Income Tax Appellate Tribunal - Delhi
Handsome Investments (P) Ltd. And Fine ... vs Assistant Commissioner Of Income Tax on 28 September, 2007
Equivalent citations: (2008)116TTJ(DELHI)155
ORDER
1. All these appeals by the assessees in the cases of Fine Investments (P) Ltd. and Handsome Investments (P) Ltd. are directed against orders of learned CIT(A), Ghaziabad. The cross-appeals by assessee as well as by Revenue in the case of Xerox Modicorp Ltd. are arising out of the orders of learned CIT(A)-r, New Delhi dt. 15th Dec, 2003. Since the issues in all these appeals are inter-related all these appeals were heard together and are disposed of by a common order.
2. The primary issue to be decided is whether the appellants Fine Investments (P) Ltd. and Handsome Investments (P) Ltd. should be treated as merely paper or dummy entities and are conduits of Xerox Modicorp Ltd. To understand the factual position in all the appeals, the brief facts are narrated herein.
3. Fine Investments (P) Ltd. ("FIPL") was incorporated on 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. ("IXS"). IXS 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:
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S. No. Name of Shareholder Number of Paid-up Value
Shares (Rs.)
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1. Mr. Ashok Kr. Goel 100 1,000
2. Mr. Damodar Pd. Dani 100 1,000
3. Furtunate Holdings (P) Ltd. 49,000 4,90,000
4. Better Investments (P) Ltd. 49,000 4,90,000
5. Attractive Investments (P) Ltd. 49,000 4,90,000
6. Handsome Investments (P) Ltd. 49,000 4,90,000
7. Indian Xerographies Systems Ltd. 49,000 4,90,000 (now Xerox Modicorp Ltd.)
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Total 2,45,200 24,52,000
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Further, FIPL had made investment of Rs. 19,60,000 consisting of investment of Rs. 4,90,000 each in the shares of Fortunate Holdings (P) Ltd. (misprinted in annual accounts relevant to the financial year ending 31st March, 1992 as FIPL), Better Investments (P) Ltd., Attractive Investments (P) Ltd. and Handsome Investments (P) Ltd.
6. The share capital held by IXS in FIPL was transferred during the previous year relevant to asst. yr. 1993-94. Further the loan taken from IXS was duly repaid by FIPL during the said period. There was no business relation between FIPL and IXS thereafter. Xerox and Modi Group have parted ways and today, Xerox controls Modi Xerox Ltd. and IXS Ltd. (later merged and renamed as Xerox India Limited).
7. FIPL was held to be paper entity of IXS in the assessment proceedings for the asst. yrs. 1990-91 to 1996-97 and income of FIPL was assessed in the hands of DCS on substantive basis in the asst. yrs. 1990-91 to 1996-97. FIPL has been assessed as separate legal entity since asst. yr. 1997-98.
8. Handsome Investments (P) Ltd. ("HIPL") was incorporated on 20th Oct., 1989 (during the previous year relevant to the asst. yr. 1990-91) with the object of carrying on the business of an investment company. HIPL is an investment company of the Modi Group.
9. HIPL had paid-up share capital of Rs. 44.13 lacs held by IXS and four sister concerns of HIPL namely. Attractive Investment (P) Ltd., Better Investment (P) Ltd., Fortunate Holdings (P) Ltd. and FIPL.
10. At the end of the previous year relevant to the asst. yr. 1993-94, HIPL had (a) outstanding loan of Rs. 1,19,86,043 payable to IXS. (b) investment of Rs. 2,15,02,865 which consisted of the following:
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S. Name of Shareholder Number of Paid-up Value No. Shares (Rs.)
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1. Equity shares of Rs. 10 each of Modi 1,06,750 1,06,72,865 Rubber Ltd. (Quoted)
2. 14 per cent fully convertible debentures of 53,350 1,06,70,000 Modi Rubber Ltd. of Rs. 200 each (Quoted)
3. Attractive Investments (P) Ltd. 4,000 40,000
4. Fine Instalments (P) Ltd. 4,000 40,000
5. Fortunate Investments (P) Ltd. 4,000 40,000
6. Better Investments (P) Ltd. 4,000 40,000
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Total 2,15,02,865
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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 assessment proceedings for the asst. yr. 1990-91, FIPL was held to be a paper entity of IXS and the income of FIPL was assessed in the hands of FIPL on protective basis. The AO completed assessment for the assessment year under consideration at an income of Rs. 13,710 as against the returned loss of Rs. 4,76,290 after making addition of Rs. 4,90,000 on account of unexplained investment, being amount of contribution to share capital of the appellant received from Better Investments (P) Ltd. The aforesaid addition made by the AO was deleted by CIT(A) in appeal filed by FIPL. However, there was no finding by CIT(A) on the issue relating to paper entity.
