularly, MKSEPL with which SCPL had been amalgamated and merged with effect from May 18, 1998, namely the date of incorporation of SCPL by reason of an order passed by the High Court in Company Petition No. 200 of 2001 on July 5, 2001. Mr. Shome contended that by reason of such amalgamation with effect from May 18, 1998, the date when SCPL was incorporated the amount of surplus, would definitely be treated as accumulated profits of MKSEPL. We need not go into the details as to whether there was accumulated profit or not. In the facts and circumstances, we also need not go into the effect of the merger or amalgamation of SCPL with MKSEPL with effect from May 18, 1998, by reason of the order dated July 5, 2001.
22. Inasmuch as the block assessment is permitted in respect of undisclosed income. In other words, the block assessment deals with incomes not disclosed in the regular course of assessment. In the present case, all these receipts were disclosed and the documents were very much available before the Assessing Officer in the course of the regular assessment. Therefore, these documents cannot be said to be incriminating materials for holding that the amounts disclosed in those documents were undisclosed income. At the same time, the investment was made out of the funds reflected in the respective accounts of the assessee, the respective firms and the respective companies and the source from which these funds had come to the hands of the respective companies. Unless the amount is found to be an undisclosed income, the income-tax authority cannot exercise its jurisdiction for block assessment. When these documents were disclosed in the regular course of assessment by the assessee and were included in the books of account regularly maintained by him and the balance-sheet was made part of his return in the course of regular assessment, the same could not be treated as undisclosed income until 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.
23. 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.
24. 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 shareholder. All these transactions between the said three companies and the said two firms were at all material times made in the normal course of business. All the withdrawal made by the assessee from the two partnership firms, MKF and MKI, were all along debited in the assessee's capital account with the respective firms.
25. The Assessing Officer in his letter dated November 18, 2002, required the assessee to explain the said transactions and show cause as to why those transactions should not be treated as deemed dividend at the hands of the assessee. In reply thereto, in his letter dated November 25, 2002, the assessee had clarified the entire situation. Through his letter dated May 23, 2002, the assessee had disclosed the relevant account statements of the respective banks through which the transactions were made. Admittedly, all these transactions were made by cheques and transacted through the respective banks, the account statements whereof were furnished along with the said letter dated May 23, 2002, disclosing the source, source of source and source of source of source of investment in the 9 per cent. RBI Relief Bonds representing the entire investment of Rs. 26,35,00,000 during the financial year 1999-2000 disclosing that these were kept in regular books of account of MKI, MKF, SCPL, MKSEPL, MKTPL and those of the assessee.
26. The statement of source, source of source and source of source of source at page 84 of the paper book, Volume I, shows the status of all the respective transactions supported by various documents. Out of the said statement at page 84, the items Nos. 17, 18, 19, 20, 21 and 22 corresponding to items Nos. 40, 41, 42, 43, 44 and 45 clearly indicate as to how these amounts were received by the respective companies and how it was paid to the respective concerns. Page 76 discloses the details of the investments made through American Express Bank except one made through Canara Bank. The respective ledger accounts of the respective companies with the respective firms are also disclosed (Vol. I, pages 103 to 109). The balance-sheet disclosed by the assessee (Vol. II, pages 125-126) clearly depicts the respective transactions and the investments made together with the ledger accounts of the assessee with MKF and MKI, respectively, reflecting the respective transaction (Vol. II, pages 127 to 134). The ledger account (pages 103 to 109) shows that MKI had regular transactions with SCPL and that MKI, carrying on business of financing, advanced 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.
27. 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 transaction is undertaken and the object and the purpose are to be sufficiently established and the law which is intended to be avoided, is to be strictly construed and applied on such established facts. Only when it can be established that the transactions were aimed at avoiding taxation and were colourable exercise and not reflected in the return and disclosed in the balance-sheet accompanying such return and are unsupported by documents and are held to be false or sham, is the court empowered to apply the principle of lifting the veil. Once it is disclosed in the return, it would come under Section 68 or 69 and not under Chapter XIV-B since all the materials were available before the Assessing Officer in the course of the regular assessment.
28. In the present case, it appears that these payments were not made by the company to the concerns without any liability of the company to the concerns. On the other hand, it is established that the concerns were owed money from the companies in the course of its regular transactions. Thus, applying the test in the facts of the present case, it is not possible to hold that these amounts were transacted without the regular course of business between the companies and the firms. There was no amount advanced to the firms, which could be legally recoverable by the companies. On the other hand, the amounts paid by the firms to the company were legally recoverable by the firms from the company. The withdrawal of the capital account of the assessee from those firms despite satisfying the other qualifications cannot be deemed to have been paid for the benefit of the assessee by the companies by imputing motive or otherwise, particularly, when from the end of the company the payment was neither a loan nor an advance given to the firms but was a repayment of the loans or advances received by the companies from the firms. By no stretch of imagination could these transactions be held to have been made for the benefit of the assessee. The section has to be construed strictly and strict construction does not permit us to hold otherwise. On the other hand, the situation would lead us to hold that this repayment of loan or advance by the company to the firms in the course of regular business transaction from its disclosed sources reflected in the disclosed income would not satisfy the test of Section 2(22)(e) even on attempt to or upon lifting the veil.