12.2 Appeal (ITA No. 3731/Del/1994) filed by the Revenue before the Tribunal against the order of C1T(A) deleting the aforesaid addition was dismissed by the Tribunal, as per pp. 8-12 of the assessee's paper book.
12.3 There is no appeal filed by FIPL for the said assessment year.
Re : Assessment in the case of HIPL 12.4 HIPL was assessed as a separate legal entity in the assessment under consideration. There is no appeal filed by HIPL for the said assessment year.
Re : Assessment in the case of IXS:
(ITA No. 907/Del/2004 (assessee's appeal) & ITA No. 1205 /Del/2004 (Department's appeal) 12.5 The original assessment in the case of IXS for the asst. yr. 1990-91 was completed under Section 143(3) of the Act. The same was reopened vide issue of notice dt. 29th March. 2001 under Section 148 of the Act. The income of FIPL as assessed by the AO amounting to Rs. 4,76,290 (including addition of Rs. 4,90,000, which had already been deleted by the Tribunal) was added in the hands of the IXS on substantive basis.
12.6 Before the CIT(A), the assessee challenged the reopening of assessment, inter alia, on the following grounds:
(a) notice under Section 148 of the Act had not been served
(b) reassessment being beyond period of 4 years was barred by limitation in terms of proviso to Section 147 of the Act
(c) 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.
12.7 The CIT(A) upheld the reopening 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 year under consideration are as follows:
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Asst. yr. Returned Assessed Addition/Disallowance
income income
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1991-92 (Rs. 5,76,564) Rs. 4,37,416 Disallowance of Rs. 10,13,980
being interest paid to IXS
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The appeal filed by FIPL before CIT(A) against the said assessment order for the asst. yr. 1991-92 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 paper entity of IXS and also the quantum of income assessed.
Re : Assessment in the case of HIPL 12.12 HIPL was assessed as a separate legal entity in the assessment under consideration. There is no appeal filed by HIPL for the said assessment year.
Re : Assessment in the case of IXS ITA No. 908/Del/2004 (assessee's appeal) & ITA No. 1206/Del/2004 (Department's appeal) 12.13 The original assessment in the case of IXS Ltd. for the asst. yr. 1991-92 was completed under Section 143(3) of the Act. The same was reopened vide issue of notice dt. 9th March, 2000 under Section 148 of the Act. The income of FIPL as assessed by the AO during the asst. yr. 1991-92 amounting to Rs. 4,37,416 was added in the hands of the IXS on substantive basis.
12.14 Before the CIT(A), the assessee challenged the reopening of assessment for the asst. yr. 1991-92, inter alia, oh 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.
12.15 The CIT(A) upheld the reopening of assessment for the asst. yr. 1991-92 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 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 substantive basis. The details of the additions/disallowances made by the AO in the assessment years under consideration are as follows:
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Asst. yr. Returned Assessed Addition/Disallowance
income income
--------------------------------------------------------------------------------
1992-93 (25,68,450) 12,28,090 The AO rejected the books of
(including b/f accounts of FIPL and recasted
loss of the P&L a/c of FIPL:
previous (a) treating Vyaj Badla transactions
years) as transactions of purchase and
(Current year sale of shares and holding the
loss was Rs. shares held as investment as stock-
19,78,179) in-trade.
(b) disallowed deduction of
administrative expenses of
Rs. 35,803
(c) disallowed Rs. 16,92,427 being
interest paid to IXS on
inter-corporate deposits.
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The appeal filed by FIPL before CIT(A) against the said assessment order for the asst. yr. 1992-93 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 paper entity of IXS and also the quantum of income assessed.
Re : Assessment in the case of HIPL 12.20 HIPL was assessed as a separate legal entity in the assessment under consideration. There is no appeal filed by HIPL for the said assessment year.
Re : Assessment 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 Section 143(3) of the Act. The same was reopened vide issue of notice dt. 9th March, 2000 under Section 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. 1992-93 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 for the assessment year under consideration.
12.24 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. 16,92,427 be excluded from computation of income of IXS Ltd. for the asst. yr. 1992-93. The CIT(A) did not deal with the other additions/disallowances on merits.
12.25 Against the aforesaid orders of the CIT(A) for the asst. yr. 1992-93, both, the assessee and the Revenue have filed appeals bearing ITA Nos. 909/2004 and 1207/2004, respectively.
12.26 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. for the asst. yr. 1992-93.
Asst. yr. 1993-94 Re : Assessment in the case of FIPL - (ITA No. 1676/Del/2003) 12.27 In the assessment proceedings for the asst. yr. 1993-94 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 additions/disallowances made by the AO in the assessment years under consideration are as follows:
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Asst. yr. Returned Assessed Addition/Disallowance
income income
--------------------------------------------------------------------------------
1993-94 (30,68,750) 36,51,360 The AO rejected the books of
(including b/f accounts of FIPL and recasted the
loss of P&L a/c of FIPL:
previous (a) treating Vyaj Badla transactions
years) as transactions of purchase and
(Current year sale of shares and holding the
loss was Rs. shares held as investment as stock-
23,561) 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
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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 paper entity of IXS and also the quantum of income assessed.
Re : Assessment in the case of HIPL - (ITA No. 1672/Del/2003) 12.29 In the assessment proceedings for the asst. yr. 1993-94 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:
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Asst. yr. Returned Assessed Addition/Disallowance
income income
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1993-94 (4,28,126) 60,48,995 (a) The AO rejected the books of
accounts of FIPL and recasted the
P&L a/c of FIPL (a) treating Vyaj
[including Badla transactions as transactions
b/f loss of of purchase and sale of shares and
previous (b) holding the shares held as
years of Rs. investment as stock in trade.
90,515]
(b) disallowed Rs. 1,00,770 being
general expenses alleging that no
business was carried on by HIPL
(c) disallowed Rs. 58,40,281 being
interest paid to IXS alleging that
the funds in respect of which
interest was paid were not used
for business.
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12.30 The appeal filed by HIPL before CIT(A) against the said assessment order for the asst. yr. 1993-94 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. 9101 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 proceedings were initiated merely on change of opinion.
On merits, it was argued that FIPL and HIPL were distinct and separate legal entities from IXS Ltd. and there was no basis to warrant in law and on facts to treat FIPL and HIPL as paper entities of IXS. Without prejudice, the assessee also challenged the quantum of income of FIPL and HIPL added in the hands of IXS. The CIT(A) upheld the reopening of assessment for the asst. yr. 1993-94 and dismissed the objections raised by the assessee.
12.33 The CIT(A) also confirmed the stand of the Department that FIPL and HIPL were paper entities of IXS and, therefore, income of FIPL and HIPL was to be assessed in the hands of IXS on substantive basis for the assessment year under consideration.
12.34 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 and HIPL amounting to Rs. 18,80,096 and Rs. 58,40,281, respectively be excluded from computation of income of IXS Ltd. for the asst. yr. 1993-94.
12.35 Against the aforesaid orders of the CIT(A) for the asst. yr. 1993-94, both, the assessee and the Revenue have filed appeals bearing ITA Nos. 910/2004 and 1208/2004, respectively.
12.36 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/HIPL is paper entity-ground No. 3 In the Department's appeal, 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 for the asst. yr. 1993-94.
Asst. yr. 1994 95 Re : Assessment in the case of FIPL--(ITA No. 1677/Del/ 2003) 12.37 In the assessment proceedings for the asst. yr. 1994-95 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 additions/disallowances made by the AO in the assessment years under consideration are as follows:
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Asst. yr. Returned Assessed Addition/Disallowance
income income
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1994-95 (22,98,900) 69,730 Disallowance of interest of Rs. 53,798
(including b/f being interest payable on loan taken
loss of from Fortunate Holdings (P) Ltd.
previous alleging that FIPL failed to explain
years) the purpose of loan
(Current year Disallowance of Rs. 12,838 being
loss was Rs. interest payable on loan taken from
23,561) 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
interest payable on loan taken from
Better Investments (P) Ltd. alleging
that such loan has not been utilized
for the purpose of the appellant's
business.
Disallowance of Rs. 9,800 being the
amount of brokerage paid for
purchase of shares alleging that the
same has not been incurred for
business purposes.
Disallowance of Rs. 3,269 being
travelling expenses alleging the same
to have not been incurred for
business purposes.