29. 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.
30. 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 established.
31. In the facts and circumstances of the case, though the company undisputedly satisfies the qualification, assuming the assessee as such shareholder or such person having substantial interest in the firms is also qualified, assuming further that the payment was made out of the accumulated profit of the companies, assuming as insisted upon by Mr. Shome that the payment also satisfies the qualification relating to the third category, yet, as discussed above, the crucial qualification that the payment was made for the benefit of such shareholder or person or such person having substantial interest in the firm having not been satisfied, the provisions of Section 2(22)(e) cannot be attracted to treat the same as deemed dividend in the absence of one of the qualifications.
32. In this case seven questions quoted below are to be answered :
'I. Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law and adopted a wholly erroneous approach in reversing the appellate order dated February 21, 2003 passed by the Commissioner of Income-tax (Appeals), Central II, Kolkata, in relation to the alleged deemed dividend of Rs. 5,99,00,000 assessed as the appellant-assessee's alleged undisclosed income with reference to the provisions of Section 2(22)(e) of the Income-tax Act, 1961 ?
II. Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law and it adopted a wholly erroneous approach in holding that the impugned sum of Rs. 5,99,00,000 was assessable to tax as deemed dividend within the meaning of Section 2(22)(e) of the Income-tax Act, 1961, in the impugned block assessment proceedings initiated under Chapter XIV-B of the said Act, even when no incriminating material was found in relation thereto in the course of the search and all transactions connected with the said amount had been duly and fully recorded in his books of account and other records maintained in the regular course of his business ?
III. Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law and it adopted a wholly erroneous approach in holding that the alleged deemed dividend of Rs. 5.99 crores was assessable to tax in the impugned block assessment, even when the respondent-Commissioner of Income-tax in his impugned order dated March 8, 2004, passed under Section 263 of the Income-tax 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 crores, are vitiated in law, having been recorded by it without any material and/or in disregard of the undisputed material, relevant and vital facts and evidences on record and whether the said findings are wholly unreasonable and/or otherwise perverse ?
VI. Whether the findings recorded by the Tribunal to the effect that the source of source (fund flow) statement filed before the Assessing Officer in compliance with his requisition, was nothing but an admission on the part of the appellant-assessee that the payments of different amounts by Safari Capitals Pvt. Ltd., to the partnership firm styled, M. K. Industries and by M. K. Shah Exports Ltd., to the partnership firm styled M. K. Foundation, were payments made for the individual benefit of the appellant-assessee within the meaning of Section 2(22)(e) of the Income-tax Act, 1961; and whether such findings are vitiated in law, having been recorded by it without any material and/or in disregard of the undisputed material, relevant and vital facts and evidences on record and whether the said findings are wholly unreasonable and/or otherwise perverse ?
VII. Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law and adopted a wholly erroneous approach in not upholding the order of the Commissioner of Income-tax (Appeals) and remanding the issue of interest under Section 158BFA(1) of the said Act to the Assessing Officer, even when it was wholly a legal issue and was required to be decided by the Tribunal itself in the light of the submissions made before it on behalf of the Revenue as well as the appellant-assessee ?'
33. In view of the discussion made above, we answer all the questions in the affirmative except the first part of question No. 6 which is answered in the negative.
Order :
34. In the result, the appeal succeeds and is hereby allowed. The order of the learned Tribunal is hereby set aside. The order passed by the Commissioner of Income-tax (Appeals) is hereby affirmed.
35. There will, however, be no order as to costs.
36. Urgent xerox certified copy of this judgment, if applied for, be given to the parties within 7 (seven) days from the date of such application on usual undertaking.
Soumitra Pal, J.
37. I agree.
38. May 12, 2005.--After the judgment was delivered, Mr. Nizamuddin prayed for stay of operation of the order. On the other hand, Mr. Podder prayed that his client was unable to furnish the bank guarantee ; therefore the bonds have not been released. Therefore, the bonds now be released.
39. In the facts and circumstances of the case, unless these bonds are the subject matters of any attachment in any other proceedings, the bonds be released in view of the decision in this appeal within a fortnight hereof upon presentation of xerox signed copy of the operative part of the judgment. As prayed for by Mr. Nizamuddin, though we are convinced and are clear in our mind that there is no scope for any stay, however we grant stay of operation of the order for a period of one week from date.
40. Xerox signed copy of the operative part of both the orders be furnished to both counsel in the course of tomorrow.