Disallowance of Rs. 7,680 being filing
fee for increase in share capital
amounting to holding the same to be
expenditure of capital nature
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12.38 The appeal filed by FIPL before CIT(A) against the said assessment order for the asst. yr. 1994-95 was dismissed by CIT(A) vide order dt. 9th Dec., 2002. FIPL is in appeal against the aforesaid order of C1T(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 (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:
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Asst. yr. Returned Assessed Addition/Disallowance
income income
----------------------------------------------------------------------------------
1994-95 2,85,210 26,95,990 The AO rejected the books of
(consisting accounts of FIPL and recasted the
of 'nil' P&L a/c of FIPL:
business (a) treating Vyaj Badla transactions
income and as transactions of purchase and sale
income of of shares and holding the shares
Rs. 2,85,210 held as investment as stock-in-trade.
from other
sources) (b) disallowing general expenses of
Rs. 49,925 incurred by the HIPL on
the ground that the HIPL is paper
entity.
(c) disallowing Rs. 11,26,596 being
interest paid to IXS on inter-
corporate deposits.
(d) disallowing interest of
Rs. 5,15,714 payable to M/s Diamond
Stone (India) (P) Ltd. on the ground
that the same has been accounted
by such party as income in the
subsequent year.
(e) disallowing interest of Rs. 1,948
payable to Attractive Investments (P)
Ltd. being the difference between the
amount of interest shown as
receivable by Attractive Investments
(P) Ltd. i.e. Rs. 39,449 and 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 purposes.
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The appeal filed by HIPL before CIT(A) against the said assessment order for the asst. yr. 1994-95 was dismissed by CIT(A) vide order dt. 29th Sept., 2004. HIPL is in appeal against the aforesaid order of CIT(A), challenging the finding that HIPL is a paper entity of LXS and also the quantum of income assessed.
Re : Assessment in the case of IXS 12.40 Income of HIPL and FIPL was assessed in the hands of IXS on substantive basis for assessment year under consideration. The CIT(A) upheld the stand of the Department that FIPL and HIPL were paper entities of IXS and, therefore, income of FIPL and HIPL was to be assessed in the hands of IXS on substantive basis for the assessment year under consideration. Against the aforesaid orders of the CIT(A) for the assessment year under consideration, DCS has filed appeal before the Tribunal. However, the appeal filed by IXS against the orders of the CIT(A) for the said assessment year has not yet come up for hearing before the Tribunal.
Asst. yrs. 1995-96 and 1996 97 Re : Assessment in the case of FIPL (ITA Nos. 1678/Del/2003 & 2077/Del/2006) 12.41 In the assessment proceedings for the asst. yrs. 1995-96 and 1996-97, FIPL was held to be a paper entity of DCS and the income of FIPL 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:
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Asst. yr. Returned Assessed Addition/Disallowance
income income
-------------------------------------------------------------------------------
1995 96 (52,960) 85,617 Disallowance of Rs. 1,38,619 being
interest paid to IXS.
Disallowance of expenses of
Rs. 84,073 holding the same to be
related to earlier years.
1996-97 (24,38,786) 79,324 Disallowance of Rs. 1,66,247 being
(including interest paid to IXS.
current year
loss of
Rs. 86,920]
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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.
Re : Assessment in the case of IXS 12.44 Income of HIPL and FIPL was assessed in the hands of IXS on substantive basis for asst. yrs. 1995-96 and 1996-97. The CIT(A) upheld the stand of the Department that FIPL and HIPL were paper entities of IXS and, therefore, income of FIPL and HIPL was to be assessed in the hands of IXS on substantive basis for the assessment years under consideration. Against the aforesaid orders of the CIT(A) for the assessment year under consideration, IXS has filed appeals before the Tribunal, which are yet to come up for hearing before the Tribunal.
13. In view of the above factual position, the question before us is whether FIPL and HIPL are paper entities or conduits of IXS? The case of the AO is that corporate veil has to be lifted and if seen behind the curtain of corporate entity, these companies, namely, FIPL and HIPL are dummies of IXS.
14. FIPL has been held to be a paper entity of the appellant for the following reasons:
(i) The investment in FIPL is held partly by IXS and partly by a few other investment companies funded by IXS.
(ii) The funds invested by FIPL for purchase of shares have been introduced by IXS.
(iii) The directors of FIPL are senior employees of sister concern of IXS.
(iv) FIPL is not having a separate office and FIPL is being run from the residence of Mr. Ashok Goyal, a director of FIPL at Noida.
(v) FIPL is not having any employee or staff for its functioning.
(vi) FIPL's bank is situated at Nehru Place which is 20 kms. away from the office of the FIPL at Noida. U.P. and is being operated by Mr. Ashok Goyal and the other director Mr. D.P. Dani who are also operating the account of IXS.
(vii) FIPL does not have a separate management but is being managed by the directors who are employees of other company and looking after interest of such company.
(viii) The ultimate beneficiary of the activities of the FIPL is IXS since it is receiving huge interest on deposits made with the FIPL for purchase of shares of Modi Xerox Ltd. by the FIPL.
(ix) The Vyaj Badla transactions have been carried out at Bombay by FIPL where FIPL does not have any manager or supervisor, though IXS was based there.
(x) FIPL in the audited balance sheet filed with the return of income has shown investment in FIPL which is not possible since no person can purchase its own shares.
(xi) FIPL was not maintaining 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 for 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 IXS 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 IXS 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. Ashok Goyal, director of the appellant and only a part of such premises was being used by Mr. Ashok Goyal for residential purposes.
15.2 The directors of FIPL are highly qualified persons and took all the decisions including those relating to financial affairs of the company. Since, FIPL is engaged in the investment business and the directors were capable of taking all the business decisions there was no need to employ any personnel.
15.3 FIPL had employed one Mr. Hari Om on part-time basis to look after accounts and other miscellaneous office work under the supervision of Mr. Ashok Goyal.
15.4 One of the directors of FIPL namely, Mr. Ashok Goyal, was also employee of Modi Xerox Ltd. a sister concern of IXS. Since, the office of Modi Xerox Ltd. was situated at Nehru Place, it was decided for administrative convenience to have the bank account of FIPL at Nehru Place instead of Noida, where the office of FIPL was situated.
15.5 The bank account of IXS was not being operated by the director of FIPL namely Mr. D. P. Dani as alleged by the AO of FIPL and therefore, no adverse inference can, therefore, be drawn from the observation made by the AO in this regard.
15.6 There is no bar in employees of a company being directors of another company and merely because the directors of a company are employees of another, it does not follow that such directors are not interested in proper management of the company of which they are the directors and are looking after the interest of the company of which they are the employees. In fact, a contrary view would be more acceptable.
15.7 Further, Modi Xerox Ltd., a sister concern of IXS, was in no way interested in FIPL or vice versa and there is no question of the director of FIPL looking after the interest of Modi Xerox in FIPL as alleged by the AO. Also neither Mr. Ashok Goyal nor Mr. D.P. Dani, directors of FIPL has any interest leave alone substantial interest in Modi Xerox Ltd. as alleged by the AO. The only connection Mr. Ashok Goyal had with Modi Xerox Ltd. was that he was an employee of such company. The other director, i.e. Mr. D.P. Dani was not even an employee of Modi Xerox Ltd.
15.8 As regards non/improper maintenance of books of account and in particular the cash book by FIPL, it is respectfully submitted that FIPL had a negligible number of cash transactions and instead of maintaining a separate cash book 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 shares of Modi Xerox Ltd., a profit making widely held company the decision to purchase such shares being a prudent decision in view of rising prices of shares of such company and taken independently of IXS - is of no consequence and by no stretch of imagination lead to inference that FIPL was merely a conduit for investing moneys of IXS in Modi Xerox Ltd.
15.11 The Vyaj Badla transactions were carried out by a firm of chartered accountants at Bombay on behalf of FIPL and it is not that IXS was carrying out such transaction for FIPL as inferred by the AO in assessment of FIPL.
15.12 FIPL and IXS are distinct and separate legal entities. Whereas FIPL is an investment company headquartered at Noida, UP and IXS is an operating company engaged in manufacturing, export and leasing business at Mumbai. The only relation between the two companies is that IXS has invested in the share capital of FIPL and has advanced interest-bearing loans to FIPL at market rate of interest. Shares of Modi Xerox Ltd. and Modi Rubber Ltd. purchased by FIPL from market have been sold to IXS, again, at market rate. The transactions between the two companies are at arm's length.
15.13 FIPL and IXS are companies assessed to the same rate of tax. There is no tax advantage either to the assessee or to the Revenue, if FIPL and IXS were to be assessed independently individually or the income of FIPL was to be clubbed with the income of IXS. The respective stands of the assessee and the AO are revenue neutral.
15.14 Merely because IXS has invested in the share capital of FIPL or advanced loans to FIPL or the employees of Modi Xerox Ltd. (sister-concern of IXS) are directors of FIPL cannot be considered adequate ground(s) to hold FIPL as paper entity of IXS. The income and assets of FIPL belong to FIPL in its own right and are enjoyed by the shareholders of FIPL. If the allegation that FIPL was a paper entity of IXS were to be true then, the income of FIPL should have been beneficially enjoyed by IXS, which is not the case. No evidence has been led by the Revenue to show that any part of the income or assets of FIPL enured for the benefit of IXS before holding that FIPL is a paper entity of IXS.
15.15 Considering the matter in its true perspective, there is no evidence brought on record to substantiate the allegation that FIPL is a paper entity of IXS. The fact that FIPL is being assessed 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 or to be clubbed with IXS - has to be determined. The matter should, therefore, be set aside to the file of the AO to recompute the income of FIPL and HIPL afresh, in accordance with law after affording adequate opportunity of hearing to the appellant.
16. Learned Departmental Representative submitted that appeals of Revenue in the ease of IXS be considered in the light of the answer to the question as to whether FIPL and HIPL are to be considered as dummy or paper entities. If so, appeals of Revenue in case of IXS do not survive. As regards reopening of assessment in the case of IXS, he submitted that the same was in consequence to the finding given in the assessment of FIPL and HIPL. Thus, reopening is to be treated as valid as only after the assessment of FIPL and HIPL, the AO could form an opinion that income chargeable to tax in the case of IXS has escaped assessment.
17. We have carefully considered the relevant facts, arguments advanced and also considered the paper book to which our attention was drawn. We find that in some of the years. FIPL and HIPL are treated as mere paper entities and income in this regard will have to be held in the case of IXS. We do not find that the reason is correct. It is a settled industrial practice to have an investment arm of each industrial group. Thus, for the purpose of achieving the object of investment, investments companies are incorporated which are always treated as separate and distinct entities independent of its promoters. What is to be found is whether the transactions between the two companies are at arm's length and if so found, the primary purpose for lifting the corporate veil no more subsists. To the extent the amount was advanced as loan by IXS to HIPL and FIPL, interest at market rate was charged, no more no less. Thus, the transaction is at arm's length. The investment companies do not carry on business so vigorously which requires them to occupy larger premises or even many employees. In a way, directors are also employees of the company whether remunerated or not.
18. Thus, so long as the companies function through the directors such companies cannot be treated as paper entities. Certain considerations like opening of bank account at a convenient place, not employing the employees and investing the funds in promoter company are the decisions taken by the respective companies and the AO cannot intervene 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 . 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.
19. 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 accounts and offered for taxation. The investment in shares is duly reflected. Only those expenses are claimed which are expenses allowable as such. Thus, the formation of investment companies is tax neutral. If that be the case, even after lifting the corporate veil no purpose will be achieved in the sense that if these companies are held as conduits and if conduits are ignored, the ultimate tax liability of IXS will not alter. Having found that the investment companies, namely, FIPL and HIPL were functioning as separate legal and entities in its own name and carried out its objects in terms of its memorandum of association and having found that the transactions between these investment companies and IXS were at arm's length, we are unable to agree with the finding of the AO that these entities are mere paper or dummy entities. Thus, the respective income shall be assessable in the respective hands in accordance with provisions of law as if all these entities are separate legal entities and not conduits.
20. Having held that the assessments are to be framed in each cases of FIPL and HIPL as if they are separate legal entities, we restore the matter back to the file of the AO to recompute the income in accordance with provisions of law after affording reasonable opportunity of being heard.
21. As regards validity of reassessment in the case of IXS, we find that original assessments in these cases were completed under Section 143(3) of the Act. The assessments were reopened beyond a period of four years from the end of relevant assessment years. In view of proviso to Section 147, no action shall be taken under Section 147 after the expiry of four years from the end of relevant assessment year unless it is found that income chargeable to tax has escaped assessment for the reason of failures on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. In the present case, it is seen that complete details regarding investments in the FIPL and HIPL were disclosed. The assessee also declared having advanced the sum to these two companies. The assessee also declared having received interest on amount advanced to them. There is no allegation in the reasons recorded for reopening that income chargeable to tax has escaped assessment as the assessee failed to disclose fully and truly all material facts. In the circumstances, we cannot sustain the reassessment proceedings in the case of assessee. The reassessments are to be cancelled. Since we have cancelled the reassessments the appeals of Revenue have become infructuous.
22. In the result, the appeals of assessee in the case of IXS are treated as allowed whereas the appeals of the Revenue in the case of IXS are dismissed. The appeals of FIPL and HIPL are treated as allowed for statistical purposes.